Indemnification provisions are among the most highly negotiated
provisions in private M&A transactions. These provisions set
out the terms and conditions under which one party will be required
to indemnify the other party for any losses the other party may
suffer post-closing. In other words, indemnification provisions set
forth the "rules of the road" and allocate the risks
involved in a transaction.
While risk allocation may seem conceptually simple, structuring
indemnification provisions may become quite complicated. As the
size, complexity and economics of a transaction increase, it can
sometimes be very difficult to specify the scope of a party's
indemnification obligations in a manner appropriate to the value
(actual or perceived) inherent in the deal. However, and to add
certainty to their bargain, parties usually arrange their affairs
to limit the amounts for which an indemnifying party may be
responsible and prevent a party from bringing immaterial
claims.
