Indemnities in Dutch M&A Agreements

Known risks in Dutch transactions require more than general warranties

Indemnities in Dutch M&A agreements are provisions that allocate a specific identified risk between buyer and seller. They are typically used where due diligence has revealed a known issue, but the financial impact or final outcome is not yet clear.

In Dutch acquisitions, indemnities often relate to tax exposures, pending claims, employment disputes, regulatory issues, environmental matters, pension liabilities, IP disputes, data protection issues, customer claims, intercompany balances or specific debt-like items.

For international buyers, indemnities are an important tool because Dutch transaction documents often distinguish between general warranties, specific indemnities, disclosure, purchase price adjustments and W&I insurance. A known risk may not be suitable for a general warranty claim. It may need a separate indemnity in the SPA.

This article is part of the M&A Insights series on Dutch deal practice and is relevant for foreign buyers, sellers, investors and international counsel involved in Dutch acquisitions.

Why indemnities matter in Dutch M&A

An indemnity prevents a known risk from being absorbed into a broad warranty package.

If due diligence identifies a pending tax audit, customer dispute, regulatory issue or employment claim, the buyer will often not want to rely only on general warranties. The buyer wants a specific contractual allocation: if the identified risk materialises, the seller bears the agreed financial consequences.

For sellers, the issue is the opposite. An indemnity may be necessary to get the deal done, but it should be limited. A broad indemnity can create open-ended post-closing exposure.

Indemnities versus warranties

The distinction between warranties and indemnities is practical.

A warranty is generally a statement about the target business. For example, the seller may warrant that the target has no material litigation, has complied with tax obligations or owns the relevant IP rights.

An indemnity usually deals with a specific known risk. For example: if a tax assessment is imposed for a pre-closing period, the seller indemnifies the buyer. Or: if a pending claim results in payment liability, the seller bears that liability.

In Dutch SPA negotiations, parties should decide whether an issue is treated as a warranty, an indemnity, a purchase price adjustment or a disclosed matter. That choice determines the risk allocation.

When are indemnities used?

Indemnities are most useful for known risks that cannot be fully quantified at signing.

Common examples include tax risks, pending or threatened litigation, employment disputes, pension liabilities, environmental matters, permit issues, historical contract breaches, product liability, IP infringement, data breaches, intercompany arrangements and specific liabilities not reflected in the price mechanism.

Buyers often try to draft indemnities broadly. Sellers should narrow the indemnity to the specific identified risk, with clear limits on amount, time, procedure and causation.

Defining the risk

The most important part of an indemnity is the description of the risk.

An indemnity for “all tax risks” is very different from an indemnity for “the outcome of the announced payroll tax audit for the period 2022–2024”. An indemnity for “all customer claims” is broader than an indemnity for “the claim of customer X as described in disclosure item Y”.

For international buyers, broad drafting may appear attractive. For sellers, it can be dangerous. The indemnity should match the due diligence finding, the disclosure and the commercial allocation of price and risk.

Scope of loss

The SPA should define what loss is covered. Does the indemnity cover only direct loss? Does it also cover legal fees, adviser costs, interest, penalties, taxes, fines, consequential loss or loss of value?

Without a clear loss definition, parties may later dispute the amount recoverable under the indemnity. This is especially relevant for tax indemnities, third-party claims, regulatory issues and data breaches.

The SPA should also address mitigation, insurance proceeds, tax benefits and recoveries from third parties.

Caps, baskets and time limits

A key negotiation point is whether general liability limitations apply to indemnities.

Buyers often want specific indemnities to sit outside the general cap, basket and de minimis regime. Their argument is that the indemnity relates to a known risk that was specifically allocated to the seller.

Sellers usually resist unlimited exposure. Parties may agree a separate cap, a specific limitation period or a restriction to actually suffered loss.

There is no standard answer. The limitation package should reflect the nature of the risk, the purchase price and the commercial bargaining position.

Third-party claims

Indemnities often relate to third-party claims. The claims procedure is therefore important.

Who controls the defence? Must the buyer notify the seller immediately? Can the seller take over the defence? Can the buyer settle without seller consent? Who decides litigation strategy? What happens if the claim also affects the ongoing business?

Sellers want control because they may ultimately pay. Buyers want control because the claim affects the business they now own.

The SPA should resolve this before closing. Otherwise, the parties may end up fighting each other while also dealing with the underlying third-party claim.

Disclosure and indemnities

Disclosure and indemnities must be aligned.

If a risk is fully disclosed, the buyer may not have a warranty claim. But that does not automatically mean the seller has no liability. The parties may agree that a disclosed risk is covered by a specific indemnity.

For sellers, disclosure should not accidentally create broader exposure. For buyers, known risks should not fall between the warranty package and the disclosure letter.

The SPA should clearly state which disclosed matters are covered by specific indemnities and which are not.

W&I insurance and specific indemnities

In larger Dutch transactions, W&I insurance may be used. W&I insurance typically covers warranty breaches, but known risks are often excluded.

That is why specific indemnities remain important. A buyer may not obtain insurance coverage for a known issue and may therefore request a seller indemnity.

Sellers should understand which risks are covered by the policy and which remain with them. The SPA, disclosure letter and W&I policy should be reviewed together.

Purchase price mechanics and no double recovery

Indemnities must also be coordinated with the purchase price mechanism. If a risk is already reflected in completion accounts, locked box leakage, debt-like items or a specific price adjustment, the buyer should not recover twice.

The SPA should include a no double recovery provision. The buyer should be compensated for the agreed risk, but not twice for the same economic loss.

This is particularly relevant for tax liabilities, debt items, working capital, pending claims and intercompany balances.

Practical conclusion

Indemnities are not boilerplate. They are specific risk allocation tools.

For buyers, indemnities protect against known risks that are not properly addressed through general warranties or purchase price adjustments. For sellers, indemnities can create long-term post-closing exposure.

A well-drafted indemnity defines the risk clearly, identifies the recoverable loss, states whether caps and time limits apply, includes a claims procedure and aligns with disclosure, W&I insurance and the purchase price mechanism.

FAQ

What is an indemnity in a Dutch M&A agreement?
An indemnity is a provision under which the seller protects the buyer against a specific identified risk, such as a tax claim, litigation matter or known contractual issue.

What is the difference between a warranty and an indemnity?
A warranty is generally a statement about the target business. An indemnity allocates a specific known risk.

Do indemnities fall under the general liability cap?
That depends on the SPA. Indemnities may fall under the general cap, but parties may also agree a separate cap or uncapped liability.

Why do indemnities matter where W&I insurance is used?
Known risks are often excluded from W&I insurance. Specific indemnities may therefore still be required.

Can a buyer recover twice for the same loss?
The SPA should prevent this through a no double recovery clause, especially where the same issue is also reflected in the purchase price mechanism.

About Dirk de Waard

Dirk de Waard is a Dutch corporate and M&A lawyer, partner at Venture Lawyers in Amsterdam, and advises foreign buyers, sellers, investors and international counsel on Dutch acquisitions, SPAs, warranties, indemnities, disclosure, W&I insurance, purchase price mechanisms and post-closing claims.

Negotiating indemnities in a Dutch acquisition?

Indemnities can make a Dutch transaction executable where due diligence has identified a specific risk. The drafting determines who carries the risk after closing and whether claim procedures, disclosure, W&I insurance and purchase price mechanics work together.

Dirk de Waard advises buyers, sellers, investors and international counsel on indemnities and risk allocation in Dutch acquisitions. Contact Dirk de Waard at dirk.dewaard@viottalaw.com to structure specific indemnities before signing.