Recent case law has highlighted how failure to consider the rights and obligations of parties during an earn-out period can prove extremely costly. The recent decision in Porton Capital Technology Funds, Porton Capital Inc. and Ploughshare Innovations Limited v 3M UK Holdings Limited and 3M Company particularly served to underline the requirement for careful consideration of earn-out mechanics.
In this case, the upside value which the sellers received for the business was entirely dependent on how successfully the buyer ran the business post-completion, but the claimants had no ongoing involvement in the business, and very little contractual protection. Thorough consideration of precise mechanics and respective rights and obligations should be considered by both parties during the negotiation of earn-out provisions to avoid such unsatisfactory outcomes.
This memorandum discusses the intricacies of the 3M case and draws out a number of valuable practice points to consider, including the tailoring of earn-out provisions to the parties' negotiating position.