In a review of 1,350 deals done between 2007-2011, CMS’ fourth annual M&A Study highlights some key differences in the legal provisions used in merger & acquisition agreements across Europe and the US.
Thomas Meyding, Head of CMS Corporate Group, says: "2011 was a good year for sellers. The fact that there are a few more buyers looking to do deals, and particularly private equity houses with funds to invest, means that sellers can be more robust in their negotiations. However, our analysis of the deal structures used illustrates some fascinating variations in international markets. For businesses looking to do deals across borders, understanding these cultural and regulatory differences is vital."
Earn-out deals are more popular in the US. 38% of US deals had an earn-out component compared with just 14% in Europe in 2011. Earn-out clauses quite often give rise to difficult negotiations, and subsequent disputes. In Europe we more often see purchase price gaps being bridged by vendor loans or option arrangements.
Material Adverse Change (MAC) clauses are much more popular in the US than in Europe where they were used in 93% of the deals compared to just 16% of deals in Europe.
Not only are baskets much more prevalent in the US, but the basis of recovery is different. In the US, 59% of deals are based on ‘excess only’ recovery as opposed to ‘first dollar’ recovery compared with only 28% in Europe in 2011 for ‘excess only’ recovery.
Working capital adjustments continue to be by far the most frequently used criteria on a purchase price adjustment in the US, used in 77% of deals as opposed to just 26% in Europe in 2011, where the deal contained a purchase price adjustment.
Basket thresholds tend to be lower in the US with 88% being less than 1% of the purchase price compared with 55% in Europe.
"Our deal analysis shows that there has been a steady reinstatement of pre-2008 standards with certain seller-friendly provisions such as lower liability caps and reasonably generous de minimis and basket provisions. In addition, the greater spread of locked box deals and growing acceptance of warranty and indemnity insurance provide more protection against downside risk than was the case even pre-2008."
