Corporate Matters — January 2014: validity of an earn-out notice

The negotiation of earn-out provisions is often one of the pinch points in the negotiation of a share purchase agreement. The preparation and service of the earn-out notice tends to attract less attention. This can be costly, as a recent High Court judgment demonstrates.

In Barratt v Treatt plc, a share purchase agreement (SPA) provided for an earn-out to be calculated by reference to the pre-tax profits of the target group as shown in the audited accounts. The agreement also required the purchaser to carry out the initial calculation of the earn-out and to provide notice of that calculation to the seller. Failure to do so by the purchaser would result in the calculation of the earn-out being referred to an independent accountant for determination.

The purchaser duly served notice of its earn-out calculation on the sellers. However, it was apparent from the notice that the calculation had been determined, at least in part, by reference to management accounts rather than the audited accounts as required by the SPA. The seller sought a declaration that the notice was invalid…

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