Anatomy of indemnification limitations
M&A indemnification regimes use three primary financial limitations to allocate post-closing risk between buyer and seller: the cap (maximum aggregate seller liability), the basket (threshold below which no claims are paid), and the deductible (similar to basket but limits recovery to amounts exceeding the threshold). Together these mechanics turn unlimited common-law breach of contract liability into a calibrated allocation.
Cap
- General cap: commonly 10-20% of purchase price for representations breach.
- Special caps: typically purchase price (full) for fundamental representations (capitalisation, authority, ownership), tax, fraud — uncapped in many jurisdictions for actual fraud.
- R&W insurance interplay: with insurance, cap is often reduced to 0.5-1% with insurance picking up above.
Basket (tipping basket) vs. deductible (true basket)
- Tipping basket: once aggregate claims exceed threshold, seller liable from dollar one (first-dollar recovery).
- Deductible (true basket): seller liable only for amounts exceeding threshold; threshold acts like an insurance deductible.
- Typical size: 0.5-1% of purchase price.
De minimis threshold
A per-claim de minimis threshold (e.g., USD 25-50k) excludes nuisance claims from counting toward the basket — only claims above the de minimis count toward basket fulfilment.
Special carve-outs from caps/baskets
- Fundamental representations (cap = purchase price; no basket).
- Tax (often own structure with longer survival and separate cap).
- Fraud (typically uncapped).
- Specific indemnities (pre-closing tax, identified liabilities, etc. — separate uncapped).
Türk M&A pratiğinde
Türk M&A işlemlerinde cap/basket/deductible yapısı yaygın benimsenir; ABA/NVCA model belgeleri pratikte yaygın referanstır. TBK Madde 19 (sözleşme özgürlüğü) ve Madde 144 (cezai şart indirimi) çerçevesinde Türk hâkim aşırı cap’leri inceleyebilir; pratikte düzenlenmiş işlemlerde sorun nadirdir. Türk işlemlerde fraud için sınırsız sorumluluk standart; vergi için ayrı uzun vadeli koruma yapısı yerleşik.
Do: structure tiered limitations matching risk categories; use deductible (true basket) where possible — first-dollar exposure is too generous to buyers; document fundamental rep list carefully.
Don’t: rely on a single cap and basket for all breach types — fundamental reps, tax, and fraud require their own carve-outs.