Earn-out clauses in share purchase transactions

The earn-out is the contractual technique under which part of the purchase price for an equity stake is made contingent on the future performance of the acquired business. It is an atypical contract, permitted under art. 425 of the Brazilian Civil Code, whose framework derives essentially from the will of the parties. In transactions between business parties, art. 421-A of the Civil Code, introduced by Law 13,874/2019, further establishes a presumption of parity and symmetry between the contracting parties and makes judicial revision of the bargain an exceptional remedy.

Precisely because it concentrates risk and expectation, the earn-out ranks among the most frequent sources of post-closing litigation. Arbitral and judicial experience shows that disputes rarely stem from the concept itself and almost always derive from imprecise drafting of the performance metric, the measurement period and the powers of the buyer in running the company during that period.

The applicable legal framework

Three provisions of the Civil Code structure the matter. Art. 421-A upholds the allocation of risks agreed by the parties and narrows judicial interference with the economic balance of the contract. Art. 422 imposes objective good faith throughout the relationship, which encompasses the duty of the buyer not to artificially frustrate the targets, whether through changes in accounting practices or through management decisions that hollow out the measurable result. Art. 425, in turn, grants freedom to create the arrangement, which requires the parties to regulate the calculation exhaustively, as no statutory default regime will rescue a lacunous text.

Essential elements of the clause

Proper drafting defines the metric by reference to objective accounting criteria frozen for the measurement period, establishes who performs the calculation, within which term and with which supporting documentation, and regulates the seller objection procedure. It should also set obligations on the buyer regarding the conduct of the business, usually under an ordinary course standard, and acceleration events, such as the sale of the asset, a change of control or the discontinuation of the business line tied to the target.

It is equally advisable to regulate the effects of corporate reorganizations on the calculation basis and to expressly prohibit charging the result with expenses unrelated to the acquired operation, such as corporate overhead allocations of the buyer.

Dispute resolution

For disagreements of an eminently accounting nature, a binding expert determination conducted by an independent audit firm designated in advance avoids litigating arithmetic. For legal controversies, an arbitration agreement governed by Law 9,307/1996 ensures confidentiality and adjudicators familiar with M&A practice. The combination of the two mechanisms, each within its own scope, is the design that best preserves the relationship between the parties and the value of the transaction.

This article is for general information only and does not constitute legal advice. For guidance on specific situations, please contact our team at contato@gotlibrocha.com.br.