Shareholder Agreement Indemnity Clause: What You Need to Know
A shareholder agreement is a legal contract between the shareholders of a company that outlines their rights, responsibilities, and obligations. One of the essential clauses in a shareholder agreement is the indemnity clause.
The indemnity clause is a promise by one party to compensate the other party in case of any losses or damages arising out of a specific event. In a shareholder agreement, the indemnity clause outlines the consequences and the responsibilities of the shareholders in case of any legal proceedings, claims, or liabilities.
The scope of indemnity clause in a shareholder agreement varies based on the type of company, the number of shareholders, and the industry. However, the general provisions of an indemnity clause include:
1. Third-party claims: The indemnity clause should cover any claims by third parties against the company or the shareholders. For example, if a shareholder makes a false statement that leads to a lawsuit against the company, the indemnity clause should provide for compensation to the affected party.
2. Breach of the agreement: The indemnity clause should cover any breaches of the shareholder agreement by the parties. For instance, if a shareholder breaches a non-compete clause or a confidentiality clause, the indemnity clause should provide for compensation to the other shareholders.
3. Costs and expenses: The indemnity clause should include the reimbursement of costs and expenses incurred by the parties in connection with any claims or legal proceedings. For example, if a shareholder has to hire an attorney to defend against a lawsuit, the indemnity clause should provide for the reimbursement of the legal fees.
4. Limitation of liability: The indemnity clause should also include a limitation of liability provision that caps the amount of damages or losses that can be claimed under the agreement.
It is crucial to note that the indemnity clause in a shareholder agreement is not a substitute for insurance coverage. Shareholders should obtain appropriate insurance coverage to protect themselves and the company against claims and losses.
In conclusion, the indemnity clause is a critical provision in a shareholder agreement that outlines the responsibilities and liabilities of the shareholders. It is essential to have a clear and comprehensive indemnity clause tailored to the needs of the specific company and industry to avoid any conflicts, disputes, or legal proceedings in the future.