Understanding when an M&A indemnification claim accrues is critical for buyers and sellers in private company transactions. This blog explores a Delaware case that clarifies the distinction between first-party and third-party indemnification claims and how survival provisions impact post-closing disputes. Learn how the timing of claims can extend beyond closing, affecting deal negotiations and risk allocation.
M&A Stories
February 12, 2025
In private company M&A, buyers frequently make post-closing claims for a seller’s breach of the purchase agreement or for indemnification related to the seller’s pre-closing operations. The agreements typically define how long a buyer has to bring such claims—these are known as survival provisions.
While the survival period’s length is usually clear, disputes often arise over when it starts. This Delaware case highlights how survival periods for indemnification claims can extend well beyond closing.
The dispute involved a buyer who settled with a major material handling system customer of the seller over design and procurement issues. The seller argued in its motion to dismiss that the buyer’s claim was untimely because it was filed after the survival period had expired. Under the agreement, the survival period for breaches of representations and warranties—such as compliance with customer contracts and the absence of material defaults—began at closing and expired before the buyer filed its claim.
However, the court found that the seller had also agreed to indemnify the buyer for third-party losses arising from breaches of contract. The survival period for this indemnification claim did not begin at closing but instead when the buyer settled with the customer. As a result, the buyer’s claim was timely.
This case underscores a key distinction in Delaware law: First-party indemnification claims—where the buyer seeks recovery for the seller’s breach of representations, warranties, or covenants—typically accrue at closing. In contrast, third-party indemnification claims—where the buyer seeks recovery for losses related to external claims—accrue when the claim is resolved, such as through settlement or a final judgment. Sellers should be aware that survival periods don’t always begin running at closing, particularly when indemnification provisions extend to third-party claims.
Comment: Buyers and sellers can extend Delaware’s breach of contract statute of limitations by contract in most M&A transactions (purchase price at least $100K, 10 Del. C. § 8106).
See: In Re Takraf USA, Inc. v. FMC Technologies, Inc. C.A. No. N24C-01-090 VLM CCLD., Superior Court of Delaware, (January 30, 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.
By John McCauley: I write about recenegal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
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Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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