Abstract: In a hand-coded sample of M&A contracts from 2007-08, risk allocation provisions
exhibit wide variation. Earn-outs are the least common means to allocate risk,
indemnities are most common, followed by price adjustment clauses. Techniques for
mitigating enforcement costs – escrows, holdbacks, and seller financing – are common.
Target SEC registration and ownership dispersion correlate negatively with the use and
extent of risk sharing. Target-owners retain risk more frequently, but not universally or
exclusively, in industries in which current liabilities vary more, and when buyers and
targets are in different industries. Bidder and target law firm agents match on bid value
and prior deal experience, but law firm mismatches are common, and both law firm
experience and experienced-based mismatches correlate with the use, variance, and
design of risk allocation provisions. While asymmetric information and incentives are
important, so are transaction and agency costs, implying roles for lawyers to serve as
transaction-cost engineers and for policy-makers to set binding default rules of property,
tort and contract law. Specific policy implications include: contract statutes of
limitations should be shorter; default law should require minimum amounts in
controversy and caps on post-closing contract liability; and lawyers should disclose to
clients their M&A experience and typical outcomes of specific risk-allocation provisions.