DealLawyers.com Blog

A party who seeks to ensure its ability to enforce indemnification claim notice requirements (typically a priority for sellers) should consider negotiating for the parties to set forth in their agreement that:

• noncompliance with the notice requirements will result in forfeiture of the indemnification right;
• the notice requirements are a material part of the agreement; and
• forfeiture of the indemnification right due to noncompliance with the notice requirements will not cause a “disproportionate forfeiture” excusing the noncompliance.

Buyers in particular should seek to ensure that the drafting provides sufficient flexibility in the event it lacks sufficient information by the deadline for notice to include details with respect to the claim.

Drafters should make clear the relationship between the indemnification claim notice provisions in the merger agreement and any escrow agreement. Where, as is typical, the merger agreement incorporates an escrow agreement, the agreements will be read as one unitary contractual scheme, requiring compliance with the provisions in both agreements. Drafters therefore should seek to ensure that the provisions are not inconsistent, or should make clear that certain requirements apply only for the escrow agreement notice and others apply only for the merger agreement notice. A seller should consider including an express statement that the requirements in both agreements will be applicable.

It also provides some suggestions for putting together the required notices:

Merger agreement parties should be careful to avoid technical non-compliance or foot-faults with respect to indemnification claim notice provisions. Buyers and sellers should seek to comply strictly with the timing, content, and process requirements specified in their agreement.

• If the agreement requires that the notice include written materials substantiating the claim, written materials should be provided with the notice even if the claimant’s investigation has not been completed.
• Where there may be confidentiality concerns about providing certain materials, the claimant should consider providing materials with redactions (even if substantial), rather than not providing them at all. Further, not only should indemnification notice provisions be drafted carefully, but so too should the indemnification claim notices themselves.
• It is generally a good practice to track in the notice the precise language of the notice requirements—for example (although not an issue in Thompson), if the agreement requires that the notice state what damages the party will incur, the party should not state in its notice that it may incur the following damages.

An indemnification claimant should consider what evidence exists as to when it became aware of the underlying breach. If the merger agreement requires (as in Thompson) that the buyer provide notice within a timeframe after becoming aware of a breach, the buyer should consider whether contemporaneous emails or other communications may establish or suggest when the buyer first became aware of the breach.