SRS Acquiom recently released a multi-year study on post-closing M&A purchase price adjustments & indemnification claims covering nearly 600 private deals for which it served as shareholder representative. The study analyzes data for transactions with escrows that were fully released during the period from Q3 2018 through Q3 2020. This excerpt lays out some of the study’s highlights:
– 79% of deals with a purchase price adjustment (PPA) mechanism had an adjustment, and 50% of deals with a PPA mechanism had a buyer-favorable claim for adjustment.
– Parties may wish to err on the side of creating a larger PPA-specific escrow fund. The average size of buyer favorable PPA claims frequently represents a large percentage of PPA-specific escrow funds.
– Fraud claims are by far the largest category of indemnification claims, and the only claim category for which the median claim size exceeds the escrow (294%). Other claim categories may exceed the escrow in some instances—often because they are alleged in conjunction with fraud—but absent an allegation of fraud claim sizes are generally much smaller than that as a percentage of escrow.
– The size of claims for undisclosed liabilities and relating to financial statements, which are often coupled with fraud claims, as a percentage of escrow has remained high in recent years.
– The trends in size and frequency of the claims in deals with representation and warranty insurance (RWI) are similar to those found across all deals. Claims in deals with RWI tended to be more concentrated in smaller transactions, whereas in the full data set midsize deals tended to have more claims.
The study says that public and financial buyers generally made the most claims, but that likely reflecting the patterns of deals using RWI, the percentage of escrow claimed by public buyers is lower than in other buyer categories.
-John Jenkins, DealLawyers.com February 11, 2021