When an M&A deal goes sour and leads to a dispute between the parties, the dispute often concerns the purchase price mechanism. This is of course easy to understand as the purchase price represents typically the biggest interest of the parties – the interest is where the money is. Commercial disputes, on the other hand, usually arise from unclear contract provisions. It is therefore safe to assume that when a dispute concerns the purchase price mechanism, it often comes down to unclear or ambiguous drafting. Drafting, again, is the lawyer’s job.
A typical situation is the following: When, for example, the earn-out payment becomes relevant months or even years after the deal has been signed, neither party nor their lawyers necessarily remember what exactly was discussed and agreed in the heat of the deal at the time when the deal was negotiated. If the drafting is ambiguous and the relevant earn-out clause is subject to alternative interpretations, the parties may easily end up in an expensive arbitration process.
As M&A deals often include financial advisors, it is quite convenient for a busy M&A lawyer to close one’s eyes and just rely on the purchase price mechanism calculation provided on a plate by the financial advisors. The financials and the purchase price mechanism are, indeed, the financial advisors’ responsibility. However, the drafting is always the lawyer’s job. Therefore, to minimise the risk for misinterpretation it is the M&A lawyer’s responsibility to seek to understand how the purchase price mechanism is intended to work and to express its contents in writing in an unambiguous manner. This is also something that a law firm’s M&A practice should demand from its lawyers to be competitive on the market.
Every M&A lawyer knows how to draft a standard SPA purchase price clause with net debt/net working capital variation mechanism including typical earn-out clauses with earn-out protection. However, by taking the time to fully understand the financials behind the deal an M&A lawyer can truly provide added value to the client by clear drafting that minimises the room for interpretation. This requires the lawyer to thoroughly familiarise oneself with the calculations, often including discussing the financials with the client and the financial advisors to get to the bottom of the (sometimes very complex) mechanism. It is always in the client’s interest for the lawyer to take the time to understand the financials rather than to spend countless hours and a lot of money fighting about it later. Good drafting never goes out of style.