Don’t let a seemingly minor clause sink your M&A deal recovery. This crucial legal blog dissects a Delaware Supreme Court case revealing the unexpected cost of overlooking the supporting document requirement in indemnification notices. Essential reading for buyers, sellers, and advisors in the lower middle market seeking to navigate post-closing risks and avoid costly litigation.
M&A Stories
May 2, 2025
Indemnification claims are a familiar chapter in the M&A narrative, particularly for buyers inheriting the complexities of a newly acquired business. Typically, the acquisition agreement mandates a written notice from the buyer to the seller within a defined period, often requiring a reasonable detailing of the alleged breach.
However, a recent Delaware Supreme Court decision, Thompson Street Capital Partners IV, LP v. Sonova United States Hearing Instruments, LLC, serves as a stark reminder that “reasonable detail” may not always suffice. The case, involving the acquisition of audiology practices, hinged on a seemingly straightforward clause: the buyer’s indemnification notice was required to include “copies of all available material written evidence” supporting its claim of improper billing practices.
The buyer failed to meet this obligation. The Delaware Supreme Court, emphasizing the contractual language, stated that absent a compelling legal justification, this omission could lead to a forfeiture of the buyer’s right to indemnification. The court remanded the case to determine if the buyer’s non-compliance could be excused due to issues of materiality and disproportionate forfeiture, matters the lower court had not adequately explored.
This litigation underscores a critical, often underestimated aspect of M&A transactions for buyers in the lower middle market: the procedural precision demanded by indemnification clauses. While the requirement to furnish supporting documentary proof might not be ubiquitous, its inclusion carries significant weight. For both buyers and sellers, such a provision offers distinct advantages. It compels the buyer to thoroughly vet the merits of their claim early, providing the seller with a more transparent understanding of the grievance and potentially fostering settlement discussions that circumvent costly litigation.
The core issue illuminated by Thompson Street v. Sonova is the potential for even sophisticated buyers to stumble on seemingly technical procedural requirements. The pre-closing period, often dominated by due diligence into the target’s operations and financials, must also include a meticulous review of the indemnification notice provision. Legal counsel must guide buyers to treat this clause not as boilerplate, but as a critical roadmap for preserving post-closing remedies.
Creating a pre-closing checklist detailing every element required in an indemnification notice is a prudent step. For a claim of improper billing, as in the Sonova case, this checklist would prompt the inclusion of: billing records, potentially redacted patient records, compliance policies, relevant communications, audit reports, and applicable regulatory guidance.
The Sonova litigation offers a valuable, if cautionary, lesson for buyers, sellers, and their advisors in the lower middle market. It highlights that the right to indemnification is not merely about the existence of a breach, but also about strict adherence to the contractual mechanisms for asserting that breach. Overlooking the seemingly granular requirement of supporting documentation can lead to a costly forfeiture, a risk that thorough pre-closing preparation can significantly mitigate.
See: Thompson Street Capital Partners IV, LP v. Sonova United States Hearing Instruments, LLC, No. 166, 2024, Supreme Court of Delaware, (April 28, 2025).
Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.
Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law in lower middle market private target deals..
By John McCauley: I write about recent problems of buyers and sellers in lower middle market private target deals.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my books: Buying Established Business Assets: A Guide for Owners, https://www.amazon.com/dp/B09TJQ5CL5
and Advisors and Selling Established Business Assets: A Guide for Owners and Advisors, https://www.amazon.com/dp/B0BPTLZNRM
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