Earn-out agreement conferred entitlement to subsequent adjustment

Under a share purchase agreement, part of the purchase price was made dependent on the company’s future earnings (a so-called earn-out). To safeguard the seller’s interests, the agreement also contained limitations on the transactions the company could carry out during the earn-out period.

The seller held that two transactions completed after the transfer wrongfully reduced the company’s profits and thus the amount of the additional consideration.

The first transaction concerned the sale of two shareholdings at a price clearly below cost, resulting in an accounting loss for the company. Contrary to the Court of Appeal, the Supreme Court found that the sale constituted an extraordinary transaction in breach of the contractual limitations. Furthermore, it was not established that the shareholdings were sold at market price. The seller was therefore entitled to have the additional consideration calculated as if the loss had not occurred.

The second transaction concerned a write-down of a shareholding. As in the Court of Appeal, the Supreme Court found that there was a sufficient accounting basis for the write-down. It was therefore not wrongfully as against the seller.

In its assessment of the transactions, the Supreme Court took as its starting point both the agreement and the principle that an earn-out agreement entails a duty of loyalty on the part of the buyer towards the seller.
 
Read the judgment from the Supreme Court (Norwegian only) (PDF)

Areas of law: Contract law, duty of loyality in contractual relationships, earn-out

Key paragraphs: 36–39

Justices: Bull, Bergsjø, Thyness, Steinsvik, Hellerslia