Risk allocation in mergers & acquisitions (M&A) isn’t just about how long a buyer has to make a claim, but how much loss must occur before a claim is valid. The 2025 ABA Study provides critical data on “baskets”—the minimum loss threshold—and the “materiality scrape,” a provision that significantly lowers the buyer’s burden of proof. The Deal Points Study found:
Baskets: Deductibles vs. First-Dollar Thresholds A basket acts as a buffer for the seller. There are two primary types:
- Deductibles: The seller is only liable for losses that exceed the basket amount.
- First-Dollar (Threshold): Once the losses reach the threshold, the seller is liable for the entire amount from the first dollar.
The study shows a strong preference for deductibles, which provide more certainty for sellers. The size of these baskets is also becoming more standardized relative to transaction value, often serving as a “tipping point” in RWI (Representations & Warranty Insurance) backed deals.
The Materiality Scrape: A Near-Universal Buyer Victory Perhaps the most significant trend in the last decade is the rise of the “materiality scrape”. This provision allows a buyer to ignore materiality qualifiers (e.g., “in all material respects”) in the representations for two purposes:
- Determining a Breach: Deciding if a rep was actually violated.
- Calculating Damages: Determining the dollar value of the loss.
In 2024-25, the use of materiality scrapes has reached a fever pitch. In deals with a “bring-down” condition (where reps must be accurate at closing), 82% included a materiality scrape.
Why it Matters: Without a scrape, a seller might argue that a $50,000 error in financial statements is not “material” and therefore not a breach. With a scrape, that $50,000 error is a breach, and it counts toward the basket. This creates a much more buyer-friendly environment, shifting the focus from “was the error big enough to matter?” to “is the aggregate of all errors big enough to exceed the deductible?”
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