asset acquisitions - Jackson Walker LLP

liability for post-closing indemnification. It is not unusual for the buyer’s first draft to omitthis provision entirely.A seller might request that the acquisition agreement contain an analogue to Section11.2(c) to allocate the risk of post-closing operations more clearly to the buyer. Such aprovision could read as follows:“(c)Any Liability arising out of the ownership or operation of the Assets afterthe Closing Date other than the Retained Liabilities.”11.5 LIMITATIONS ON AMOUNT — SELLER AND SHAREHOLDERSSeller and Shareholders shall have no liability (for indemnification or otherwise) with respectto claims under Section 11.2(a) until the total of all Damages with respect to such matters exceeds$_______________, and then only for the amount by which such Damages exceed$_______________. However, this Section 11.5 will not apply to claims under Section 11.2(b)through (i) or to matters arising in respect of Sections 3.9, 3.11, 3.14, 3.22, 3.29, 3.30, 3.31 or 3.32or to any Breach of any of Seller’s and Shareholders’ representations and warranties of which theSeller had Knowledge at any time prior to the date on which such representation and warranty ismade or any intentional Breach by Seller or either Shareholder of any covenant or obligation, andSeller and the Shareholders will be jointly and severally liable for all Damages with respect to suchBreaches.COMMENTSection 11.5 provides the Seller and the Shareholders with a safety net, or “basket,”with respect to specified categories of indemnification but does not establish a ceiling, or“cap.” The basket is a minimum amount that must be exceeded before any indemnification isowed — in effect, it is a deductible. A more aggressive buyer may wish to provide for a“threshold” deductible that, once crossed, entitles the indemnified party to recover alldamages, rather than merely the excess over the basket. The purpose of the basket ordeductible is to recognize that representations concerning an ongoing business are unlikely tobe perfectly accurate and to avoid disputes over insignificant amounts. In addition, the buyercan point to the basket as a reason why specific representations do not need materialityqualifications.In the Model Agreement, the Seller’s and Shareholders’ representations are generallynot subject to materiality qualifications, and the full dollar amount of damages caused by abreach must be indemnified, subject to the effect of the basket established by this Section.This framework avoids “double-dipping” — that is, the situation in which a seller contendsthat the breach exists only to the extent that it is material, and then the material breach issubjected to the deduction of the basket. If the acquisition agreement contains materialityqualifications to the seller’s representations, the buyer should consider a provision to theeffect that such a materiality qualification will not be taken into account in determining themagnitude of the damages occasioned by the breach for purposes of calculating whether theyare applied to the basket; otherwise, the immaterial items may be material in the aggregate,but not applied to the basket. Another approach would involve the use of a provision such asthe following:3148166v1- 165 -