Indemnification in M&A Contracts Part III: Time Period for Indemnification (aka. The Survival Periods)
Part III in our series on indemnification in M&A takes us to time periods for indemnification.
The Indemnification Section of the Purchase Agreement does more than just list the types of claims that one party will indemnify the other party for. The Indemnification Section also generally sets a time period that the indemnification provision applies, and states that after that period, each party may no longer seek recovery for those types of claims from the other party. In other words, the Indemnification Section specifies a statute of limitations (typically referred to as a Survival Period) for the claims that apply between the parties to the Purchase Agreement.
The period specified usually is shorter than the statute of limitations under state law that applies without the Purchase Agreement being specific. This period is commonly 12-18 months for most representations and warranties in the Purchase Agreement, excluding the Fundamental Representations and Warranties. Fundamental Representations and Warranties can be subject to negotiation and generally include items like organization, authority, authorization, capitalization, ownership of seller’s assets, and brokerage. Fundamental Representations and Warranties tend to be important representations/warranties. Fundamental Representations and Warranties get their own separate “Survival Period” that is subject to negotiation but is generally tied to the shorter of
- the normal statute of limitations period under state law; or
- 5-6 years if there isn’t a specific statute of limitations under state law.
You can think of the Survival Period as the limitation on how long you have to discover a potential issue and ask for damages. For the seller, it provides security that after a particular date, the seller no longer has to worry about indemnification for particular types of claims.
Specifically named claims may get a special Survival Period that is longer or shorter than the generally applicable one. For example, a buyer may ask for a specific statute of limitation for tax or employment claims that is longer or shorter than the standard Survival Period specified. In addition, claims based on fraud almost always get an extended Survival Period (which often lasts for an indefinite period).
Again, as noted, this Survival Period only applies to the parties to the Purchase Agreement. Third parties can still bring claims after the specified period against one or all parties to the Purchase Agreement. But after the expiration of the applicable Survival Period, each party (buyer, seller, etc.) will not have a claim requiring the other party to pick up the tab.
Now that we have staked a claim and talked about time periods for indemnification, we will turn to caps, baskets, and deductibles in Part IV.