Cross-Border Earnout Disputes
Author | Stephen Brown-Okruhlik and Laurene Oliveira |
Pages | 4-8 |
American Bar Association, Litigation Section
Commercial & Business Litigation Committee
Winter 2024, Vol. 25, Issue 2
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Cross-Border Earnout Disputes
By Stephen Brown-Okruhlik and Laurene Oliveira
“Earnout” provisions can be a useful tool in merger and acquisition (M&A) agreements. They
allow parties buying and selling a business to make a portion of the purchase price contingent
on the post-closing performance of the target company. Earnouts have become increasingly
common in recent years. So have earnout disputes. Parties to M&A agreements should
consider what rules of contract interpretation and legal remedies might apply in the event of a
dispute over earnouts. This is especially true in cross-border transactions involving the law and
procedure of a foreign jurisdiction. Canada provides some good examples regarding these
topics, which are discussed below.
Earnouts in Mergers and Acquisitions Deals
Earnouts in M&A transactions shift a portion of the consideration that a buyer pays to a seller
to sometime after the sale of a business closes and make the payment of such consideration
contingent on the future performance of the target business. Earnouts can provide an incentive
to sellers to continue promoting the interests of the business after closing. They are sometimes
used to retain key employees who may or may not also be sellers. Earnouts can also bridge a
gap between the parties’ opinions about the company’s value.
Earnout provisions come in many forms and are often heavily negotiated and tailored to the
circumstances of the transaction. For example, earnouts can be tied to the target company’s
financial indicators, like sales, revenue, or earnings before interest, taxes, depreciation, and
amortization (EBITDA). They might also be triggered by one or more milestones, like the
commercialization of a product or a further corporate transaction. Sometimes earnout
entitlements are accelerated by the occurrence of specified events, like a change of control of
the target business or the buyer.
Earnout provisions may impose express requirements on the buyer to make “best” or
“commercially reasonable” efforts to achieve the earnout triggers, expressly relieve the buyer
of any obligation, or be silent on the issue. They may impose specific post-closing obligations on
the buyer, like continuing to run the business in its ordinary course or a prohibition on merging
the target company with another entity during the earnout period. If earnout payments are
triggered or quantified in reference to specific financial metrics like revenue or EBITDA, the
parties might agree to refer calculations or accounting disputes to a third-party valuator. The
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