Tatjana Paterno
Tatjana Paterno is a member of Bass, Berry & Sims.
Margaret Dodson
Margaret Dodson is an associate at Bass, Berry & Sims.

After a long “winter,” we are starting to see some signs that the M&A activity is picking up. An informal poll at a recent ABA meeting of M&A attorneys indicated that M&A practitioners expect continued improvement in dealflow as the year progresses. Market data tells a similar story.


Following the drop in M&A activity in most of 2022 and 2023, first quarter of 2024 marked an uptick in the number of domestic deals being completed, perhaps suggesting that activity may have bottomed out.

Based on data compiled by Houlihan Lokey (NYSE: HLI), transaction multiples remain at their lowest levels over the past decade but are not yet showing signs of improvement. High cost of debt has led buyers to put a lot of focus on pre-closing diligence and also increasing pressure on performance post-closing. Transaction documentation can be helpful in making sure that if issues are identified post-closing, there’s recourse available and this recourse can help support performance objectives going forward.

With that in mind, buyers can take a fresh look at their acquisition agreement indemnification provisions to make sure they are well-positioned to address any post-closing issues. Buyers would be well-served to make sure that their indemnification provisions address the following issues:

  1. Know your notice requirements. Buyers should make sure they are familiar with notice provisions related to indemnification rights. Courts tend to strictly construe bargained-for contractual rights like survival periods and notice requirements tied to asserting contractual indemnification claims. Avoid language that requires a buyer to provide, for example, “all information” relating to a claim, as such a requirement could lead to an argument by the seller that the buyer has not complied with the applicable requirements and notice is therefore invalid.
  2. Understand the limitations of today’s RWI policies. Be realistic about relying on your representation and warranty insurance (RWI) for the seller’s breaches. More and more often, attempting to recover under RWI is becoming like its own form of litigation, with insurers hiring sophisticated outside counsel to investigate claims and request detailed information to support buyers’ claims—and then holding payment and settlements back until insureds fully comply with their requests. Where buyers have leverage and where other reasons for getting an RWI policy do not apply (e.g., the seller is not a key employee for the company post-closing), they may consider pressing for more traditional purchase agreement indemnification rights in order to ensure that the sellers have “skin in the game.”
  3. Consider including fee-shifting provisions. To help encourage the settlement of bona fide claims, buyers should ensure that purchase agreements include a prevailing party fee provision that entitles them to seek attorneys’ fees and costs stemming from any successful recovery associated with exercising their indemnification rights. Courts will often not allow this fee-shifting absent an express contractual agreement on this point.
  4. Look for opportunities to avoid costly litigation battles. In post-closing disputes, both buyers and sellers want to minimize the time and costs involved with litigation. Consider language referring disputes on post-closing issues like purchase price adjustments and earnouts to an independent accountant. These clauses are often enforced like arbitration provisions and can provide a quick resolution to disputes in lieu of a more costly and time-consuming resolution in court. Also, consider whether to give the independent accountant authority to decide legal (as opposed to just accounting-related) issues, which could help parties circumvent more traditional litigation altogether as most sophisticated accountants have internal counsel or can engage outside counsel to advise on legal matters. For even more protection against costly litigation, consider including a requirement that the parties mediate, or at least come to the table for a period of time to negotiate in good faith, before filing an arbitration, lawsuit or claim.
  5. Be sure first-party claims are expressly covered. Make sure claims between parties are expressly covered by contractual indemnification provisions. While this might seem like a no-brainer, buyers do not want to be left seeking to enforce, for example, a right to recover for a seller’s breach of a key representation pursuant to an indemnification section that exhaustively addresses third-party claims but does not cover claims between parties.
  6. Protect against fraud or breaches of fundamental representations. The vast majority of deals with indemnification provisions include a cap on the seller’s liability, a “basket” (meaning the buyer cannot seek indemnification from the seller until its damages exceed a certain amount), or both. Buyers should expressly exclude fraud claims or claims for breaches of “fundamental representations”—which should themselves be expressly defined—from any such limitation of liability provisions. While this is important in all deals, it is especially significant for transactions involving companies in highly regulated industries, like healthcare, or companies that otherwise provide services to and bill the government where damages related to fraud could be very significant.
  7. Limit your own participation in third-party claims. Finally, buyers should place contractual limits on any requirement that they cooperate with third-party claims that are the seller’s responsibility. For example, if the buyer takes over the target’s books and records, the buyer may not want to spend time and resources locating documents that are potentially responsive to discovery requests involving a pre-closing liability of the seller. Be explicit about go-forward cooperation requirements to protect against being required to cooperate and to do the heavy lifting in the seller’s third-party litigation.

Buyers who incorporate these considerations into their indemnification provisions should be in a better position if—and when—post-closing issues arise.