

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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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.
Earnouts Spark Litigation Conflicts
- Acquirers may manipulate post-acquisition operations to minimize earnout payments.
- This creates inherent conflict, driving widespread litigation in Delaware courts.
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.