Follow us

The virtues of earn-outs and contingent deferred payments are appealing in their ability to: 

  1. bridge the value gap between acquirer and vendor; 
  2. settle uncertainty regarding business performance; and 
  3. incentivise vendors who are also part of management. 

Their popularity rose over the last 18 months, as buy-sell spreads widened and performance uncertainty increased. However, the challenges they present remain, being that they: 

  1. must be documented precisely and in detail to avoid disputes or unintended consequences; 
  2. require consideration of how the purchaser’s conduct and integration can impact them; and
  3. can incentivise unwanted or unintended behaviour post-completion.

We consider two cases in the NSW Supreme Court late last year that deal with disputes in earn-outs and contingent deferred payments to identify the lessons. The facts of the cases will be interesting to M&A participants, especially those who have considered earn-outs before.

Lessons from the cases

The lessons from these cases are that the courts will:

  1. be pragmatic in interpreting these provisions to avoid absurdities that may arise from a literal read of the drafting, including by having regard to the history of negotiations; and
  2. not apply general provisions regarding the conduct of the parties literally, such as obligations requiring each party to deliver the benefit of the contract to the other and requiring co-operation. 

Above all, the key lesson is the importance of being precise and detailed in recording the expected calculation methodology, dealing with potential eventualities and expectations on conduct post-completion.

SSABR v AMA Group1

In this case the plaintiffs sold two smash repair businesses to AMA Group Ltd for $4.8 million plus an “Earn-Out Amount” to be paid in two years’ time (the “Earn-Out Period”). The Earn-Out Amount was calculated in the business sale agreement as follows:

EBIT for the Business for the Earn-Out Period MULTIPLIED by 4 LESS the Initial Cash Payment (on an unadjusted basis).

The vendors argued that the “Earn-Out Period” was defined as a 2 year period, and therefore the formula as drafted required EBIT for the 2 years to be aggregated. 

AMA Group argued that EBIT should be construed to mean “average annual EBIT”, pointing to an earlier heads of agreement signed by the parties that referred to average EBIT and surrounding circumstances that indicated the parties intended to value the businesses on a multiple of an average annual profit figure. 

A key factor supporting AMA Group’s argument was the “protracted and closely documented negotiation” of the earn-out mechanism in the binding heads of agreement that referred to the average EBIT and included a worked example. 

Justice Rees concluded that it was apparent from the history of negotiations and drafting that the plaintiff’s position is not what the parties meant. However, for her Honour to correct the contractual language by the legal principle of rectification, she needed to be satisfied that the following two conditions were met:

  1. the literal meaning of the contractual words must be an absurdity; and
  2. it must be self-evident what the objective intention is to be taken to have been. 

Her Honour found that neither condition was satisfied, and so turned to equitable principles that would allow a written contract to be rectified in circumstances where “you and I both knew, when we entered this contract, what our intention was concerning it, and you cannot in conscience now try to enforce the contract in accordance with its terms in a way that is inconsistent with our common intention.”

Justice Rees noted that at no stage during the drafting of the business sale agreement did either party communicate any intention to alter or depart from the common intention set out in the binding heads of agreement, which referenced average earnings. She said it “beggars belief” that there would be no contemporaneous record of a major change to the parties’ bargain that would effectively double the agreed multiple from four to eight. 

Post-completion the acquired business’s revenue agreement with a key customer was amended to align with those entered into with the broader AMA business, which reduced earnings in the acquired business. The vendor sought to argue that the acquirer’s conduct in accepting the amendments either breached representations made outside the agreement prior to completion that the business would be conducted in the same way or the implied duty of good faith. These were ultimately unsuccessful on the facts, highlighting the importance of recording any expectations regarding post-completion conduct.

No earn-out was ultimately payable following the Court’s decision. 

Wilson v QBT2

In this case the acquired target had a 40% interest in a joint venture entity (JV Company) that carried on a travel agency business. The joint venture partner (JV Partner) could acquire the target’s shares in the JV Company on a change of control of the target.

The parties to the sale agreement escrowed $4 million of the purchase price, with either the full or an adjusted amount to be released in the following two scenarios:

  1. receipt of written consent from the JV Partner to the change of control; or
  2. payment by the JV Partner to the target for the shares in the joint venture entity.

Neither of these scenarios eventuated because COVID-19 set in and affected the performance of the JV Partner (and JV Company). Before the JV Partner could give its consent or exercise its option, it was placed into voluntary administration. The administrator transferred the JV Partner’s shares in the JV Company to the vendors by signing a share transfer. Consequently, the target retained its shares in the JV Company.

The acquirer of the target, who refused to pay the $4 million to the vendors, argued that the language of the contract was clear - the deferred amount was payable only in the two scenarios described above. In circumstances where neither scenario eventuated, the acquirer argued the quarantined amount should be returned to the acquirer. 

The vendors argued the $4 million was payable because the drafting should be interpreted as dealing with two possibilities (even though it was not expressly drafted in this way); either the target retained their shares in the JV Company or the shares were acquired by the JV Partner, and in either case the intent was for the amount to be paid to the vendors.

Justice Ball did not agree with the acquirer’s claim, saying that (emphasis added): 

[It] produces commercially absurd results…” and “it made no commercial sense for the [vendors] to receive nothing if [the target] retains its shares in the JV Company other than as a consequence of written consent from [the JV Partner], when the obvious purpose of the Deferred Amount was to compensate the [vendors] for the value of the shares [the target] held in the JV Company.

Considering the agreement as a whole, the judge held that the vendors’ interpretation of the contract was preferred because:

  • the reference to deferred amount in the sale agreement was not qualified by the words “if any”, suggesting the parties intended the amount would be paid and the only question was how much and when;
  • the purchaser was prohibited from using the deferred amount “for any reason other than as contemplated by [the sale] agreement”; and
  • under the sale agreement, the purchaser must pay the amount (emphasis added).

His Honour noted the drafting errors in the deferred amount mechanism, admitting that to give effect to the intention of the parties, he needed to do “some violence to the language” otherwise one would “permit the tail to wag the dog.” 

It is worth noting that, while not relevant given his earlier finding, Justice Ball concluded that the signed share transfer did in fact amount to consent in writing to the change of control. He noted that by transferring its shares, the JV Partner “manifested an intention to abandon any rights it had arising from the Change of Control” which the court found sufficient to amount to consent, even though it was not express.


While the judges applied slightly different legal principles in these cases, they demonstrate a pragmatic approach to interpretating earn-outs to give them the meaning a reasonable businessperson would have understood them to mean. However, the bigger lesson is the need for precision and detail when formulating the earn-out, to avoid unintended consequences or disputes. We note that both cases are the subject of appeals.  

  1. SSABR Pty Ltd v AMA Group Ltd [2023] NSWSC 1551    
  2. Grant Reid Wilson atf G&L Wilson Family Trust v QBT Pty Limited [2023] NSWSC 1255

Key contacts

Kam Jamshidi photo

Kam Jamshidi

Partner, Melbourne

Kam Jamshidi
Alexandra Hodsman photo

Alexandra Hodsman

Senior Associate, Melbourne

Alexandra Hodsman

Stay in the know

We’ll send you the latest insights and briefings tailored to your needs

Sydney Australia Perth Brisbane Melbourne Corporate Deal Talk: Australian M&A Update Kam Jamshidi Alexandra Hodsman