Gail Weinstein is Senior Counsel and Warren S. de Wied and Steven Epstein are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. de Wied, Mr. Epstein, Philip Richter, Randi Lally, and Erica Jaffe, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here); Are M&A Contract Clauses Value Relevant to Bidder and Target Shareholders? (discussed on the Forum here) both by John C. Coates, Darius Palia and Ge Wu; and The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo and Guhan Subramanian.
Since the COVID-19 pandemic began in 2020, there has been a higher proportion of M&A deals including earnouts—used, as usual, to bridge gaps in buyers’ and sellers’ views of valuation in light of economic and financial uncertainties in the marketplace generally and with respect to specific businesses. Also, earnouts have been used in some deals this year to address difficulties in upfront financing as the M&A financing environment has remained challenging. In this Briefing, we discuss (i) the prevalence of earnouts in M&A deals; (ii) the trend in litigation over earnout disputes; (iii) a change in the frequency of certain earnout-related buyer covenants; (iv) basic Delaware legal principles relating to earnouts; and (v) the recent major Delaware earnout decisions, which reflect a new judicial trend of more frequent holdings against buyers. We also offer earnout-related practice points.
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