Indemnity

An indemnity is an undertaking by the seller or company to cover the buyer’s or investor’s loss if a specified event occurs. Unlike representations and warranties, no breach of an assurance is required; it is enough that the event covered occurs.

When Is It Used?

• Known risks: A pending lawsuit, tax audit or administrative investigation identified in due diligence,
• Tax indemnity: Tax liabilities for pre-closing periods remaining with the seller,
• Employees: Employee claims and social security liabilities relating to the pre-closing period,
• Compliance: Fines that may arise from past non-compliance, such as a personal data breach or competition law infringement.

Key Provisions

• The scope of loss to be indemnified (direct loss, costs, legal fees),
• Claims process: the buyer notifying third-party claims, the seller’s right to conduct or join the defence, no settlement without the seller’s consent,
• Time and amount limits; specific indemnities are usually kept outside the general limits,
• Security: holding part of the price in escrow, deferring part of the price (holdback), a bank guarantee or personal guarantee.

Position under Turkish Law

Under Turkish law, an indemnity undertaking is characterised as a guarantee agreement based on the provision on undertaking the act of a third party in the Turkish Code of Obligations (Art. 128). This means the obligor’s fault is not required and liability is determined by the scope of the undertaking. The scope, duration and limits of the undertaking should therefore be written clearly in the agreement.

In funding rounds, if the indemnity is given by the company, the compensation comes out of a company in which the investor is also a shareholder. Investors may therefore ask for compensation to be paid by issuing additional shares to them, or for founders to be liable in certain cases. These options should be regulated clearly in the investment agreement.