Which cup is it under? In the appendix nobody read.
“35% is not a bad starting point. I expected them to come in more aggressive, based on what you told me. If we bring it down to 25%, I’ll feel comfortable.”
A classic. My client has just received the draft SPA (Share Purchase Agreement). The first thing he has done is check that the figures in the price section match what was agreed in the letter of intent. The second thing has been to jump to the section detailing the liability caps.
The cap is set at 35%, meaning they are being told that, no matter what happens, they will never be required to return more than one third of what they were paid. It is practically a third of the price, but it is a reasonable starting point. He is happy, relatively speaking.
Then comes the call with the legal advisors.
“Indeed, regarding the 35% cap, we believe there is room for negotiation, although it should be noted that this limit applies exclusively to the general representations and warranties set out in the agreement, and excludes the specific indemnity obligations in Appendix 7.1, which are governed by their own regime without any quantitative limit unless expressly agreed otherwise…”
Translation:
“That 35% or 25% matters a lot less than you think if you haven’t paid close attention to what they’ve slipped into the Specific Indemnities Appendix.”
The cap and the basket
It is worth briefly explaining how the seller protection mechanism works in a standard SPA.
When someone buys a company, they want the seller to be responsible for what happened while they owned it. The buyer’s concern is that, a year after closing, a tax audit appears relating to prior years, or a former employee sues, or there is an issue with a contract signed before the sale, and the buyer ends up having to pay for something they did not manage.
Due diligence helps identify some of these risks, but it cannot eliminate them all. Many are not even known by the seller at the time of sale.
That is why representations and warranties exist in the SPA. The seller declares the state of the company at closing, and if past risks materialise later, the seller is liable.
But that liability usually has two limitations, which protect the seller from indefinite exposure.
The first is the cap, which sets the maximum amount the buyer can claim. It is usually expressed as a percentage of the purchase price. In mid-market transactions in Spain, it is typically negotiated between 20% and 35% for general reps, and up to 100% for fundamental reps (such as ownership of shares or legal capacity to sign — things the seller should clearly know beforehand).
The second is the basket (or threshold), which sets a minimum claim level. The buyer cannot claim for minor issues. They must accumulate a minimum amount of damage before indemnification is triggered (for example, €100,000). This protects the seller from dozens of small claims that would otherwise become unmanageable after closing.
What the seller thinks they have achieved
When a seller negotiates, for example, a 25% cap and a €100,000 basket, they feel reassured. Whatever happens after closing, the maximum they can be asked to return is a quarter of the price, and only if damages exceed €100,000.
On top of that, this liability is time-limited. In Spain, tax, labour, and social security claims usually expire between four and five years. Other types of claims, such as contractual disputes or third-party claims, are usually shorter, often around two years.
In practice, a prudent seller mentally sets aside that 25% and does not touch it for the first few years.
The problem is that this cap does not cover everything. There are three categories of claims that typically fall outside it.
The first is fraud or wilful misconduct (dolo). If the seller deliberately hid relevant information (falsified accounts, a known lawsuit, a contract they knew would not be renewed, or undisclosed debt), liability is unlimited. In principle, this should not concern a seller acting in good faith.
The second is fundamental representations, which are also usually uncapped. Things like ownership of shares or legal capacity to sign.
The third is specific indemnities.
What specific indemnities are for (in theory)
Specific indemnities have a very clear purpose. When due diligence identifies a concrete, known and clearly defined risk, it makes sense to treat it separately from general representations and warranties.
A pending lawsuit with a named counterparty. A known tax contingency under inspection. A specific contract with a problematic clause that both parties have reviewed. Each of these is already identified and requires separate treatment.
The logic is that general reps & warranties are designed to cover what neither party knows. Specific indemnities, on the other hand, are designed to cover what is known, but exceptional enough to require bespoke treatment, usually listed in an appendix with precise definitions.
That was the idea. And for years, that is more or less how it worked.
What is happening in the market now
Lately, I have been seeing something with increasing frequency that used to be exceptional. Buyer-side lawyers have started to include entire categories of risk under the label of “specific indemnities” that are anything but specific.
M&A advisors and lawyers across the industry confirm they are seeing the same trend.
The appendix of specific indemnities arrives with a long list. Some entries are the usual ones, the ones that should always be there: a specific tax contingency under audit, a known lawsuit with an identified supplier, a specific contract with a problematic clause reviewed by both sides. True specific indemnities — named, described, and sometimes quantified.
But mixed into the list are the non-specific ones.
An indemnity covering the entire tax risk of the last five fiscal years, in the broadest possible sense, including income tax, VAT, corporate tax, and withholding taxes. Not a specific issue identified during due diligence. Not a single audited year. The entire period, just in case.
Another covering all social security exposure, including any potential adjustments in contributions. Not a specific employee issue, but the whole category.
Another covering data protection compliance as a whole, including GDPR, privacy policy, cookies, and all data processing in customer and employee contracts. Not a specific breach, but the entire regulatory framework.
Why this is happening
The short answer is that sellers have been pushing for lower post-closing liability for years, and buyers (more precisely, their lawyers) have found a “tricky” way to counterbalance this without touching the headline numbers everyone negotiates.
If the seller does not accept a higher general cap, the solution is to remove the highest-risk categories from the general regime and move them into specific indemnities.
Every time I see it, it frustrates me. Because in theory, SPA structures are supposed to be clean and logical.
General liability capped at a percentage of the price, with four to five years for tax, labour, and social security claims, and two years for everything else. Fundamental reps and fraud uncapped. Specific indemnities for clearly identified risks, usually with their own cap and quantified exposure (for example: “this risk may cost up to €500,000”), sometimes even backed by escrow.
Everything structured, readable, and predictable.
But when part of the general reps — say, all tax and social security risk — is moved into “specific indemnities” (or what I would call non-specific indemnities), the structure collapses. You end up with a 25% cap on everything except tax and social security, and potentially 100% or unlimited exposure on exactly those areas.
So what does that mean in practice?
An effective cap of 50%?
Of 75%?
Of 100%, because the real risk has always been tax and labour anyway?
No idea.
What can be done?
Honestly, I do not have a single answer, and in any case these issues are usually negotiated by legal advisors. At a minimum, they must be actively challenged in every SPA negotiation.
What I do know is that liabilities in a share purchase agreement are communicating vessels. You cannot look at the general cap, the fundamental reps, and the specific indemnities in isolation and think you have the full picture. You need to read everything together, because the real impact of each clause depends on all the others.
That is why it is so important to have experienced M&A lawyers on your side, not generalist lawyers who only see an SPA once every five years. The difference between the two is the risk you will carry in the five years after the sale, and your peace of mind.
By Joshua Novick, partner at Bondo Advisors
cloud technology axon
Since Suma Capital’s entry in 2020, Gestcompost has quadrupled its E...
