Goulston & Storrs Collaborates on 2021 ABA Private Target Mergers & Acquisitions Deal Points Study; Shares Key Trends

Allison Sherrier, a corporate attorney in the Goulston & Storrs New York office, recently served on the American Bar Association’s (ABA) Market Trends Subcommittee of the M&A Committee to release the 2021 Private Target Mergers & Acquisitions (M&A) Deal Points Study. The biennial study is generally recognized as the most cited, credible, and reliable source of information on private middle-market M&A transactions in the U.S.

Sherrier was one of more than 40 leading corporate and M&A lawyers from around the country who analyzed 123 publicly available purchase agreements, executed and closed in 2020 and the first quarter of 2021, to create the Deal Points Study. Specifically, the study evaluated the prevalence of certain contract provisions used in private M&A deal negotiations – including financial terms, representations and warranties, covenants, closing conditions, and indemnification related provisions – in middle market deals ranging in size from $30 million to $750 million.

Sherrier identified 10 key trends of note from the Deal Points Study in a recent “What’sMarket” blog. Highlights include the following.

1. Purchase Price Adjustment Escrows. Forty-seven percent (47%) of the 2021 deals evaluated included a separate escrow account in which to hold back a portion of the purchase price at closing, to be used to settle a post-closing true up of closing or pre-closing estimates. While this is down slightly from 51% in 2019, it is up significantly from a low of 20% in 2008.  

2. Representation and Warranty Insurance (RWI). Sixty-five percent (65%) of deals included references to RWI – up significantly from 29% in 2017.

3. Indemnity Caps and Escrows Continue as a Percentage of Total Enterprise Value (TEV). While 99% of deals included a cap on sellers’ indemnification liabilities for beaches of general representations and warranties, the median indemnity cap (as a percentage of TEV) decreased from 11% of TEV in 2008 to 2% of TEV in 2021. This is largely a result of the increase in RWI, which provides buyers an alternative source of recovery for breaches of general representations and warranties.

4. Definition of Material Adverse Effect (MAE). Ninety-nine percent (99%) of deals include MAE qualifiers. Given its significance, the definition of MAE tends to be heavily negotiated.

- Seventy-three percent (73%) of the deals include impairment of a target’s ability to consummate the transaction as an MAE – a steady increase from 61% in 2017 and 50% in 2008. 

- At the same time, the Study shows a trend away from including the impact on the target’s prospects as an MAE, with this appearing in just 7% of deals – down from 38% in 2008.

5. Knowledge Qualifiers. In qualifying representations and warranties by the knowledge of the seller, buyers prefer a “constructive knowledge” formulation, while sellers prefer an “actual knowledge” standard. 81% of the deals utilized a constructive knowledge formulation – up from 61% in 2006.

Sherrier represents public and private companies in M&A and corporate restructuring transactions. She works across a wide range of industries including healthcare, technology, manufacturing, and retail. She also has significant experience advising clients regarding the formation of private equity funds, structuring CPOM transactions, and on general corporate governance matters.