DealLawyers.com Blog

This Skadden memo reviews recent Delaware decisions addressing M&A indemnification provisions and says that those decisions underscore the importance of avoiding ambiguity in defining the scope of indemnification, identifying when compliance with a provision is material, and determining damages. Here are some key takeaways:

– Each case featured allegations of noncompliance with law, an area fraught with the potential for loss. Although devoting more attention to drafting compliance provisions may increase costs and time to close, the added certainty may be worth the price to avoid litigation. Additionally, sellers need to take steps to ensure that their companies are in compliance with the law to limit the possibility of litigation.

– If a post-merger agreement modifies indemnification provisions, the parties should assess how fraudulent inducement and other claims may interact in order to avoid ambiguity in their modifications.

– Contracting parties need to carefully draft the notice requirements for indemnification: (1) to create a condition that is material to the exchange under the Restatement (Second) of Contracts § 241 factors, or (2) if the condition is immaterial to the exchange, the parties should avoid drafting a notice provision that would cause a disproportionate forfeiture under Restatement (Second) of Contracts § 229

The memo also recommends specifying the multiple or liquidated damages that would apply in the event of a breach of representations regarding key contracts instead of facing the possibility of needing to expend resources to prove damages with expert testimony, and says that the decisions highlight that a record of the parties negotiations may be decisive at trial in establishing the meaning and materiality of a contractual term.

– John Jenkins