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 including:
– 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.