Delaware courts are frequently called upon to interpret indemnification provisions linked to representations and warranties, which serve as potential remedies for losses, dictating when and how one party must make whole the other. Transaction parties often heavily negotiate indemnification provisions because they are valuable mechanisms for allocating risks and transaction costs.
Three recent Delaware opinions underscore the importance of (i) defining the scope of indemnification to avoid ambiguity, (ii) signaling when compliance with a provision is material and (iii) determining how to calculate damages.
Ambiguity in Scope
In LGM Holdings,[1] the Delaware Supreme Court reversed a Superior Court decision, ruling that a post-merger letter agreement addressing the scope of indemnification was ambiguous. In the merger agreement for a $35 million pharmaceutical business, the sellers represented material compliance with law. But after closing, the U.S. Food and Drug Administration and the Department of Justice investigated the business, including for pre-closing conduct. To address potential losses and claims, the sellers and buyers entered into a letter agreement, which included a $6 million indemnification cap.
For further information, please contact:
Edward B. Micheletti, Partner, Skadden
edward.micheletti@skadden.com
