Special indemnities in M&A: when data issues get their own line

What is a special indemnity in an M&A deal?

A special indemnity, also called a specific or line-item indemnity, is a stand-alone promise in the purchase agreement that the seller will compensate the buyer for a named, known issue, whatever the general representations say. It exists because a general indemnity covers breaches of representations, while a known problem may be disclosed against those representations and therefore fall outside them.

The short answer for advisors: it depends on what the agreement says, and the drafting differs by deal and governing law. This page explains the concept in general terms, so confirm the specifics with deal counsel.

How does a special indemnity differ from a general indemnity?

That last row is the practical driver. Where an issue is known, a transactional insurance policy commonly excludes it, so read the policy's exclusions, so a buyer who cannot price the risk asks the seller for a line-item promise instead. See the page for rep and warranty insurance brokers for how this exclusion interacts with a placement.

When do data issues get their own line?

Buyers request special indemnities for matters such as pending litigation, a tax exposure or an environmental condition. Data issues are a newer addition, and they appear in diligence reports when records have unclear rights. Typical triggers:

1. Personal data of customers or employees in systems that will transfer, where notice or consent is uncertain.
2. Customer content held on behalf of clients, such as an agency's or outsourcer's client records, with no written consent to reuse.
3. A prior data license or exclusivity grant, for example an earlier AI-training license that restricts what the buyer can do.
4. Recording or monitoring practices that may not meet state consent rules.
5. Records created by contractors with no assignment clause.

None of these is a prediction that a buyer will request an indemnity. They are the fact patterns that make a buyer ask the question.

How should an M&A advisor handle it?

Work through the questions in order.

• Has the seller's counsel completed a rights review of the main record sets before the data room opens?
• Does the disclosure schedule describe known data issues in plain terms, not buried in a general exception?
• Can the issue be fixed before signing, for example by obtaining consent, deleting records or amending a contract?
• If not, can the exposure be sized, and does the proposed cap and survival period match the exposure?
• Is the proposed security proportional, and can it be released as the issue resolves?
• Does any data license the company may enter into later conflict with the buyer's expected ownership of the records?

The last question links back to a rights review that is useful regardless of any later licensing. Our guide on data quality due diligence covers the record-quality side, and the guide on data synergies in M&A separates operational value from licensing value. For the AI-claims side, see AI washing in due diligence.

What does this mean for an advisor who meets data-licensing candidates?

A company that licenses its operational records to AI developers needs the same clean chain of rights that a buyer's counsel will want to see. A completed rights review, before the sale or before a license, shortens the indemnity conversation because the facts are documented.

SourceX introductions concern companies in the US with 50+ full-time employees at peak (contractors excluded), several years of documented operations and rights to license the data. The company keeps ownership, signs only if it agrees price and terms, and the partner never handles or describes records. A January 2023 Jones Day alert reports that Congress created a statutory M&A broker exemption with terms narrower than the SEC staff's earlier 2014 no-action relief, applying only to M&A transactions involving small private companies. It concerns sales of those companies, and nothing in it addresses data-licensing introductions, so advisors should not assume it covers a referral reward. Advisors can find the broader role on the page for M&A advisors and compare the corporate side on the corporate development page.

What to ask deal counsel

• Which of the target's record sets carry third-party rights, and is consent documented?
• Would a license of those records trigger a rep or covenant in the purchase agreement?
• If a special indemnity is proposed, what is the cap, survival period and security, and does it sit outside the basket?
• Does the insurer's exclusion list match the issues in the disclosure schedule?

This is general information, not legal, tax or financial advice. Confirm with your own counsel before acting, because indemnity drafting and enforceability differ by agreement and governing law.

When not to raise a data license at all

• A signed letter of intent restricts new encumbrances on the company's assets.
• Most records belong to clients who have not agreed.
• The data is mainly consumer personal information or protected health information with no authorization.
• The company has already licensed the data for AI training.

Next step

If a client passes the baseline, use the company fit checker for a preliminary, non-binding screen and review who qualifies. To introduce a company, register as a partner. Partners earn 25% of the eligible platform fees SourceX actually collects, capped at $100,000 per referred company, payable only after the buyer pays and SourceX receives its fee. No reward is guaranteed. Check your own firm's and regulator's rules on fees first.