In a review of 1,350 transactions conducted between 2007 and 2011, international law firm CMS has highlighted five key differences in the legal provisions used in merger & acquisition agreements across Europe and the US.
“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,” said Thomas Meyding, Head of the CMS Corporate Group.
Here are 5 major differences between deal terms in Europe and the US:
- 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 purchase price gaps are often bridged by vendor loans or option arrangements. • Material Adverse Change 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.
CMS is an international law firm with 2,800 lawyers located in 52 offices in Europe, Russia, China, North Africa and South America (www.cmslegal.com).