Under an agreement for the sale of shares, part of the purchase price was made contingent on the company's future earnings (a so-called earn-out). To protect the seller's interests, the agreement also contained restrictions on the transactions and other measures the company could undertake during the earn-out period.
The seller argued that two transactions carried out after the transfer had unjustifiably reduced the company's profit and, consequently, the amount of the additional consideration.
The first transaction concerned the sale of two shareholdings at a price clearly below their cost price, resulting in an accounting loss for the company. The Supreme Court – unlike the Court of Appeal – held that the sale constituted an extraordinary transaction in breach of the restrictions set out in the agreement. It had also not been established that the shareholdings were sold at market value. The seller was therefore entitled to have the additional consideration calculated as if the loss had not occurred.
The second transaction concerned the impairment of a shareholding. Like the Court of Appeal, the Supreme Court found that there were sufficient accounting grounds for the impairment. The impairment therefore did not constitute an unjustified measure vis-à-vis the seller.
In assessing the transactions, the Supreme Court relied both on the agreement itself and on the fact that an earn-out agreement gives rise to a duty of loyalty on the part of the buyer towards the seller.
Source: Supreme Court
