Indemnification (M&A)
In M&A, the contractual obligation of one party (typically the seller) to compensate the other (typically the buyer) for losses arising from breaches of representations, warranties, or covenants, or from specifically identified risks.
Note: This entry covers the M&A risk-allocation concept. For entity-level indemnification of directors and officers under TBOC Chapter 8, see Indemnification (Corporate).
In M&A transactions, "indemnification" refers to the contractual obligation of one party (typically the seller) to compensate the other (typically the buyer) for losses arising from breaches of representations, warranties, or covenants, or from specifically identified risks. Distinct from corporate indemnification under TBOC Chapter 8, that is the entity's protection of its directors and officers; this is the deal-level risk-shifting mechanism between buyer and seller.
Sources of indemnifiable loss
Typical M&A indemnification covers: (1) breach of representations and warranties; (2) breach of pre-closing or post-closing covenants; (3) excluded liabilities (in asset purchases) or specifically retained liabilities; (4) "special indemnities" for identified risks (pending litigation, known environmental issues, contingent tax positions); (5) third-party claims arising from pre-closing matters.
Limits on indemnification
Indemnification obligations are typically capped (the "cap") and subject to a threshold or deductible (the "basket"). Survival periods limit the time within which claims must be brought. In Texas, a contract term that shortens the time to sue to less than two years is void, as is a requirement to give notice of a claim within less than 90 days as a condition of suing, unless the contract relates to the sale or purchase of a business entity and involves consideration of at least $500,000. Tex. Civ. Prac. & Rem. Code §§ 16.070, 16.071. Specific carve-outs typically apply to fundamental reps, taxes, fraud, and special indemnities.
Direct claim vs. third-party claim procedures
Most agreements distinguish: (1) direct claims (buyer's own losses, asserted directly against seller), usually require notice within a specified period and a defined dispute-resolution mechanism; (2) third-party claims (claims by outsiders against buyer that trigger seller indemnification), usually require prompt notice, opportunity for seller to assume defense, and constraints on buyer's authority to settle without seller consent.
Recovery sources
Indemnification claims are typically satisfied through: (1) escrow / holdback (first source); (2) RWI policy (where applicable); (3) direct clawback from the seller; (4) setoff against earnout or deferred consideration. Most transactions establish a hierarchy among these sources.
Indemnification is often among the most heavily negotiated sections of an M&A agreement. The combination of survival period, cap, basket, escrow size, special indemnities, and RWI structure together determine the seller's post-closing liability profile. The ABA's 2025 Private Target Deal Points Study reports that 63% of deals studied referenced RWI and that 41% provided that representations and warranties do not survive closing, up from 30% in the prior study.
Companion article: Selling Your Business in Texas