Indemnification by holders: Overview, definition, and example
What is indemnification by holders?
Indemnification by holders refers to a legal obligation where the holders of certain rights or assets, such as securities or shares, agree to compensate and protect another party—usually the issuer, company, or other stakeholders—against losses, liabilities, or damages arising from specific actions or breaches by the holders. This provision ensures that the party seeking indemnification is shielded from financial harm due to the holder's actions or omissions.
Why is indemnification by holders important?
Indemnification by holders is important because it helps protect companies or issuers from risks related to the actions of rights holders. For example, if a shareholder or security holder breaches a legal obligation or makes false claims, the indemnification clause shifts the financial burden of resulting damages or liabilities to the holder.
For companies, this type of indemnification reduces exposure to unnecessary risks and legal disputes. For holders, it clarifies their responsibilities and encourages compliance with applicable laws, agreements, and obligations.
Understanding indemnification by holders through an example
Imagine a company allows its shareholders to sell their shares in a public offering. The shareholders agree to indemnify the company for any liabilities arising from misrepresentations in the offering materials provided by the shareholders. If a shareholder submits false financial data that results in a lawsuit, the indemnification clause ensures the shareholder, not the company, is responsible for covering the damages or legal costs.
In another example, bondholders agree to indemnify the issuing company for any tax liabilities or penalties incurred as a result of their failure to provide accurate tax identification information. If a bondholder provides incorrect details that result in penalties, the indemnification clause ensures that the bondholder compensates the company for those penalties.
An example of an indemnification by holders clause
Here’s how an indemnification by holders clause might appear in a contract:
“The Holders agree to indemnify and hold harmless the Company, its officers, directors, employees, and agents from and against any and all claims, losses, liabilities, damages, and expenses (including reasonable attorneys’ fees) arising out of or relating to any breach by the Holders of their representations, warranties, or obligations under this Agreement.”
Conclusion
Indemnification by holders protects companies or other parties from risks stemming from the actions or omissions of rights holders. It ensures accountability and fairness while reducing potential liabilities. Including a well-drafted indemnification by holders clause in contracts provides clarity, mitigates risks, and safeguards the interests of all parties involved in the agreement.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.