Meaning
Contractual clauses allocate the financial risk of undisclosed liabilities between the seller and the buyer. Effective asset purchase agreement indemnities provide the primary mechanism for the buyer to recover losses resulting from breaches of representations or warranties. These provisions typically include specific procedures for notifying the seller of a claim.
Liability Limitation
Caps and baskets define the extent of the seller’s exposure. A tipping basket requires the seller to pay the full amount once a threshold is met, while a deductible basket only covers losses above the agreed limit. Asset purchase agreement indemnities often cap total liability at a percentage of the purchase price, excluding fraud or fundamental breaches.
Survival Duration
Time limits restrict how long a buyer can bring a claim after the closing date. General warranties usually expire within eighteen to twenty-four months, though tax and environmental claims often last until the statutory period ends. Asset purchase agreement indemnities must specify these dates to provide certainty for the financial accounting of the exit.
Escrow Protection
Cash holdbacks secure the payment of potential claims without requiring the buyer to sue for recovery. A portion of the deal proceeds sits in a third party account for the duration of the survival period. If a breach occurs, the buyer accesses these funds directly, reducing the risk that the seller has already distributed the sale proceeds to investors.
This protection remains a standard feature in private equity exits where the seller is a special purpose vehicle. Negotiating the release of these funds often involves a final audit of the post-closing performance.
