Failure to Comply With Purchase Terms Proves Costly

Selling a company can be fraught with difficulties, particularly where payment for shares is deferred and the price payable is calculated on the basis of performance. In one such case, a disagreement between buyer and seller resulted in a round of costly litigation which took them no closer to a final resolution.

The relevant agreement for the sale and purchase of shares made provision for the price payable – or 'earnout' – to be assessed on the basis of profits or losses made by the company during two future accounting periods. The seller purported to serve an earnout notice, which set the price payable under the earnout, on the buyer. The buyer did not challenge the notice within the time limit laid down by the agreement.

The seller argued that the price specified in the unchallenged notice was therefore decisive and had to be paid. However, the buyer successfully argued before a judge that the notice was invalid in that the earnout had not been calculated by reference to the agreed accounting periods.

In dismissing the seller's challenge to that decision, the Court of Appeal found that the judge's analysis of the agreement could not be faulted. The invalidity of the notice meant that the dispute in respect of the price payable would have to be resolved by an independent accountant in accordance with the agreement.

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