Which Corporate Sales Risks Drive Disputes in M&A Deals?

Representations and warranties create liability because the buyer can bring an indemnification claim if any statement is breached after closing, even if the breach was unknown at the time of signing. The seller typically remains liable for a defined period (often 12 to 24 months for general reps, longer for tax and environmental matters), and the financial exposure can be substantial. In a Queens Commercial Court case, a seller faced a $2 million indemnification demand because financial statements included in the reps contained overstated receivables. The seller had believed the numbers were accurate at signing, but the buyer's post-closing audit revealed the misstatement, triggering a claim well within the survival period. The key risk is that you may be defending claims for facts you did not control or discover until litigation forced disclosure.

Qualifications (such as to the seller's knowledge or except as disclosed in the schedules) and baskets (minimum thresholds before indemnification kicks in) are the primary tools to limit post-closing exposure. A basket might require the buyer to aggregate all breaches and only recover if they exceed, say, $100,000; a deductible might require the buyer to absorb the first $50,000 of any claim. These mechanics are heavily negotiated because they directly determine whether a $500,000 breach actually triggers a $500,000 payment or is absorbed below the threshold. The interaction between knowledge qualifications and baskets is often where disputes arise, because parties disagree on what knowledge means and whether a particular fact fell within the seller's actual awareness.

Survival periods determine how long after closing a buyer can bring an indemnification claim; once the period expires, the seller is no longer liable even if a breach is later discovered. A 12-month survival period exposes the seller to one year of claims; an 18-month or 24-month period extends that exposure significantly. In federal court proceedings involving multi-million-dollar acquisitions, the difference between a 12-month and 24-month survival can mean tens of millions in exposure. The practical significance is that a seller's insurance and escrow arrangements must cover the full survival period, and any breach discovered after expiration is the buyer's loss. Negotiating shorter survival periods for non-fundamental reps (such as compliance with routine regulations) while accepting longer periods for tax and environmental matters is standard risk allocation.

Most corporate sales agreements require the indemnified party to notify the indemnifying party of a claim, allow a reasonable period for the indemnifying party to defend or settle, and establish procedures for claim documentation and dispute resolution. The mechanics matter because procedural failures can waive the right to indemnification entirely. Many agreements require notice within 30 or 60 days of discovery; missing that deadline can bar the claim. The indemnifying party typically has the right to control defense and settlement of third-party claims (such as tax audits or regulatory investigations), which creates tension if the parties disagree on strategy. Business, corporate, and securities law counsel should review these procedures carefully, because a buyer or seller that fails to follow them can lose millions in otherwise valid claims.

Earn-out disputes most often arise from disagreement over how revenue or EBITDA is calculated, whether the buyer has an obligation to operate the business in a manner that allows the earn-out to be achieved, and whether certain costs or adjustments should be included or excluded from the calculation. A seller might argue that the buyer deliberately starved the business of resources to reduce the earn-out; the buyer responds that market conditions or operational challenges made the targets unachievable. Courts have imposed implied duties of good faith and fair dealing in earn-out calculations, but proving breach requires extensive factual discovery. The calculation disputes are often compounded by disagreement over which accounting principles apply (GAAP, modified GAAP, or contractual definitions) and whether accrual-based or cash-based methods control.

Yes, but enforcement is difficult and expensive. New York courts recognize an implied covenant of good faith and fair dealing in commercial contracts, including earn-out provisions, which means the buyer cannot deliberately take actions designed to prevent the earn-out from vesting. However, proving the buyer's intent or proving that specific operational decisions were made in bad faith requires extensive discovery, expert testimony on industry standards, and often years of litigation. The practical reality is that earn-out disputes are rarely resolved quickly or cheaply, and the buyer's control over the business after closing gives it significant leverage in the calculation process. Sellers should negotiate detailed earn-out definitions, independent accounting verification mechanisms, and dispute resolution procedures (such as expert determination) at signing rather than relying on good faith arguments later.

An escrow holds a percentage of the purchase price (typically 10 to 20 percent) in a third-party account for 12 to 24 months to secure indemnification claims. A holdback accomplishes the same goal but keeps the funds with the buyer. Escrow is preferable for sellers because a neutral third party controls the funds and cannot unilaterally apply them to disputed claims; holdback arrangements give the buyer unilateral control and create incentive to assert inflated claims. The escrow amount, release mechanics, and dispute resolution procedures are heavily negotiated. A well-drafted escrow agreement specifies that the escrow agent holds the funds, that claims must be documented and substantiated, and that disputed amounts are either returned to the seller or held pending resolution. Consignment sales and asset purchase structures sometimes use different escrow mechanics, so the escrow agreement must align with the transaction type.

Representations and warranties insurance (RWI) has become standard in mid-market and larger transactions. The seller (or sometimes the buyer) purchases a policy that covers breaches of reps and warranties beyond the escrow amount, typically for the full survival period. RWI shifts some indemnification exposure from the seller to the insurer, but policies contain exclusions, sublimits, and retention amounts that create gaps. The policy language must align with the purchase agreement reps and warranties; if the policy excludes a rep that the purchase agreement covers, the seller remains exposed. Insurance also does not cover earn-out disputes, post-closing operational issues, or breaches of covenants, so it is a risk transfer tool, not a complete solution.