Tom Cockriel, co-leader of Trenam’s Business Transactions Practice Group, authored an article for the September/October 2024 issue of Mergers & Acquisitions Magazine entitled “The Expanding Scope of Excluded Liabilities in Dealmaking,” offering analysis and guidance on the rising trend.
The article focuses on a recent development in asset purchases: the emergence of “excluded liabilities” as a pro-buyer broad indemnity protection.
“Historically, the seller would make a representation related to its financial statements that the target company did not have any undisclosed liabilities,” Cockriel explained. “Those representations were typically tied to generally accepted accounting principles (GAAP) and narrowly construed as applying to off-balance-sheet arrangements and similar items.”
Over time, the undisclosed liabilities concept has changed from a representation and warranty to a specific indemnified matter, and it has expanded in scope to cover any known and unknown liabilities related to the business of the target company prior to closing.
“Such transition has expanded the seller’s potential liability for post-closing claims,” Cockriel warned.
He shared options for sellers to consider when addressing the excluded liabilities provision, such as seeking to:
- Remove it entirely;
- Narrow it to the historical scope of undisclosed financial liabilities;
- Require that, if a claim can be made under a representation or the excluded liabilities clause, then it must be made under the representation; and,
- Include limitations on the excluded liabilities clause that are similar to the representations.
To access the full article, please click here.
