An indemnification provision in an acquisition agreement that includes a 'basket' and a 'cap' functions to:
- ARequire the seller to repurchase the business if losses exceed a certain amount
- BLimit the types of claims that can be made to only fraud claims
- CBasket sets loss threshold; cap sets maximum indemnity✓ Correct answer
- DTransfer all post-closing liabilities to the buyer regardless of their nature
Why C — Basket sets loss threshold; cap sets maximum indemnity
The basket establishes a de minimis threshold that must be exceeded before the buyer can make indemnification claims (typically 0.5-1.5% of deal value), filtering out minor losses. The cap sets the maximum aggregate indemnification liability of the seller, often 10-20% of the purchase price for general representations, with carve-outs for fraud. Together, these provisions allocate post-closing risk in a balanced manner, protecting sellers from minor or unlimited claims while giving buyers a meaningful remedy for significant breaches.
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