Indemnification is a way of offsetting the risk associated with a particular event. It can be understood as vouching for another person or getting someone else to vouch for you. When you indemnify someone, you are saying that you will take responsibility if there is an issue with the contract, business deal, or related event.
This means you agree to defend any lawsuits on their behalf and bear liability for pay damages if you lose the case. If you have questions about the role of an indemnitor and how this may relate to your business, reach out to a skilled corporate law attorney. A lawyer at our firm can answer any questions you may have about this indemnification in mergers and acquisitions in Georgia.
Indemnification clauses are incredibly common in mergers and acquisitions. If a major company, such as AT&T, merges with or acquires a smaller company, there will likely be a broad indemnification clause in the purchase agreement. This provision would state that the smaller company is responsible for handling any lawsuits that arise from that contract.
Unfortunately, in scenarios such as these, the smaller company often cannot afford the legal fees required to litigate the dispute. Even if the business can afford to litigate, the damages they will have to pay if they lose the case will likely bankrupt them.
The larger company, however, will be unaffected and able to save face in front of its stock owners. If you are a business owner, you should carefully review any indemnification clauses with an experienced lawyer before signing.
There are two indemnification clauses in a typical purchase agreement—one to protect the buyer and one to protect the seller. The seller typically takes legal responsibility for anything that could have gone wrong before the contract was signed. Conversely, the buyer assumes legal responsibility for anything that goes wrong after the purchase is complete.
If a dispute arises between the buyer and the seller, determining liability is often a matter of proving when the problem occurred. For example, if you find out there is an issue with your car’s engine after you buy it, the seller can escape liability by proving the vehicle was fine before the purchase. Mergers and acquisitions between two companies are often much more complex than this, so you should seek legal help if you are facing a dispute regarding indemnity.
Indemnity obligations are often capped at regular damages—not punitive or treble damages. Regular damages cover the financial losses associated with a particular event. In the earlier car example, these economic losses might be the costs of repairing the vehicle and paying medical bills for any injuries related to the car’s defective engine. These damages might add up to $30,000.00
Punitive and treble damages are designed to punish the at-fault party for their horrible actions and disincentivize similar behavior in the future. So, if you can prove that the seller intentionally messed with the engine before the sale, that might warrant punitive or treble damages in a typical lawsuit.
However, because indemnification is generally capped at regular damages, the buyer in this situation would not be able to pursue those additional punitive damages. If you are planning on executing a legal agreement with an indemnity clause, it is crucial that you speak with a lawyer in Georgia who is familiar with this concept.
When planning for a merger or acquisition, you should thoroughly examine the purchase agreement for any indemnity clauses. You should be aware of whether the other party expects you to bear liability for certain events. If you need help reviewing your contract, speak with an attorney at Sparks Law to discuss indemnification in mergers and acquisitions in Georgia.