Shareholder Primacy

Earnout disputes, proxy advisors

May 14, 2025
This discussion dives deep into the tangled world of earnout disputes in mergers, including a landmark Delaware case that highlights key legal complexities. It explores how changing interest rates have increased the significance of earnouts, along with their potential pitfalls and litigation risks. A particularly gripping analysis of Johnson & Johnson's challenges with a healthcare acquisition underscores the critical nature of precise contractual language. The episode also humorously examines the evolving role of proxy advisors and their impact on corporate governance.
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INSIGHT

Earnouts Bridge Valuation Gaps

  • Earnouts address valuation gaps by tying part of the payment to future performance.
  • They also handle information asymmetry and control allocation between buyers and sellers.
INSIGHT

Earnouts Spark Litigation Conflicts

  • Acquirers may manipulate post-acquisition operations to minimize earnout payments.
  • This creates inherent conflict, driving widespread litigation in Delaware courts.
ANECDOTE

Schneider's Tractor Purchase Clause

  • Schneider promised to buy 60 tractors every three years to grow W&S's fleet.
  • They did, but retired more tractors, leaving the total fleet smaller and missing profit targets.
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