How to Seek Indemnifications During a Merger
When you merge your company with another, you are not only acquiring the assets and shares of that company. You may also be acquiring the debts and legal liabilities of the other corporation. You can avoid responsibility for these liabilities or debts by seeking indemnifications during the merger negotiation process. Indemnifications are contractual agreements that give you the express right to recover any damages that your corporation suffers if it turns out that any of the representations made in the merger agreement are breached.
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Things You'll Need
- Mergers and acquisitions attorneys
- Copies of tax returns, financial statements and accounting papers
Instructions
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Conduct Due Diligence
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1
Request that the other company to the merger provide you with copies of all internal accounting and audits for the past 5 years. This will help you to identify potential problems against which you would want to be indemnified.
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2
Seek copies of the other company's tax returns, audits and current quarterly tax liabilities. This will reveal any tax problems that you will want the other company to represent provide warranties for in the merger agreement.
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Negotiate the Merger
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3
Insist that a nondisclosure agreement be signed by both parties to the merger. This will ensure that both companies produce all relevant corporate information during the negotiation process, and will give you recourse to sue on if the other company releases your information during the negotiation process.
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4
Seek warranties and representations that specifically address any potential problems revealed during your due diligence procedure. Typically, merger agreements contain a lot of boilerplate warranties and representations, but these may not be adequate to cover you when you later seek indemnification. Include these specific warranties and representations in the merger agreement.
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5
Argue that you require these specific indemnifications as a show of good faith that all of the corporate information the other company provided is complete and accurate.
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6
Remind the other company that you are not buying an "as is" product like a car. Flaws or problems in the information provided by the company may only show themselves to be false down the road, so you need to be assured that if that happens, you can seek your remedy from them.
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1
Tips & Warnings
Suggest the use of indemnification "baskets" if the other company is firmly against blanket indemnification. Baskets are basically dollar amount limits on the degree to which the other company agrees to indemnify you in the case of a breach of a warranty or representation. This is particularly useful when only one aspect of the indemnification is a sticking point in the negotiation, because you can separate it out and give it its own basket.
