Time Limitations in Seller Indemnities

Time Limitations in Seller Indemnities

This is Part III of a multi-part blog dealing with seller indemnitees in business sale transactions. Part I dealt with dollar limitations; Part II touched on seller indemnities in business sale and merger transactions.

 

Read More:

Part I – Dollar Limitations

Part II – Seller Representations and Warranties

Part IV – Seller Indemnities (continued)

Part V – Indemnity Payment

This part of the sale agreement can be very lengthy, often consuming ten or

Another sticky area is the length of time during which indemnification claims may be raised. As usual in this world of indemnities, there is no standard boilerplate as such. Some agreements provide that the indemnity period extends for the length of the applicable statutes of limitation with respect to the matter for which the claim is made except, perhaps, for fraud claims, ownership of assets, and legal authority to transfer as examples of more extended or indefinite provisions. Other agreements have specific time limits, such as 18 months, two years or three years. As usual, buyers prefer no limits and sellers prefer extremely limited time limits if indemnities have to be given. So the resulting language is often between those two extremes. The times negotiated can depend on such factors as type of business, the quality of the financial statements, degree of buyer due diligence and bargaining strength of the parties.

There are various types of indemnity claims. Some claims are made by the buyer. And some claims are made by third parties. Therefore, you see some agreements that deal with each type separately with perhaps differing time limitations.

As has been pointed out by various experts, for each party, and particularly from the buyer’s perspective, it is important to make sure that there is coordination of time limits between the time periods set out in the seller representations and warranties section of the purchase or merger document and the time limits set out in the indemnity section. For example, if the time limit for survival of representations and warranties in the representation and warranty section is two years, and the time limit in the indemnity section is three years, the buyer could be very disappointed to find that there will not be much protection. A better drafting approach in order to avoid these issues from arising is to have the survival period for representations and warranties, covenants and indemnities dealt with in a consistent manner in the same section in the purchase or merger agreement.

In Part IV next month dealing with seller indemnitees in business sale and merger transactions, I will touch briefly on indemnity subject matter limitations.

 

Michael W. Margrave

mmargrave@mclawfirm.com