M&A Indemnification Provisions, 0517 SCBJ, SC Lawyer, May 2017, #38

Author:Melinda Davis Lux, J.
 
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M&A Indemnification Provisions

Vol. 28 Issue 6 Pg. 38

South Carolina BAR Journal

May, 2017

Are You Drafting Unenforceable Time Limits?

Melinda Davis Lux, J.

Every day, lawyers across the country assist buyers and sellers of businesses in transactions involving mergers and acquisitions (M&A). These transactions are accomplished by a purchase agreement heavily negotiated between the buyer and the seller. The convention in an M&A transaction is for the seller to make representations and warranties to the buyer regarding the target business. When the target business is a private company, the acquisition agreement typically provides the buyer with a post-closing right to indemnification if any of the seller’s representations and warranties prove to be untrue. The purchase agreement also typically provides that the buyer’s right to indemnification is the buyer’s exclusive remedy for breaches of the seller’s representations and warranties.

Indemnification time Limits in M&A Agreements

How long after an acquisition closes may the buyer of a business bring a claim for indemnification against the seller? After selling a business, the seller desires to cut off the seller’s post-closing liability for breaches of the representations and warranties in the acquisition agreement as quickly as possible. The seller wants the comfort of knowing that the proceeds of the sale received by the seller at closing are no longer at risk.

Consequently, it is common in M&A agreements to provide that the buyer’s right to bring a indemnification claim against the seller for breaches of most representations and warranties (excluding certain “fundamental” representations and warranties) terminates on a negotiated date. According to the American Bar Association’s 2015 Private Target M&A Deal Point Study, 82 percent of acquisition agreements included in the study provided that the buyer’s right to bring indemnification claims based on non-fundamental representations and warranties terminated 18 months or less after closing.

Shortening the statute of limitations (SOL)

The statute of limitations in South Carolina for bringing “an action upon a contract” is three years.1 A provision in an M&A agreement that purports to limit the buyer’s right to bring indemnification claims to a period of 18 months from the closing is essentially an attempt to shorten that statute of limitations. Is the 18-month time-bar enforceable? South Carolina law does not permit parties to a contract to shorten an otherwise applicable statute of limitations. Specifically, S.C. Code §15-3-140 provides: No clause, provision or agreement in any contract of whatsoever nature, verbal or written, whereby it is agreed that either party shall be barred from bringing suit upon any cause of action arising out of the contract if not brought within a period less than the time period prescribed by the statute of limitations, for similar causes of action, shall bar such action, but the action may be brought notwithstanding such clause, provision or agreement if brought within the time period prescribed by the statute of limitations in reference to like causes of action.

In Scott v. Guardsmark Security,2 the district court applied §15-3-140 and found that a time limitation in an employment agreement was void because “South Carolina law prohibits contractual provisions that reduce a statute of limitations.”

Applying §15-3-140 to M&A indemnification provisions, it is...

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