16.4 Remedies (Indemnities) 475ranty will not necessarily be regarded as circumstances that would change the
valuation of the target as a whole. In addition, there is the problem of counterparty
credit risk: if the seller has used the proceeds, the seller may be unable to pay.
Agreed indemnities for breach of contract. The acquirer should therefore ensure
that the parties have regulated the question of remedies for breach of contract. The
acquirer is not sufficiently protected if the parties have agreed on the specifica-
tions of the object and not much else.
The acquirer should ensure that the contract sets out what it means if the vendor
is responsible for misrepresentations or breach of contract. There should be a clear
mechanism to calculate their effect on price or damages.
Different remedies should apply to breaches of different categories of terms.
For example, it is not meaningful to agree that all misrepresentations amount to
breach of contract and give the buyer a right to claim large damages or a large
price reduction.
The vendor will therefore require de minimis exclusions (materiality clauses).
The parties often agree that the vendor is responsible for material misrepresenta-
tions or for misrepresentations that exceed a certain threshold (a euro amount de-
pending on deal size or a percentage threshold, for example, 1%-2%).
The vendor will require a cap to its liability. The cap can be a certain percent-
age of the purchase price or a fixed maximum amount. The vendor may not in-
voke caps in the event of fraud or when it has caused damage wilfully or through
gross negligence (for limitation of liability clauses, see Volume II).^56 The cap ac-
ceptable to the vendor can depend on the nature of the vendor and the market and
whether an M&A insurance policy is used. Whereas a traditional industrial vendor
can accept a higher cap (for example, 30%-50% of the purchase price), a financial
investor who plans to distribute the purchase price to its own investors immedi-
ately after closing will insist on a much lower cap. The use of an M&A insurance
(see below) can enable the parties to agree on a very low cap (for example, 1%-
2% of the purchase price).
In addition to general materiality clauses and caps that apply to its liability in
general, the vendor can also try to limit its liability for certain specific facts by
materiality clauses or caps that cover its warranties for those facts.
The acquirer can try to ensure that the qualifiers, de minimis exclusions and
caps are not cumulative and that they do not provide for a “double-dip” for the
vendor.^57
Who may benefit from indemnities? The acquisition agreement is a contract be-
tween its parties and only those parties may rely on it. On the other hand, most of
the representations and warranties of the vendor relate to the specifications of the
target. In a share deal, they relate to circumstances of the target company. Nor-
(^56) For German law, see §§ 276 and 444 BGB. For the possible effects of § 444 BGB on
contract practice, see Jaques H, Haftung des Verkäufers für arglistiges Verhalten beim
Unternehmenskauf - zugleich eine Stellungnahme zu § 444 BGB n. F., BB 2002
pp 417–423.
(^57) Goldberg L, op cit, pp 218–219.