Most merger agreements have a concept of a “basket” in the indemnification section. The idea is that the buyer should not be permitted to bring indemnification claims, with some exceptions, until the damages rise to some level of materiality in the context of the overall deal.
In SRS Acquiom’s view, this threshold should be met only after the buyer has suffered actual damages in excess of the basket amount, rather than once the buyer has merely asserted damages in excess of the threshold amount. Otherwise, the buyer could circumvent the purpose of the basket and seek recovery for all claims by simply submitting tenuous claims that have only a remote possibility of actual damages.
The type of language SRS Acquiom believes is flawed in connection with this issue is similar to this:
Buyer shall not be entitled to indemnification unless and until the aggregate amount of claims submitted by Buyer exceeds $X.
or more vaguely:
Buyer shall not be entitled to indemnification unless and until the aggregate amount of losses for which it seeks to be indemnified exceeds $X.
To avoid this uncertainty and potential ability to circumvent the intent of the basket, SRS Acquiom suggests language that is more precise:
Buyer shall not be entitled to indemnification hereunder unless and until the aggregate amount of actual losses for which it is entitled to indemnification hereunder exceeds $X.