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In a recent case, the claimants alleged they had sold their shares to the defendant under a sale and purchase agreement (“SPA”) in return for an immediate cash payment plus three potential earn-out payments. The defendant denied there was any agreement for further earn-out payments.
Earn-out payments are a common feature of SPAs when the shareholder of the company being sold is also a director who is going to continue working for the company. Earn-outs incentivise that individual to continue promoting the interests of the company after the sale.
In August 2016, the claimants sold shares in Bloom Media (UK) Limited to Jaywing Plc. They had a written SPA. The claimants say they reached a further oral agreement with the defendant in January 2018 which introduced new conditions for further earn-out payments. The claimants said they had met those conditions and were entitled to two more earn-out payments worth over a £1m.
The SPA contained a no oral modification clause and the court preferred the documentary evidence over the witness evidence. The court found the terms of the SPA had not been amended.
The court held that the defendant had breached the SPA because the earn-out statement it prepared did not comply with the provisions in the SPA. However, no damages were due to the claimants from the breach because the claimants had failed to meet the (written) conditions in the SPA for an earn-out payment.
The key reminders here are:
- Where there is an ongoing relationship between a seller and a buyer of shares, the parties should pay careful attention to the written clauses of the SPA (especially notice provisions).
- It is very difficult to argue that an agreement has been modified orally when that agreement has a no oral modification clause. You should record variations in a signed written agreement.
- In most cases, the court will prefer contemporaneous documentary evidence over witness evidence. In the modern world, agreements are so commonly recorded in writing ranging from detailed SPAs to informal emails and texts that the court will rarely believe a witness who says the documents do not reflect the agreement.
If you are a seller or purchaser of shares and have concerns about an earn-out clause in the agreement, then contact our corporate disputes solicitors George Gwynn or Morgan Rees to seek specialist advice on the options available to you.
If you want to sell or purchase shares in a business, speak to Sarah Ward.