In brief:
- Earn-out provisions are a commonly used mechanism in share sale agreements, performing a useful function in allowing parties to manage risk and incentives by making a portion of the purchase price contingent on the post-completion performance of the target business
- However, disputes often surface, arising either from different expectations between buyers and sellers or from the differing interpretation of earn-out provisions
- Many of these disputes can, however, be avoided with the right foresight and planning
- When disputes do arise, expert determination can be key to resolving the dispute, but a recent Court of Appeal decision demonstrates the high threshold required to challenge such a determination, making the choice of expert all the more important.
Earn-out provisions - typical issues and how to avoid them
- Interpretation - Disputes frequently arise from ambiguous drafting or where the agreement fails to address all foreseeable scenarios during the earn-out period. To mitigate this risk, the relevant clauses should be drafted with precision and tested against realistic scenarios. If possible, we recommend that a litigator specialising in share sale disputes reviews the earn-out provisions before the agreement is finalised to identify potential areas of contention.
- Calculation of additional consideration - Earn-out provisions are often used where the future performance of the target business is uncertain, or where significant growth is anticipated but contingent on external factors. To reduce the scope for disagreement, the agreement should include a clear formula for calculating the additional consideration, supported where possible by worked examples. Parties should also consider how multiple trigger events interact - specifically, whether they give rise to separate calculations or a single composite assessment.
- Earn-out triggers - The agreement should clearly define the events that trigger an earn-out payment. Triggers may be time-based (for example, a calculation based on revenue generated within four years of completion) or event-based (such as the sale of a particular asset). Parties should consider the trigger events and whether these align with anticipated commercial milestones for the target company. Where multiple triggers exist, the agreement should address what happens if two or more are activated simultaneously, or shortly after one another. For time-limited triggers, parties should consider whether adequate safeguards are in place to prevent the buyer from deliberately delaying an investment or transaction so that the resulting value falls outside the earn-out period. The agreement should also specify when payment falls due and whether it is payable in a single sum or by instalments.
- Operational control - Sellers should consider what oversight they will retain over the business during the earn-out period. Key questions include: what happens if the buyer fails to take reasonable steps to maximise earn-out performance? Can the buyer change the business strategy or business plan without the seller's consent? Governance mechanisms - such as external expert oversight, accountant monitoring, or periodic reporting obligations - should be built into the agreement to ensure compliance and transparency.
- Reporting obligations - The agreement should specify what information the buyer is required to provide to the seller during the earn-out period, and who is responsible for preparing it. Consideration should be given to whether third parties, such as independent accountants, should be appointed to oversee the information being produced by the buyer. The agreement should also include a mechanism enabling the seller to raise queries on the reports, together with clear timeframes and provisions as to which party bears any costs associated with such requests for information.
- Dispute resolution - If a disagreement arises, the agreement should set out a clear mechanism for resolving it. Parties should consider whether disputed earn-out consideration should be held in escrow pending resolution, to protect the seller against the risk of dissipation by the buyer, for example through a restructuring including the target company. Many earn-out agreements provide for disputes to be resolved by expert determination or arbitration rather than court proceedings in order to maintain confidentiality, particularly where the transaction is high-profile or where publicity could adversely affect the buyer or target company's ongoing business relationships. As can be seen from the case discussed below, the grounds for challenging an expert determination are limited so agreeing the right mechanism for expert selection is key.
Challenging an expert determination - the court's approach
One of the limited grounds for challenging an expert determination is where there has been "manifest error" by the expert. However, the recent Court of Appeal decision in WH Holding Ltd v London Stadium LLP [2026] EWCA Civ 153 handed down on 23 February 2026 demonstrates the very high threshold that must be met in order to be successful in such a challenge.
At first instance, the High Court had determined that the expert had made an error, however the Defendant appealed that decision, submitting that it did not amount to a manifest error. The Court of Appeal concluded that challenges based on manifest error face an extremely high threshold. The court referred to the Supreme Court decision in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2 which approved the definition of "manifest error" given by Simon Brown LJ in Veba Oil Supply and Trading GmbH v Petrotrade Inc (“The Robin”) [2001] EWCA Civ 1832, [2002] CLC 405 that a manifest error must constitute an "oversight or blunder so obvious and obviously capable of affecting the determination as to admit of no difference of opinion".
The Court of Appeal held that it is not sufficient to show that the expert merely misunderstood or misapplied a contractual formula, thereby reaching a "wrong" answer, and noted that an expert is appointed to determine the dispute, not to guarantee the "correct" construction of the agreement. To establish manifest error, the challenging party must demonstrate that the expert's decision was so obviously wrong that no reasonable expert could have reached it.
This decision underscores the importance of getting earn-out provisions right at the drafting stage, as the scope for correcting errors through a subsequent challenge is narrow. It also highlights the critical importance of careful attention to the expert selection mechanism: given that a determination will be very difficult to overturn, the right choice of expert – with the appropriate qualifications, experience and understanding of the relevant commercial context – can be decisive.