Terrific post -- the ABA survey data is always worth unpacking carefully. A few thoughts:
I'm skeptical that the decline in purchase-price use is random variance. More likely, this is a function of the increased adoption of RWI and locked-box deal structures, both of which suggest an increase in PE-to-PE deal flow.
On the escrow-as-sole-source increase from 11% to 42%: Same dynamic. When RWI is backstopping the deal’s rep and warranty exposure, buyers have already secured their principal risk mitigation through the insurance. That makes them more willing to accept a hard cap on purchase price adjustment exposure through the escrow mechanism. The escrow-as-sole-source provision becomes less threatening when it’s not the buyer’s only protection against a bad deal.
On silence as a drafting choice: The pattern you identify across multiple provisions — accounting methodology, exclusivity of remedy, RWI as sole source, termination fee versus specific performance — is the post’s most interesting thread. Sophisticated parties sometimes leave these issues unresolved deliberately, reasoning that the cost of negotiating to resolution exceeds the perceived probability of dispute. That calculation isn’t always wrong, but it tends to look very wrong in hindsight when the dispute materializes.
However, since such disputes rarely arise, the cost when they do must be discounted by their rarity.
Human frailty, even among very sophisticated parties, may explain a fair number of these statistics. In the real world, drafts are passing back and forth in the wee hours in advance of a looming closing. Things get missed and mistakes get made. Or decision makers opt to forego nailing down relatively minor points in the interest of getting the deal done. I've done hundreds of transactions involving the world's top firms. I've yet to see a perfect set of docs.
"Earnout" is a portmanteau combining "earn" and "out". The hyphenated form illustrates this joining of "earn" and "out" to form a new word (the hyphen punctuation mark is used to join two words).
ABA publications use both spelling forms. For example, the hyphenated form of the word appears in "The Ins and Outs of Earn-Outs: A Delaware Perspective" by Richard Rose in Business Law Today.
Delaware cases use both forms. E.g., Winshall v. VIACOM INTERN. INC.
76 A. 3d 808 (2013) (earn-out) and Coleman v. PRICEWATERHOUSECOOPERS, LLC
902 A. 2d 1102 (2006) (earnout). Most likely, this reflects the parties' usage of the term.
Accountants use the term "contingent compensation" which the FASB defines in its Master Glossary as "Usually an obligation of the acquirer to transfer additional assets or equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree if specified future events occur or conditions are met. However, contingent consideration also may give the acquirer the right to the return of previously transferred consideration if specified conditions are met." Therefore, the hyphen/no-hyphen debate could be avoided by adopting the accounting profession's terminology.
Terrific post -- the ABA survey data is always worth unpacking carefully. A few thoughts:
I'm skeptical that the decline in purchase-price use is random variance. More likely, this is a function of the increased adoption of RWI and locked-box deal structures, both of which suggest an increase in PE-to-PE deal flow.
On the escrow-as-sole-source increase from 11% to 42%: Same dynamic. When RWI is backstopping the deal’s rep and warranty exposure, buyers have already secured their principal risk mitigation through the insurance. That makes them more willing to accept a hard cap on purchase price adjustment exposure through the escrow mechanism. The escrow-as-sole-source provision becomes less threatening when it’s not the buyer’s only protection against a bad deal.
On silence as a drafting choice: The pattern you identify across multiple provisions — accounting methodology, exclusivity of remedy, RWI as sole source, termination fee versus specific performance — is the post’s most interesting thread. Sophisticated parties sometimes leave these issues unresolved deliberately, reasoning that the cost of negotiating to resolution exceeds the perceived probability of dispute. That calculation isn’t always wrong, but it tends to look very wrong in hindsight when the dispute materializes.
Best,
Daniel
However, since such disputes rarely arise, the cost when they do must be discounted by their rarity.
Human frailty, even among very sophisticated parties, may explain a fair number of these statistics. In the real world, drafts are passing back and forth in the wee hours in advance of a looming closing. Things get missed and mistakes get made. Or decision makers opt to forego nailing down relatively minor points in the interest of getting the deal done. I've done hundreds of transactions involving the world's top firms. I've yet to see a perfect set of docs.
"Earnout" is a portmanteau combining "earn" and "out". The hyphenated form illustrates this joining of "earn" and "out" to form a new word (the hyphen punctuation mark is used to join two words).
ABA publications use both spelling forms. For example, the hyphenated form of the word appears in "The Ins and Outs of Earn-Outs: A Delaware Perspective" by Richard Rose in Business Law Today.
Delaware cases use both forms. E.g., Winshall v. VIACOM INTERN. INC.
76 A. 3d 808 (2013) (earn-out) and Coleman v. PRICEWATERHOUSECOOPERS, LLC
902 A. 2d 1102 (2006) (earnout). Most likely, this reflects the parties' usage of the term.
Accountants use the term "contingent compensation" which the FASB defines in its Master Glossary as "Usually an obligation of the acquirer to transfer additional assets or equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree if specified future events occur or conditions are met. However, contingent consideration also may give the acquirer the right to the return of previously transferred consideration if specified conditions are met." Therefore, the hyphen/no-hyphen debate could be avoided by adopting the accounting profession's terminology.