Supply Contract Assignment Provisions in Corporate Share Transactions
Share transactions preserve entity contracts without assignment, but direct and indirect change of control provisions demand advance consent to avoid termination.
Indemnity Covenants
Meaning
Contractual promises that require one party to compensate another for specific losses, damages, interest payments or liabilities arising from a breach of warranty or a third-party claim. These indemnity covenants appear in share purchase agreements to allocate risk between the buyer and the seller. They provide a mechanism for recovering the value lost if a disclosed fact proves false.
The scope usually includes legal fees and settlement costs associated with defending a claim.
Liability Limitation
Parties often negotiate a maximum amount to restrict the total exposure of the indemnifying party. An indemnity covenants section might also include a basket or de minimis threshold. This prevents small or immaterial claims from triggering a payment obligation.
The limit ensures that the seller retains a portion of the exit proceeds regardless of minor errors.
Triggering Event
Formal notification is required as soon as a loss is identified or a claim is filed. The indemnity covenants specify the timeline for this notice and the consequences of delay. A late notice might void the right to recover if the delay prejudiced the defense of the claim.
Documentation of the breach must be thorough and evidence-based.
Procedural Recovery
Payment of the indemnified amount follows a set of steps defined in the purchase document. Funds may be held in an escrow account to ensure the indemnity covenants are backed by cash. The release of these funds depends on the resolution of the underlying issue or the passage of a survival period.