Michael D. Magidson , Health Care and Business Attorney
Indemnification provisions are standard in asset purchase agreements but they are frequently misunderstood or hastily drafted. An agreement to indemnify another is an ongoing, post-closing obligation with far-reaching implications. If you are being asked to sign such an agreement, it is important to understand how it works and look for ways to limit your exposure.
In general, to indemnify another in the asset purchase context means to assume all responsibility and liability for any losses or damages they might suffer arising out of your ownership of the assets. Indemnification is about allocation of risk; the indemnifying party is usually in a better position to avoid losses. For instance, the seller is more familiar than the buyer with the condition of the assets There are some ways to limit your indemnification exposure. An indemnification provision generally includes all losses suffered by the indemnified party, including attorneys’ fees and costs. Therefore, the indemnifying party should seek to have the ability to control the legal defense of a third party claim against the indemnified party so as to manage legal expenses. More fundamentally, it is essential to carefully examine the scope of the indemnification obligation to make sure that it contains reasonable scope and time limitations.
Depending on the relative bargaining strength of the parties, there are other limits on an indemnification obligation which can be negotiated. For instance, the obligation could be capped at the purchase price or a percentage of the purchase price. Another option is a “basket” or “hurdle,” which is a threshold dollar amount at which the indemnification obligation is triggered. These come in two types – “deductible” baskets and “tipping” baskets. A deductible basket operates like an insurance deductible in that the indemnifying party is only responsible for amounts in excess of the threshold. With a tipping basket, the indemnification obligation kicks in after the threshold is reached, but requires the indemnifying party to be responsible for the entire amount of the claim.
The foregoing is merely a summary of some of the concepts which should be considered when negotiating an indemnification provision in an asset purchase agreement. Each transaction is different, so please contact Blalock Walters, P.A. if you have any questions relating to these types of agreements.
