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Earn out clause? Valid with due care.

by Raffaele Caso | Jul 20, 2021 | Blog

In a share deal or in an asset deal agreement, the earn out is the additional price, based on a future company’s performance, that the buyer pays to the seller in addition to the fixed base price. The earn out clause sets out both the performance parameter to be referred to and the method for calculating the variable part.

This clause is not a guarantee given by the seller on the profitability of the target company, but a way of fixing the price, an agreement by which the parties set the determination of the price to a future and uncertain event.


Earn out to solve the negotiation impasse

The earn out is a clause aimed at reducing the risk arising from a shares’ or asset’s acquisition and it is a useful tool to compensate the different price expectations that arise when the parties assess, in a different way, the future performance of the target company.

A recent ruling by the Court of Rome on 13 November 2020 clarifies interesting aspects and provides guidance on how to avoid running into a void clause.


The clause examined in the ruling

According to the Roman court, it is valid the clause that sets out, in the context of a share deal, a symbolic price for the shares’ transfer (1 euro) and a potential future integration of the price, equal to 50% of the possible assets resulting from the final liquidation financial statement.


Is the clause null and void because the price cannot be determined?

The price is not indeterminable (with consequent nullity pursuant to Articles 1418, paragraph 2, and 1346 of the Civil Code), since it is linked to the assets of the final liquidation financial statement that has to be prepared, in accordance with the criteria identified by law, by the administrative body and approved by the shareholders’ meeting.




Is the clause null and void because it is subject to the will of one of the parties (merely potestative clause)?

The variable part of the price does not depend on the buyer, and therefore Article 1355 of the Civil Code is not violated. The preparation of the financial statements, on the basis of which the higher price to be paid is determined, is not the responsibility of the acquiring party but of the company’s directors, who are bound by mandatory rules in their activity.


Symbolic fixed part and variable part: is this a donation?

Considering that the fixed part of the price was only symbolic (1 euro) and that the variable part was subject to a future and uncertain event (therefore possibly even equal to zero Euro), the seller argued that the contract for the shares’s transfer was null and void, because it lacked the price and therefore the cause justifying the patrimonial attribution.

The Roman court then explains the nature of the specific contract for the shares’s transfer, specifying that in such contracts, as well as in the assets’ deal agreement, the indication of a purely symbolic price is legitimate, without necessarily being brought within the figure of donation.

For the purposes of donation, it is not only sufficient that there is no consideration, but it is also necessary to increase the assets of others and the so-called spirit of liberality, i.e. the awareness of conferring a pecuniary advantage on others.

The indication of the symbolic price is justified, also for the purposes of the deed’s taxation, where the consideration is identified on the basis of interests, including non-assets’ interests, of the parties.  For example, in return for the payment of 1 Euro, the seller is satisfied because he gets rid of a series of debts, responsibilities and duties and, on the other hand, the buyer is satisfied because he has acquired know-how, technology or customers/suppliers to integrate and interact with his own business.


Final points for negotiating the earn out clause

The earn out clause is therefore a useful tool to find common ground on the price between buyer and seller and. In order to avoid its nullity, it is suggested:

  1. to specify the condition to which it is subject;
  2. the condition shall not be subject to the mere will of one of the parties;
  3. to specify the method of calculation in order not to make it indeterminable;
  4. to specify the interests, including the non-asset’s ones, supporting the possible symbolic price.



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