Baskets and Materiality

Corporate and Business Attorney Mary Beth KerriganBy: Mary Beth Kerrigan

A Delaware opinion recently focused on how the use of “baskets” in indemnification provisions for M&A transactions can impact the definition of “materiality” in definitive agreements. In i/mx Information Management Solutions, Inc. v. MultiPlan, Inc., the Delaware Court of Chancery denied the defendant’s motion to dismiss the plaintiff’s declaratory judgment claims. In this case, the defendant (MultiPlan) had asserted a post-closing claim against an escrow alleging, among other things, that the plaintiff (i/mx) had breached a representation that it was not in “material breach or default” under any “Material Contracts”.

The defendant argued that the basket in the indemnification section (set at $100,000) established the materiality threshold for purposes of the representations and warranties in the definitive agreement. “Materiality” was not otherwise defined in the definitive agreement. The plaintiff, on the other hand, argued that existing Delaware case law should apply, which defines a “material breach” as “a failure to do something that is so fundamental to a contract that the failure to perform that obligation defeats the essential purpose of the contract and makes it impossible for the other party to perform under the contract.”

The court concluded that the defendant’s interpretation of the definition of “materiality” was a reasonable conclusion. However, even assuming that the $100,000 basket appropriately defined “materiality”, the court determined that the plaintiff might be able to show that the damages as a result of the defendant’s claim were less than $100,000. The court therefore denied the defendant’s motion to dismiss.

This case serves as an important reminder to drafters of the potential connection between baskets and the definition of “materiality” in definitive agreements. Including clear, well-defined provisions in these agreements can avoid unintended judicial interpretation of such provisions.

For more information on this topic, please contact Mary Beth.

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