Indemnification Playbook
Indemnification provisions are the backbone of post-closing risk allocation. At Mage, we help you systematically extract and compare baskets, caps, survival periods, and escrow mechanics across your deal documents so you can negotiate from a position of knowledge.
2024-2025 Market Terms at a Glance
With Rep & Warranty Insurance
Without RWI (Traditional)
Core Mechanics: Baskets, Deductibles & Caps
Deductible Basket
Seller-friendly. Buyer absorbs losses up to threshold; seller pays only excess.
Tipping Basket
Buyer-friendly. Once threshold exceeded, seller pays entire amount from dollar one.
Mini-Basket (De Minimis)
Individual claim threshold before counting toward main basket.
Cap Structure
Fundamental Representations
Fundamental reps receive super-priority treatment: longer survival periods (6+ years) and higher caps (typically 100% of purchase price).
Standard Fundamental Reps
- Organization & Good Standing
- Authority to Execute
- Capitalization / Title to Shares
- Broker's Fees
Negotiated "Grey Area" Reps
- Tax Representations
Buyers argue for 6-year statute of limitations alignment
- Intellectual Property
Critical for tech deals; sellers often resist
Negotiation Strategy
If seller refuses to make Tax a fundamental rep, request a Special Indemnity for tax matters with statute of limitations survival period as an alternative.
Survival Periods
| Representation Type | Typical Survival | Rationale |
|---|---|---|
| General Reps | 12-18 months | Covers one full audit cycle |
| Fundamental Reps | 6 years / Indefinite | Statute of limitations alignment |
| Tax Representations | SOL + 60 days | Tax statute of limitations plus buffer |
| Environmental | SOL + 60 days | Environmental law limitations |
The "Survival Trap" in Delaware
A survival clause can effectively shorten the statute of limitations. Ensure the contract explicitly states that claims made before the expiration date are preserved until resolved.
Escrow & Holdback Mechanics
Indemnity Escrow
- Typically matches the Cap amounte.g., 10% of purchase price
- Duration: Survival PeriodUsually 18 months
Adjustment Escrow
- Smaller, separate amountTypically 1-2% of purchase price
- Short duration60-90 days post-closing
Best Practice for Buyers
Ensure the agreement specifies that the escrow is not the exclusive remedy. Buyer should be able to sue seller directly if losses exceed the escrow amount (up to the Cap).
Critical Drafting Nuances
Materiality Scrapes
"Scrapes" delete words like "material" or "Material Adverse Effect" when determining breach or damages.
Double Scrape (Buyer-Favorable)
Scrapes materiality for both determining breach AND calculating damages. Standard in pro-buyer and RWI deals.
Single Scrape (Compromise)
Scrapes materiality only for calculating damages. Seller still gets materiality qualifier for establishing breach.
Sandbagging Provisions
Can a buyer sue for a breach they knew about before closing?
Pro-Sandbagging
Explicitly allows buyer to sue even with prior knowledge
Anti-Sandbagging
Prohibits buyer claims if they had prior knowledge
Silent
Most common. Delaware favors buyer; NY is riskier for buyers
Due Diligence Review Checklist
Cap Analysis
Is it market? (10-15% private, ~1% with RWI)
Basket Type
Deductible (seller) or tipping basket (buyer)?
Survival Period
Does general survival cover one full audit cycle?
Definition of "Losses"
Includes diminution in value? Excludes punitive damages?
Exclusive Remedy
Clear carve-outs for Fraud and Equitable Remedies?
Materiality Scrape
Double scrape, single scrape, or none?
Sandbagging
Pro, anti, or silent? Jurisdiction implications?
Special Indemnities
Outside basket/cap for known risks?
How Mage Streamlines Indemnification Analysis
Clause Extraction
Automatically extract and categorize indemnification provisions, caps, baskets, and survival periods
Market Comparison
Compare proposed terms against market standards to identify outliers and negotiation points
Risk Flagging
Highlight missing provisions, unusual terms, and potential issues requiring special indemnities