Market Standards: Trends in Recoverable Loss Exclusions

Indemnification provisions are some of the most intensely scrutinized and negotiated terms in private-target acquisition agreements. While there are many ways to limit or expand indemnification obligations, a key term that parties often negotiate is the definition of a recoverable “loss.” Because they usually face greater overall exposure to post-closing indemnification claims, sellers will seek to impose limitations and exclusions on recoverable losses, while buyers will seek to keep recoverable losses broad and will resist exclusions or limitations in order to maximize their right to indemnification from the seller for post-closing damages and third-party claims. Typical exclusions from recoverable losses include punitive, incidental, and/or consequential damages.

According to Market Standards, 133 transaction agreements were filed between December 1, 2022 and February 1, 2023 containing indemnification provisions that either provided explicit exclusions from recoverable losses or contained no express exclusions. Of those 133 deals:

• Seven deals excluded punitive damages
• Five deals excluded consequential damages
• Three deals excluded incidental damages
• Six deals excluded damages of a specific nature or source other than punitive, consequential, or incidental damages

Exclusions from recoverable losses, though rare across the board, were more prevalent in stock acquisitions (7% of all stock acquisitions) than in deals structured as asset acquisitions (3%) or mergers (5%):

Exclusions from recoverable losses also tended to be concentrated in middle market transactions with a total deal value between $100 million and $500 million, with no deals valued at less than $10 million or more than $500 million containing any exclusions whatsoever:

Market Standards is a powerful tool for researching and comparing over 38,000 M&A transactions from 2008 to the present. Leverage Market Standards to find on-point precedent language on the most highly negotiated transactions with over 150+ M&A deal points. To learn more about how it can help M&A attorneys work more efficiently, click here.

Discover Emerging Trends in M&A Transactions

Learn more about drafting and negotiating indemnification provisions and exclusions from recoverable losses with our key drafting considerations chart.

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