Basket agreements, also known as “Korb-Vereinbarungen” in German, are an important tool for mergers and acquisitions, as well as for corporate reorganizations. In simple terms, a basket agreement allows companies to consolidate multiple transactions into a single basket, or “Korb,” for the purpose of calculating any potential indemnification claims.
Essentially, a basket agreement is a risk-sharing agreement between buyers and sellers that sets a threshold for indemnification claims. With a basket agreement, any losses suffered by the buyer due to breaches of warranties and representations by the seller are only recoverable if they exceed a certain amount, called the “basket.” The basket is typically a percentage of the purchase price, and can range anywhere from 1% to 10% depending on the specifics of the deal.
The purpose of a basket agreement is to protect the seller from frivolous claims and to prevent buyers from making small indemnification claims that are not worth pursuing. It also gives the parties a clear understanding of their rights and obligations in the event of any potential claims, which can be important for maintaining good relationships between the buyer and seller after the deal has closed.
In addition to the basket threshold, most basket agreements also include a cap on indemnification claims. This cap sets a maximum amount that the buyer can recover from the seller, regardless of the actual losses suffered. Caps typically range from 10% to 20% of the purchase price, depending on the risks involved and the negotiating leverage of the parties.
When drafting a basket agreement, it is important to keep in mind the legal requirements of both the buyer and the seller, as well as any regulatory restrictions that may apply. In many cases, basket agreements must be approved by antitrust authorities or other regulatory bodies, which can add additional complexity to the drafting process.
Overall, basket agreements are a useful tool for managing risk in M&A transactions and corporate reorganizations. They enable buyers and sellers to establish clear frameworks for assessing and resolving indemnification claims, which can help avoid disputes and facilitate smoother transitions. If you are involved in a transaction that includes a basket agreement, it is important to work with experienced legal counsel who can help you navigate the complexities of these agreements and ensure that your interests are protected.