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Mergers and Acquisitions Law

Delaware Chancery Court Clarifies Method of Interpreting a Private M&A Indemnification Clause

By George Khoukaz

On July 31, 2019, the Delaware Chancery Court (the “Court”) held that a buyer breached a securities purchase agreement (the “Agreement”) by violating the tax indemnification procedure outlined in the Agreement.  Matthew Hill and his father (collectively, the “Sellers”) filed a lawsuit against LW Buyer, LLC (the “Buyer”), claiming that the Buyer, by settling tax claims without notifying the Sellers, violated the indemnification procedure agreed upon by the parties. 

The tax indemnification clause in the Agreement required that the Sellers indemnify the Buyer for any previously unpaid taxes, provided that the Buyer notify the Sellers of such a breach within one year from the closing date by providing the specific factual basis of the claim in reasonable detail. After closing, the Buyer determined that certain sales and use taxes were owed by the Sellers for the pre-closing period.  The Buyer paid the amount owed, and provided the Sellers with a written notice one day before the end of the one-year period.  The Buyer insisted its notice provided the sellers with enough information to be aware of the basis for its claims, while the Sellers’ complaint alleged the claim notice “failed to specify a single inaccuracy or provide any background information about the alleged inaccuracies.”

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