In the previous article “M&A in family-owned companies: Non-competition clause” we carried out a brief analysis of the content and importance of this type of clauses within business transaction agreements. Following up on the topic, this time we will continue our analysis with the indemnity package.
The indemnity package plays a key role in the agreement as it establishes the terms in which the family will pay the buyer the losses resulting from any breach of the contract after the completion of the M&A process. For example, if the family business did not pay the loan it was obligated to pay before the M&A process was completed and that results in losses, then it must pay the buyer an indemnity.
There are two elements of the indemnity clause whose establishment will be fundamental: the basket and the cap. The basket is a kind of deductible: the family will only be liable for losses in excess of this amount. The cap is the limit of what can be paid to the buyer.
Thus, the M&A lawyer will have to balance these amounts as best as possible to make the indemnity package agreeable to both parties. This task has a peculiarity in cases involving family companies because unlike the case of investment funds and large corporations, these payments directly affect the family’s wealth.
It is for this reason that the mergers and acquisitions lawyer will normally encounter a major obstacle on the side of the family. The latter is often unhappy with the idea that they will be held liable after the deal closes and that such liabilities will result in losses to their wealth. To overcome such obstacles, the M&A specialist will have to show the family the benefits that the indemnification clause can bring.
From the buyer’s point of view, in order for the latter to be satisfied with the indemnification package, the M&A lawyer should focus on obtaining guarantees to ensure compliance with the clause.
Finally, it is worth mentioning representation and warranty insurances as useful tools to solve indemnification problems. These insurance policies cover indemnities for certain breaches of transaction contracts. While they are quite common in the United States, the reality is that in Latin America they are very recent, so they may not be as readily available. However, we expect that eventually, their accessibility will improve, which is why it is worth keeping them in mind.
