[author: Ajay Gill]
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- Earnout calculations and notice provisions
- Prevention better than cure?
- Specific performance and delay
The High Court has ruled that earn-out calculations, emailed by the buyer to the sellers in relation to a share sale, were not validly communicated.
Earnout calculations and notice provisions
Under an earnout provision in a share purchase agreement, the buyer was required to “submit” its revenue determinations to the sellers. It did so by email. Initially for Year 1 post completion and then for Year 2. The sellers pointed out that email was not a valid method of service under the formal notice provisions. The buyers tried to argue these provisions did not apply to the draft revenue determinations but only to formal notices under the SPA. The court disagreed. The words used in the notice provisions—which referred to “any notice or other communication”—were extremely widely drafted; it would be undesirable to draw fine distinctions between different forms of communication (e.g., formal notices served under the SPA and these revenue determinations); and it would be illogical for these, very important, communications not to be caught.
Prevention better than cure?
The buyer argued that even if the notices were invalid then the sellers should be estopped (i.e. prevented) from challenging them. The buyer was successful on this point for the Year 1 determination, since the sellers had engaged with the figures without, at that point, challenging the validity of how the figures were conveyed. For the Year 2 determination, the buyer had contested, promptly, the validity of service (as well as the figures) and so was not prevented from making this point.
Specific performance and delay
The remedy the sellers wanted was for the buyers to engage in the contractual dispute resolution process for the earnout. The buyers said the sellers should not be entitled to this remedy of specific performance because they had delayed bringing their claim, citing financial constraints. The court acknowledged these constraints, but noted that delay could be prejudicial. Ultimately, the court ordered specific performance in relation to the Year 2 determination, requiring the parties to engage in the dispute resolution procedure outlined in the agreement. The court reasoned that the sellers had consistently challenged the Year 2 figures, so the balance of justice favoured allowing the dispute resolution process to proceed.
Judgment: Hughes v CSC Computer Sciences
[View source.]
