Tuesday, May 19, 2009
A new report out of Europe notes that 17% of transactions announced in the fourth quarter of 2008 -- a period of great instability included earnout provisions. Earnouts are a very tricky business. Vic Goldberg at Columbia has looked at the earnout problem in the context of a reinterpretation of the old Bloor v Falstaff case (here). On the one hand, ernouts can be under-engineered, leaving many gaping holes in the interpretation of how parties should act after the merger closes. What exactly does best efforts, or best commerically reasonable efforts mean, anyway? On the other hand, they can also be over-specified thus leaving parties with little flexibility in reacting to changing circumstances. My guess is that extreme volatility in the marketplace during the fall left parties looking to transactions willing to punt on valuations. Now that the market has stabilized one wonders whether parties to these agreements (buyers and sellers) are having second looks at whether they, in fact, got a good deal.