Earnouts are used in acquisitions and divestitures to bridge the gap between competing valuations created by the uncertainty in the oil and gas industry. This uncertainty depresses valuations which lead to fewer transactions. While the mitigation of all uncertainty is not achievable, conceptualizing an earnout as a tool to combat market inefficiency can assist practitioners in drafting appropriately tailored earnout provisions that allow transactions to take place and reward risk-taking.
An earnout is a form of consideration that is payable post-closing contingent upon the satisfaction of specified facts or conditions. It affords a seller a higher potential purchase price with a quicker closing and reduces the chances that a buyer will “overpay” or be left with insufficient liquidity after closing. However, it comes at a cost. Both parties maintain exposure to the asset and each other, increasing the risk of disputes regarding the earnout. For earnouts to reduce market inefficiency, they must be tailored to the assets, risks, and businesses involved.
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
Not a Lexis Subscriber?
Subscribe Now
Not a Bloomberg Law Subscriber?
Subscribe Now
LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.
For questions call 1-877-256-2472 or contact us at [email protected]
