Survival
What is the Survival section? This section allows the parties to use indemnification to resolve post-Closing disputes. But what is indemnification? In short, it is a built-in enforcement mechanism that allows the parties to be made whole following a breach of the Agreement without going through the costly and time-consuming legal system. Rather than enforcing the representations and warranties (and, potentially, other areas of the Agreement) through litigation, the parties agree that certain breaches will be handled between the parties without going to court. For example, if the Buyer breaches a portion of the Agreement that is subject to indemnification, the Seller calculates the damage suffered because of the breach and makes a claim to the Buyer for payment. The Buyer can accept the claim and make the payment, or object and it is resolved by an agreed upon dispute resolution process (one that is meant to be faster and cheaper than litigation).
The Middle Ground: The Survival provision states that the representations and warranties (and any other provisions) subject to indemnification under the Agreement will survive after the Closing, and provides an explanation of when each representation is no longer applicable. Typically, the general survival period is anywhere between one and two years, with certain specified representations lasting for a longer period of time. The portions of the Agreement that tend to last longer than the baseline survival period include representations regarding fundamental corporate matters (i.e. organization and authority of both parties), Title to Purchased Assets, the Condition and Sufficiency of Assets, Taxes, Environmental Matters, and Employment Matters.
Purpose: Since most purchase agreements terminate at the Closing, certain portions must be identified for “survival” in order to remain effective after Closing. The indemnification provisions are some of the most important to survive termination of the Agreement. Without this survival clause, any cause for indemnification would have to be discovered prior to Closing, and that is simply not a reasonable expectation, especially for the Buyer who won’t take control of the Business until after the Closing. So, the Survival section is used to show how long claims for indemnification are available and ensures that those claims can be made after the ownership transition has taken place.
Buyer Preference: Ideally, the Buyer would be able to negotiate for indefinite survival of all representations, warranties, and covenants made by the Seller. In practice, that’s probably not going to happen since the Seller does not want to perpetually plan for the possibility of a claim, and because some states do not allow for contractual extension of a statute of limitations. To address the second concern, the Buyer has a couple options: (1) it can negotiate to change the governing law provision to a state with a longer statute of limitations or to a state that allows for contractual extension of the statute of limitations, or (2) state explicitly in the Agreement that a claim for indemnification does not accrue until the wrongdoing is discovered or should have been discovered. In addition to these general strategies, the Buyer wants to assess which representations, covenants, etc. present the greatest loss potential down the road and negotiate for the extended survival of those provisions. For example, whether companies are properly collecting sales tax has arisen as a major issue for buyers of e-commerce businesses, so the Buyer in that situation wants the representation relating to sales tax to survive for as long as it could be exposed to pre-Closing sales tax liability.
Seller Preference: Other than the payment provisions that favor the Seller and extend past the Closing, the Seller will prefer a short survival period for the representations, warranties, and covenants contained in the Agreement. That is because, by the nature of the transaction, the Buyer is more likely to bring a claim for indemnification than the Seller. In some jurisdictions, simply limiting the survival period is not enough to prevent an indemnification claim during that period; the survival language must actually limit the time in which a claim can be brought for a breach. Unlike the Buyer, the Seller should have intimate knowledge of where its risk lies regarding the Purchased Assets, so its top priority on this point is to attempt to limit the survival periods in those areas.
Differences in a Stock Sale Transaction Structure: None.
