In an opinion denying a motion to dismiss, Delaware's Vice Chancellor Parsons considered the relationship between an indemnification 'basket' and the interpretation of 'material' in purchase agreements, suggesting that it is at least plausible that the dollar amount of the basket may define 'material' for purposes of the agreement generally.(1) (An indemnification 'basket' is used in purchase agreements to set a monetary threshold in calculating damages that must be crossed before a party may seek indemnification.)
Practitioners often consider the relationship between these two concepts, and the opinion confirms that parties should be clear in drafting the intent of the basket provision or risk judicial interpretation that may be at odds with the parties' intent. In the dispute, the parties to a stock purchase agreement are contesting an indemnification obligation related to an alleged breach of a material contract by the seller. Since the agreement did not define 'materiality', the seller argued that this should be interpreted according to the relatively high standard articulated in Delaware case law, while the buyer asserted that the agreement's $100,000 claims basket should define 'materiality' in the agreement, even though the basket provision did not mention materiality. In discussing the positions advanced by the parties, the court stated that the buyer's position was conceivable, noting that such an interpretation would recognise that the parties intended some relationship between the basket and the interpretation of 'materiality'.
Although this case does not resolve whether baskets and similar provisions should define the term 'material' even in the absence of an explicit reference to materiality, it serves as a helpful reminder of the potential interpretation of such provisions in purchase agreements.
For further information on this topic please contact Marko S Zatylny at Ropes & Gray's Boston office by telephone (+1 415 315 6300), fax (+1 415 315 6350) or email (firstname.lastname@example.org). Alternatively, contact James C Davis at Ropes & Gray LLP's Chicago office by telephone (+1 312 845 1200), fax (+1 312 845 5500) or email (email@example.com). The Ropes & Gray website can be accessed at www.ropesgray.com.
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