Double Materiality Scrapes in Private Equity Stock Purchases
Written by Andrew Miller
In private equity stock purchase transactions, representations and warranties and related indemnification provisions are central to post-closing risk allocation. Sellers frequently qualify representations by “materiality” or “Material Adverse Effect” (MAE), while indemnification provisions separately include baskets, caps, and survival periods. A double materiality scrape is intended to reconcile these overlapping concepts and has become a focal point in sponsor-led transactions.
What Is a Double Materiality Scrape?
A double materiality scrape provides that, for indemnification purposes, all materiality, MAE, and similar qualifiers in the representations and warranties are disregarded for determining whether a breach has occurred and calculating indemnifiable losses. As a result, the buyer does not need to establish that a particular breach was “material.” Instead, the negotiated indemnification basket functions as the primary economic threshold and the cap on damages functions as the limit on the financial risk.
RWI-Backed Deals
In private equity transactions supported by representation and warranty insurance, double materiality scrapes are widely viewed as market standard. Insurers typically expect materiality scrapes to avoid disputes over subjective thresholds, and sellers often face limited exposure beyond the retention amount.
Uninsured Deals
In uninsured transactions, double materiality scrapes are more heavily negotiated, but the moist recent 2025 ABA Private Target Mergers & Acquisitions Deal Points Study indicates that a large majority of deals studied in 2024 and 2025 included double materiality scrapes. Sellers may still resist them due to increased exposure and often seek compromises such as single materiality scrapes, higher baskets, or reduced survival periods. Caps on damages do not seem to be a limiting trend with the most recent deal study indicating that caps have been steadily increasing in deals.
Governing Law Overview
Delaware courts generally enforce clearly drafted double materiality scrapes and view them as a legitimate solution to the “double materiality” problem. New York courts also enforce them where contractual intent is clear and unambiguous. Pennsylvania courts construe indemnification provisions narrowly but will enforce unambiguous agreements between sophisticated parties.
Buyer and Seller-Views
Sellers often argue that double materiality scrapes expand indemnification exposure, increase disclosure burdens, and shift risk beyond what was originally contemplated. As alternatives, sellers may propose single scrapes or economic adjustments to baskets and caps. However, buyers that are paying a premium for the business should demand double scrapes as the premium price carries significant financial risk so the risk of inaccuracies in the reps and warranties and the calculation of damages should have fewer limitations to offset the additional buyer risk.
Takeaway In private equity stock purchases, double materiality scrapes significantly affect post-closing risk allocation. They are largely expected in RWI-backed deals but remain a key negotiation point in uninsured transactions. Careful drafting and integration with the broader indemnification framework are essential.
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