Market Trends: What You Need to Know
As shown in the American Bar Association s Private Target Mergers and Acquisitions Deal Point Studies:
Earnout provisions were included in 27% of the deals reported in the 2019 study. The previous six studies noted inclusion of earnout provisions in 28%, 26%, 25%, 38%, 29%, and 19% of reported deals, respectively.
Approximately 60%-70% of earnout provisions reviewed in the ABA studies use either earnings before interest, taxes, depreciation, and amortization (EBITDA) or revenue as the principal earnout metric.
It remains somewhat rare in earnout provisions for buyers to expressly agree to operate the post-closing target business consistent with pre-closing past practice, or to take actions to maximize the earnout, the first usually being more common than the second.
Market Trends: What You Need to Know
As shown in the American Bar Association s Private Target Mergers and Acquisitions Deal Point Studies:
Insurance reduction provisions were included in 90% of the merger and acquisition (“M&A”) deals reported in the 2019 study.
Over the past 12 or so years covered by the seven ABA studies looking at the topic, the usage of insurance reduction provisions has increased from 63% to 90% an increase of almost 50%, and insurance reduction provisions have become a “given” in M&A purchase agreements.
Comparatively, the previous six studies noted the inclusion of insurance reduction provisions in 88%, 87%, 81%, 85%, 68%, and 63% of reported deals, respectively.
Market Trends: What You Need to Know
As shown in the American Bar Association s Private Target Mergers and Acquisitions Deal Point Studies:
Only 2% to 9% of the merger and acquisition purchase agreements covered by the studies expressly included consequential damages within the scope of indemnified losses
26% to 39% of the purchase agreements expressly excluded consequential damages within the scope of indemnified losses
39% to 65% of the purchase agreements were silent on the issue
Introduction
In M&A transactions, the definitive purchase agreement, whether asset purchase agreement, stock purchase agreement, or merger agreement, typically contains representations and warranties and related indemnification covenants. Buyers and sellers often negotiate the scope and types of damages subject to indemnification under the purchase agreement, including whether consequential damages that the buyer may suffer as a result of the seller s breach should be included in, or excluded from,
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Whether the arbitrator will be specified as the AAA, JAMS, or another named service provider
How expenses associated with the ADR proceedings are to be allocated between buyer and seller
Related Provisions
When drafting and negotiating ADR provisions, practitioners must pay careful attention to how the ADR provisions will interact with other provisions in the purchase agreement. This is important because ADR provisions are related to at least three other provisions in an M&A agreement:
The “exclusivity of remedies” provision, which states that the indemnification structure and procedures in the purchase agreement are the sole remedy for claims (subject to limited exceptions such as fraud)