Key Lessons in Drafting Earnout Provisions from Recent Developments in Delaware Case Law

Summary

The year 2022 is synonymous with economic uncertainty, particularly in the M&A context. The Federal Reserve's quantitative tightening and rising interest rates have drawn air out of company valuations, especially in the hyper-growth space. Because of this, among other things, the seller-friendly market of 2021 is transitioning to an environment that favors buyers. And in this transition period, the valuation gap between seller and buyer is bound to expand. One tool in the M&A practitioner's toolkit to bridge that valuation gap is the earnout. This article discusses recent developments in Delaware case law and highlights key considerations in drafting earnout provisions.