What is Indemnity Escrow?

Indemnity escrow is a crucial component of many M&A transactions. It provides a layer of protection for both the buyer and the seller against potential liabilities and financial losses that may arise after the deal is closed. In this blog post, we will delve into the details of indemnity escrow, its purpose, and how it works.

Understanding Indemnity Escrow

Indemnity escrow is an agreement between the buyer and the seller in an M&A deal, where a portion of the purchase price is set aside in an escrow account to cover any potential losses or liabilities that may arise post-closing. It serves as a form of insurance for both parties, providing financial security and ensuring that any indemnification claims can be fulfilled.

Who Should Indemnify the Escrow Bank?

One common question that arises in indemnity escrow is who should indemnify the escrow bank. The escrow agreement typically states that the buyer and the shareholder representative should jointly share the responsibility of indemnifying the escrow bank. This ensures that both parties are equally invested in the process and have an incentive to resolve any indemnification claims promptly.

Benefits of Indemnity Escrow

Indemnity escrow offers several benefits for both the buyer and the seller in an M&A transaction. Let's take a closer look at these benefits:

1. Protection against Potential Liabilities

Indemnity escrow provides a safeguard for the buyer against any undisclosed or unknown liabilities that may arise after the deal is closed. It gives the buyer the assurance that they can seek indemnification from the escrow funds if they discover any issues post-closing.

2. Security for the Seller

On the other hand, indemnity escrow also offers security for the seller. By setting aside a portion of the purchase price in an escrow account, the seller can ensure that they will be able to fulfill their indemnification obligations in case any claims arise.

3. Efficient Resolution of Indemnification Claims

Indemnity escrow streamlines the process of resolving indemnification claims. By having the funds readily available in the escrow account, both parties can expedite the resolution of any claims and avoid lengthy legal battles.

Indemnity Escrows, Holdbacks, and Baskets

When it comes to M&A transactions, there are other related concepts that are worth mentioning alongside indemnity escrow. These include indemnity holdbacks, tipping baskets, true deductible baskets, and dollar-one baskets. Let's explore these concepts in more detail:

1. Indemnity Holdbacks

Indemnity holdbacks are provisions in the purchase agreement that allow the buyer to withhold a portion of the purchase price for a specified period of time. This ensures that the buyer has recourse if any indemnification claims arise during that period.

2. Tipping Baskets and True Deductible Baskets

Tipping baskets and true deductible baskets are mechanisms that define the threshold for indemnification claims. Tipping baskets set a minimum claim amount that must be reached before the indemnification process can be initiated. True deductible baskets, on the other hand, establish a deductible amount that the buyer must bear before seeking indemnification.

3. Dollar-One Basket

The dollar-one basket is a concept that provides full indemnification for any losses or liabilities, regardless of the amount. It eliminates the need for a deductible or a minimum claim threshold, ensuring that the buyer is fully protected from any financial losses.

Conclusion

Indemnity escrow plays a vital role in M&A transactions, offering protection and security for both the buyer and the seller. By understanding the purpose and benefits of indemnity escrow, parties involved in M&A deals can navigate the indemnification process more effectively and ensure a smooth transaction.