本篇文章在2017年1月公眾號剛創立的的時候貼過，最近在整理之前發的文章，重讀這篇關於併購協議中的賠償條款（Indemnification provision）的談判與起草，仍然覺得相當精彩，尤其對初學法律英語的朋友更是。
本人參與的境外收併購案例中，感覺賠償條款對律師來說，可能是最難談的條款之一，其難度甚至超過了「先決條件」、」陳述與保證「以及」分手費「等條款，老外律師尤其重視。
對於買方來說，以我個人經驗而言，賠償條款談的最理想的結果就是：（1）賠償沒有下限和上限，通常叫basket（我將會在下一篇文章中專門寫這個話題）；（2）賠償不分類型，直接的、間接的損失全能賠；（3）能夠從對價中扣留一部分作為未來潛在賠償的資金（如果一定時間內沒有發生賠償事件，則資金釋放給賣方），比如說放在託管帳戶（Escrow account)中。但這這只是理想。本人從事境外併購十幾年，從沒有見過對買方如此有利的賠償條款，但我從上面三點肯定會出現在我起草併購協議的第一版中。
但有意思的一點的是，如果賣家是基金公司，一般來說，賠償條款幾乎不可能談，因為基金出售資產後起收入和收益一般會直接分配給基金的LP，不太可能保留一部分資金專門用於未來賠償，恐怕LP也不會同意。這種情況，本人的經驗是，購買Representation & Warranties insurance（未來我會就這個話題寫文章，有興趣的朋友可以研究一下）。
Indemnification provision are one of most important provisions to be negotiated in a purchase agreement. In the first part of this article, we』ll try to give a simple explanation of the indemnification provisions, explain how these provisions may come up after the closing, and give a few generic tips for sellers in handling indemnification. Secondly, we』ll provide some detail on specific provisions of the indemnity section and provide more seller tips related to those provisions.
First Part:
A very basic seller indemnification provision reads something like this:
"The seller and each shareholder, jointly and severally, will indemnify and hold harmless the buyer and its shareholders and subsidiaries (collectively, the 「Buyer Indemnified Parties」),and will reimburse the Buyer Indemnified Parties for any loss, liability, claim, damage, or expense (including costs of investigation and defense and reasonable attorneys』 fees and expenses), whether or not involving a third-party claim, arising from or in connection with … [a list of matters]."
So what does all of this legalese mean? In simple terms, the duty to indemnify and hold another harmless means to compensate the other for a loss suffered. In the context of a purchase agreement, the indemnity given by the seller and its shareholders is a contractual agreement by them to compensate the buyer for certain losses the buyer suffers after the closing and which are related in some to way to representations, warranties, covenants, or other obligations of the seller and/or its shareholders set forth in the purchase agreement.
In short, if the buyer is harmed or damaged in specific ways after the closing, then the seller is contractually agreeing to compensate the buyer for that damage or harm. From the seller’s perspective then, it’s critical to review and understand the seller’s indemnity obligations and to be sure they are as narrowly drawn as possible.
Some of the matters typically made part of the seller’s indemnification provision are as follows:
breaches of representations or warranties made by the seller or shareholders;
breaches of covenants or other obligations of the seller or shareholders;
any liabilities arising out of the ownership or operation of the company’s assets before the closing;
any product manufactured by or shipped by the seller or any services provided by the seller before the closing;
certain specific matters which may be disclosed in the disclosure schedules; and
all liabilities specifically retained by the seller.
Here are two short examples of situations where post-closing indemnity might come up. One, if the buyer purchases the seller’s business based on a multiple of 5 times the seller’s EBITDA (based on seller’s financial statements). The purchase agreement contains are presentation and warranty from the seller that its financial statements are true, correct, accurate, in accordance with GAAP, etc. After closing, the buyer discovers that the seller has not properly booked certain sales, and that revenues and earnings are overstated. Here, the buyer will have right to make an indemnity claim based on the allegation that it overpaid for the business based on the seller’s misrepresentation of its financial statements.
Second, suppose that after closing, the IRS(Internal Revenue Service, 美國國稅局) audits the business the seller has sold and finds an underpayment of taxes for one or more years ending before the closing. If the buyer is harmed by the under reporting of tax (either because the buyer overpaid for the business or perhaps because the deal was a stock sale and the purchased business is responsible for the tax), then the buyer will expect the seller to indemnify it for its losses.
With this background in mind, here’s a list of tips for sellers in negotiating the indemnification provisions of the purchase agreement:
Tip 1 – Don’t Leave It All to Your Lawyers. Indemnification is a little more esoteric（只有內行才懂的） than the parts of the purchase agreement that deal with business issues, but it is a critical part of the purchase agreement. Make sure you read and understand every word of Indemnification clause. Otherwise, go to your lawyer and ask.
Tip 2 – Thoroughly Review the Representations, Warranties, and Disclosure Schedules. One of the causes for indemnification by the seller is the seller’s breach of representations and warranties. In fact, this is how the indemnity section and the representations and warranties are connected (the seller breaches are presentation which causes the buyer loss or damage and the seller must indemnify). Therefore, it’s vital that the seller thoroughly review and understand the representations and warranties and make adequate disclosures if there are potential issues related to the representations and warranties.
Tip 3 – Thoroughly Review Retained Liabilities. – Another cause for indemnification is liabilities or obligations retained by the seller. Therefore, it’s important to review and understand what the seller is retaining and, if applicable, to properly discharge those liabilities after the closing.
Second Part:
Furthermore, here are several specific negotiation points with indemnification provisions.
Tip 1 – Include Deductibles and Caps. It’s customary to limit the maximum amount the seller may have to pay to the buyer under the indemnification provisions with 「deductibles」 and 「caps.」 Deductibles are thresholds below which the seller will not have to indemnify the buyer even if the buyer has a loss (sort of like a deductible on your automobile policy). And caps are ceilings on the maximum amount for which the seller may be required to indemnify the buyer. There are multiple variations on how deductibles and caps can be structured but just know that both are important and should be reviewed with your lawyer and considered in light of your deal. Your lawyer will be able to tell you what amounts are customary given the size of the transaction and other factors.
Tip 2 – Consider the Term of the Indemnity. If you』ve sold your business, you don’t want the buyer coming back to you many years later attempting to recover for some supposed loss or damage. You want your indemnity obligation to expire as quickly as possible. Therefore, you should include a time limit(s) within which the buyer must provide notice to you of any potential claims it may have. Actual negotiations of the time limits are usually very detailed and complicated and it’s customary to have various time limits depending on the source of the potential claim by the buyer. For example, the limit to bring a claim for breach of most of the representations and warranties might be one or two years, but the limit for tax claims might be the applicable statute of limitations that governs when the IRS can bring an action; and there might be no time limit at all for, say, environmental issues..
Tip 3 – Be Sure Indemnity Is the Buyer’s Exclusive Remedy. From your perspective as the seller, you want to make sure the indemnification provisions are the only mechanism through which the buyer can recover from you after the closing. You don’t want to spend substantial time and energy negotiating indemnification terms and then have the buyer essentially circumvent the contract by suing you on some other basis. Therefore, be certain to include a clause making indemnification the buyer’s exclusive remedy. Including such a provision means the buyer won’t be able to bring other types of actions, at least with respect to those liabilities covered in the indemnification provisions, and gives more certainty to the seller (for example, the seller knows the caps discussed above will be the maximum liability). A buyer will generally contest such a provision, and may successfully carve out some types of liabilities, especially those that are due to a seller’s fraud or intentional misrepresentation. But for the most part, the negotiated indemnification terms should be the buyer’s sole remedy.
Tip 4 – Limit the Types of Damages the Buyer Can Recover. The buyer will want to recover as many types of damages as possible, while the seller wants to limit the types of recoverable damages. Types of damages that can be sought in court include direct, indirect, incidental, consequential, special, exemplary, and punitive, and different courts may interpret these in different ways. The seller generally attempts to include in the indemnification provisions a limitation on the types of damages that the buyer can recover. Lawyers and academics argue over what these categories of damages actually cover and whether it is appropriate or customary for them to be excluded in the indemnification provisions. The key point, however, is that you don’t want to be liable for remote, indirect damages that arise from circumstances of the buyer that the buyer did not communicate to you when the transaction was underway. Your lawyer should be able to propose a provision that will limit your damages appropriately.
Tip 5 – Carefully Limit Setoff Rights. The right to setoff is an issue that arises when part of the purchase price is to be paid over time (e.g., via a promissory note), a term the buyer will often push for to, among other reasons, provide a readily available fund from which indemnity payments can be deducted if the buyer should make a claim. The note’s maturity date may correspond to the time limitation in the indemnification provisions. If the buyer has the right of setoff and reasonably believes it has a claim for indemnification, it can withhold payment under the note until the matter is settled. This mechanism gives the buyer much more power in the event of a potential indemnity claim, so the seller should be careful to clarify and limit the boundaries of any right to setoff.
Tip 6 – Consider Including Adjustments for Tax Benefit/Insurance Proceeds. If a buyer suffers a post-closing loss related to the acquired company, it may derive some tax benefit from the loss. If the indemnification provisions are silent with respect to tax benefits, then the buyer can bring an indemnification claim against the seller for the entire amount of the loss, while possibly still enjoying at least some of the tax benefit occasioned by the loss. Similarly, a buyer who suffers a loss may receive insurance proceeds for the loss, but unless the indemnification provisions provide otherwise, these are not deducted from the amount of the claim brought against the seller. The indemnification provisions can provide that indemnification should be net of tax benefits and insurance proceeds, but such provisions can be extremely complicated (and expensive, given the time they take lawyers to draft and negotiate) to include in the purchase agreement. As a buyer, you should certainly consider adding such provisions but discuss these with your lawyer.