Schedule - Initial And Deferred Purchase Price in Shares with Earn Out (Share Sales)

This Schedule - Initial And Deferred Purchase Price in Shares with Earn Out (Share Sales) replaces the purchase price schedule in the relevant share sale agreement where the default position is that the purchase price is paid in cash at completion.

It is designed for transactions where the purchase price consists of an initial allotment of shares in the buyer to the seller or sellers at completion, and a further allotment of shares calculated by reference to a multiple of the target company’s profits during an earn-out period. It is typically used in an institutional buy-out (IBO) where the buyer retains management to run the company day to day and the earn-out incentivises performance.

What does Schedule - Initial And Deferred Purchase Price in Shares with Earn Out (Share Sales) do?

It sets out a purchase price mechanism under which consideration is delivered by the issue of shares in the buyer, both at completion and as deferred consideration linked to the target’s performance over an earn-out period.

What does Schedule - Initial And Deferred Purchase Price in Shares with Earn Out (Share Sales) cover?

• Initial consideration satisfied by allotment of buyer shares at completion, and deferred consideration satisfied by further allotment of buyer shares based on profits during an earn-out period.
• Valuation of the buyer’s shares by an independent accountant for the purposes of calculating the value of the shares allotted as initial and deferred consideration.
• Calculation of profits by the buyer’s accountants, with the seller or sellers able to dispute the calculation and appoint an independent valuer.
• Entitlement rules where a seller ceases employment before the end of the earn-out period due to ill health, death or termination of a service agreement (other than summary dismissal), including pro-rating where appropriate.
• A cap on the deferred consideration, to be specified.
• A set-off mechanism allowing deferred consideration to be set off against sums owed to the buyer for claims under the agreement (for example, warranty claims).
• Protection provisions intended to prevent the buyer from artificially reducing profits during the earn-out period, thereby reducing deferred consideration.
• Confirmation that the seller or sellers are not entitled to dividends declared or paid by reference to a date prior to allotment of the initial or deferred consideration shares.
• Retention requirements for the initial and deferred consideration shares for a specified number of months after their respective allotments.

When should you use Schedule - Initial And Deferred Purchase Price in Shares with Earn Out (Share Sales)?

• The parties have agreed that the purchase price will be paid in buyer shares at completion, with an earn-out element paid by further share allotments linked to profits.
• The buyer is retaining management and the earn-out is intended to incentivise performance during the earn-out period.
• You need mechanisms for share valuation, profit calculation, dispute resolution via an independent valuer, and protections during the earn-out period.
• The deal terms require retention of the consideration shares for a specified period and limit dividend entitlement prior to allotment.

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