In any sale and purchase of a company, there is one element that can save the parties from a million-dollar problem: indemnity in M&A. Sound familiar? It’s time to get it right.
What exactly does an indemnity cover in M&A?
Imagine this: you are about to close a deal. You have done your due diligence, but you see a possible tax lawsuit. It hasn’t materialised yet, but alarm bells are ringing. In that scenario, an indemnity clause is not a suggestion: it’s your bulletproof vest. It obligates the seller to bear the cost if that problem is triggered after closing. Without it, that potential lawsuit can become your nightmare, legally and financially.
Indemnities apply to known risks. We are not talking about vague promises like warranties, but precise guarantees: if X happens, you pay.
Typical examples:
- Ongoing litigation
- Fines for tax inspections in process
- Outstanding labour debts
The key is to put it in writing. Because if you know it and you don’t agree to it, you won’t be able to claim. It’s that simple. It’s that dangerous.
Indemnities vs Civil Code
This is where the second level of the game comes in: the Civil Code. Article 1484 states that the seller is liable for hidden defects. But beware: if the buyer knows about them, there is no longer any liability. In the M&A world, this is not always the case. That is why sandbagging clauses exist. What do they do? They allow you to claim even if you were already aware of the problem, as long as the seller has concealed it or lied about it in his statements.
But is that legal in Spain? It depends. Some courts validate them on the grounds of contractual autonomy. Others do not, considering them contrary to mandatory rules. What is clear is this: if you don’t talk about it and don’t agree to it, you lose. This is why it is often decided to directly exclude the application of the Civil Code. But this is not a minor decision. Because in doing so, it also removes its protections. It can be a double-edged sword.
At Confianz we evaluate each case. It’s not about filling a contract with meaningless clauses. It’s about designing an agreement that works, that holds up and that defends you. We also help to set clear limits: what risks are covered, for how long, with what economic ceiling and under what conditions. Because a poorly negotiated indemnity can be a dead letter.
How we approach it at Confianz
At Confianz we do not use templates. Each operation has its own edges, risks and urgencies. And indemnities are too important to improvise. Our approach:
- We take a closer look at due diligence
- We detect real risks, not assumed risks
- We design clauses that make both legal and practical sense.
- We negotiate without fear and with substance
We know that a badly drafted clause can cost millions. And we also know that negotiations are often avoided so as not to «strain» the relationship. We say the opposite: you have to tighten it where it is needed, so that it does not break later. Moreover, we help to filter out what is reasonable. Because not everything should be covered by indemnity. They can be limited to clear cases: malice, blatant errors or known but unresolved facts. This protects the buyer, without suffocating the seller.
That is why we say that indemnities are not small print. They are the heart of the contract. And if they are badly done, there is no turning back.
An indemnity in M&A is not just a legal formality. It is your life insurance in a complex transaction. It may sound like a technicality, but it is not. If you are in the middle of an M&A transaction or about to enter into one, don’t jump in without it in place. A clear indemnity can save you years of litigation and headaches.
At Confianz, we have been fine-tuning these clauses for years. Not with theory, but with practice. Real cases. Real people. Real risks. Are you buying or selling a company? Let’s talk.