In today’s volatile economic climate, the prospects of an acquired business can often be uncertain. In such cases, an ‘earnout’ can prove instrumental in bridging the valuation gap between the buyer and the seller, effectively facilitating the closure of the deal. However, choosing this route is not devoid of risk, especially when circumstances that are not clearly addressed by the earnout language arise. To add further complexity, the longer the earnout period, the higher the chances of circumstances changing. Stikeman Elliott LLP recently illustrated this with a focus on three recent earnout cases processed under Delaware law.
It was underscored that drafting the earnout provisions to be specific and comprehensive can be a labor-intensive task, inviting debate between legal counsel involved. Despite the effort, these provisions may not foresee and cover every scenario that might occur during the earnout period. Therefore, these agreements should ideally incorporate language that accounts for the most plausible eventualities.
In addition to precise wording, parties need to consider how any disputes arising from earnouts are to be governed and resolved. A misunderstanding or dispute can spark litigation which can lead to expensive and protracted legal battles. Therefore, including a clear dispute resolution methodology within the earnout agreement can help expedite resolving any potential disagreements.
Conclusively, the importance of carefully considering and choosing the words in earnout agreements stresses how crucial communication is in legal practices. Even a minor oversight could result in significant complications and disputes. Legal professionals should underline the importance of comprehensive planning and precision when drafting these agreements to minimize possible pitfalls.