Kira Systems' latest Deal Terms Study was created in order to find the various relationships between materiality scrape provisions and indemnification baskets and/or deductibles. The study reviewed the prevalence of and variation in materiality scrape provisions in private target M&A agreements publicly filed in 2017 and 2018 that include indemnification baskets and/or deductibles; (2) the association between double materiality scrape provisions and larger indemnification baskets (based on percentage of deal value); and (3) the association between the prevalence of double materiality scrape provisions and eligible claim thresholds.
The Basics: What is a Materiality Scrape?
Representations and warranties in private M&A transactions are typically heavily negotiated, with vendors often attempting to qualify their representations with materiality to avoid being found liable for immaterial breaches or damages. The materiality scrape is a provision that allows the purchaser, when determining whether a vendor is in breach of a representation that the vendor made in the purchase agreement, to disregard any qualifications a vendor has made to that representation. It's a pro-buyer provision that can be buried deep within contracts, and may pose risk to vendors.
Key Findings About Materiality Scrape Provisions in M&A Agreements
1. High presence of materiality scrape provisions in M&A agreements, with even more present in 2018.
For 2017, of 73 agreements including indemnification baskets and/or deductibles, 81% also included materiality scrapes that deleted all materiality qualifications from the representations and warranties in the transaction agreement for any indemnification purpose. For 2018, of 80 agreements including indemnification baskets and/or deductibles, 90% also included materiality scrapes.
2. Materiality scrape provisions are worded with significant variation from contract to contract, including vague wording.
42% of the 2017 agreements and 26% of the 2018 agreements contained materiality scrape provisions that were limited solely to the calculation of damages/losses. In addition, 14% of the 2017 agreements and 10% of the 2018 agreements provided for materiality scrapes that were somewhat vaguely worded
3. Transactions with double materiality scrapes tend to have larger indemnification baskets overall
For 2017,4 of the 25 agreements with double materiality scrapes, 19 agreements, or 76%, had Large Baskets. In comparison, of the 22 agreements with single materiality scrapes, 15 agreements, or 68%, had Large Baskets. For 2018, of the 41 agreements with double materiality scrapes, 34 agreements, or 83%, had Large Baskets, and of the 19 agreements with single materiality scrapes, 12 agreements, or 63%, had Large Baskets.
Using Kira, you can create a similar analysis of your firm’s own deals (and even study a specific industry or geography) with significantly greater speed, consistency and accuracy than a manual review. Kira allows you to unearth what’s standard practice for the many private transactions which are never publicly disclosed, and to easily find real precedent clause language to apply to future transactions.
To take a deeper dive into the results of the Materiality Scrape Provision study, including the findings regarding the relationship between double materiality scrapes and basket size or eligible claim thresholds, please download the entire free study.