Bass, Berry & Sims is pleased to provide its valued clients with key highlights from the 2023 American Bar Association (ABA) Private Target Mergers & Acquisitions Deal Points Study that was released on December 18, 2023. The Study – which examines the prevalence of certain contract provisions in publicly available, private target M&A transactions – is considered the preeminent study of M&A transaction terms and is widely utilized by practitioners, investment bankers, corporate development teams, and other advisors.
The latest biannual Deal Points Study includes over 100 pages of detailed data on various negotiated deal points in acquisition agreements. It draws on data from over 100 middle market transactions executed or closed in 2022 or Q1 of 2023 involving privately held targets. Transactions included in the Study range in size from $30 million to $750 million and represent a broad base of industries, with technology, healthcare and financial services representing approximately 20%, 16% and 10%, respectively, of the deals analyzed.
RWI: The use of representation and warranties insurance (RWI) contracted.
55% of deals in the 2023 Study referenced RWI, as compared to 65% of the deals in the 2021 Study. This decline could be attributable to higher costs and limited availability of RWI during the period covered by the 2023 Study or could indicate market participants’ growing preference for a traditional indemnity structure.
EARNOUTS: Earnouts became more prevalent and displayed more buyer-friendly features.
Use of earnouts increased significantly – by 30% (i.e., from 20% during the period covered by the 2021 Study to 26% during the period covered by the 2023 Study). This likely reflects the growing valuation gap that we have observed in the market during the period covered by the 2023 Study. Further, 25% of all deals with an earnout included an express disclaimer of fiduciary relationship with respect to the earnout, an increase of over 300% from the period analyzed by the 2021 Study. This could reflect a swing to more buyer-friendly terms as the M&A market changed during the more recent period.
#METOO: Inclusion of a #MeToo representation increased.
57% of all transactions analyzed in the 2023 Study included a stand-alone #MeToo representation, as compared to 37% of deals in the 2021 Study. This indicates practitioners’ increased focus on this issue as they examine targets.
MITIGATION: Buyers are increasingly required to mitigate damages/losses.
69% of deals in the 2023 Study included an express covenant to mitigate damages/losses, as compared to 56% in the 2021 Study. This could reflect the increasing willingness of buyers to accept this seller-friendly term in exchange for some of the other more buyer-friendly terms.
ANTI-SANDBAGGING: Express anti-sandbagging decreased.
The percentage of deals that were silent with respect to sandbagging continued to increase to 76% in the 2023 Study, as compared to 68% in the 2021 Study and 59% in the 2019 Study. As a reminder, silence may have a different effect under the laws of different states; therefore, parties should consider the effect of remaining silent under the terms of applicable law.
New Deal Terms
- The 2023 Study analyzed whether deals included a stand-alone indemnity for breaches of covenants, a provision that was not measured in prior studies. 94% of deals covered by the 2023 Study included this provision.
- For deals with available post-closing purchase price adjustment provisions, the 2023 Study looked at whether the buyers had express approval rights with respect to the target’s estimate of the purchase price adjustment versus just the right to review and consult with the target. 59% of deals where payment at closing was based on a target’s estimate of the purchase price adjustment included such review and consultation rights. In contrast, the buyers had express approval rights in only 8% of the deals.
- For certain deal points – such as the definition of knowledge, certain representations and warranties, provisions addressing updates to disclosure schedules before closing, closing bring-down standards, sandbagging and non-reliance/disclaimer of other representations and warranties – the 2023 Study also compared usage in deals with RWI deals to deals where no RWI was referenced.
The Study is a publication of the Market Trends Subcommittee of the ABA’s Business Law Section’s M&A Committee. The 2023 working group of contributors included over 50 experienced M&A attorneys from prominent law firms across the globe, including Bass, Berry & Sims member Tatjana Paterno, who co-chaired the Study, and associates David Venturella and Brad Yenter.
Tatjana and the Study’s co-author Jessica Pearlman co-authored an article for the ABA announcing the release of the 2023 Private Target Mergers & Acquisitions Deal Points Study. To read the full article, “Announcing the ABA’s 2023 Private Target Mergers & Acquisitions Deal Points Study,” that provides an overview of the Study and outlines some key findings, click here.