Meaning
A contractual threshold used in merger and acquisition agreements prevents buyers from bringing claims for indemnification until the aggregate value of such claims exceeds a specified amount. This mechanism, known as the indemnity basket, acts as a filter for minor issues that do not materially affect the value of the acquired business. It defines the point where the seller’s liability begins.
Deductible Threshold
Two main varieties of this clause dictate how payments are made once the threshold is crossed. An indemnity basket configured as a deductible only requires the seller to pay for losses that exceed the target amount. This is contrasted with a first-dollar basket, where the seller becomes liable for the entire amount from the first penny once the limit is met.
Claim Concentration
Individual minor breaches are aggregated to reach the required level of loss. The indemnity basket ensures that buyers focus on substantial failures rather than minor operational discrepancies. This focus prevents administrative costs from exceeding the value of the recovery.
Boundary Limitation
Sellers utilize this clause to protect themselves from continuous small demands. By inserting an indemnity basket, they establish a zone of safety for minor post-closing issues. This boundary stabilizes the finality of the transaction.
