All of French Company Law: ordinary law of companies and specific regime for different types of companies

Company Law (en cours)

The earn-out clause is the one that provides that the initial price paid to the transferor at the end of negotiations may be subsequently supplemented, provided that the undertaking whose rights have been transferred proves to be profitable, according to conditions established by the parties themselves .
If the case law has long been reluctant to affirm the validity of such clauses, it now accepts …

Characteristics and operation.

POITRINAL, Transfers of business: the "earn-out" agreements, JCP E 7 January 1999, 18; PAROT, Revision of the transfer price of shares resulting from an "earn-out" clause or liability guarantee. The new legislative provisions, Actes prat. ing. sociétaire, July-August 2000, 27; BEAUREGARD and VIGNALOU, "Earn-out" clauses, some points of caution in their implementation, Act. prat. ing. sociétaire 2014, No 137, 5.

The earn-out clause is the one that provides that the initial price paid to the transferor at the end of negotiations may be subsequently supplemented, provided that the undertaking whose rights have been transferred proves to be profitable, according to conditions established by the parties themselves .

If the case law has long been reluctant to affirm the validity of such clauses, it now accepts them if certain conditions are met . It considers that the transfer price, consisting on the one hand of a fixed element of a very low amount corresponding to the value of the shares at the time of the transfer, taking into account the fair value of the photovoltaic projects held in the portfolio, and on the other hand, a variable part based on the price supplement resulting from the photovoltaic projects and determinable according to a method set in the transfer deed, cannot be considered as nominal .

The calculation of the price supplement must be based on accurate accounts  and according to objective elements that do not depend on the will of the debtor of the obligation , failing which the earn-out clause risks invalidity based on the prohibition of potestative clauses. It has been ruled that the condition requiring the beneficiary of a price supplement clause to hold the position of chairman of the board of directors of the transferred company at the date of payment is potestative on the part of the transferee, and consequently leads to the annulment of the share transfer act . Conversely, the transferee cannot be held liable on the basis of contractual liability for not implementing actions recommended by the business plan established by the parties during negotiations, and thus preventing the transferor from achieving the gross margin and EBITDA  targets set for the payment of price supplements, when the share transfer agreement contains an entire agreement clause that excludes prior exchanges and discussions from the contractual scope and the transferor has not committed to implementing the synergies dictated by the business plan .

Cass. com., 20 September 2011, LawLex202300001056JBJ, considering that the claim constituted, within the framework of a transfer of shares, by an additional price that must be calculated based on the evolution of the company's self-financing capacity, cannot be subject to taxation as long as it is contingent upon the occurrence of an uncertain event.

Versailles, 2 October 2012, LawLex202300001076JBJ, holding that the transferor of shares may request the payment of an additional price for the variable part of the transfer price linked to the company's results if this amount was calculated based on a net result affected by accounting irregularities.

Cass. com., 15 December 2015, LawLex202300008642JBJ.

Cass. com., 27 October 2009, LawLex202300001059JBJ.

Paris, 17 March 2009, LawLex202300001078JBJ, indicating that the strategic decisions of the transferee that result in the transferor losing a chance to receive an additional price entitle the transferor to compensation; Paris, 15 September 2011, LawLex202300001077JBJ, holding that the transferee who causes the disappearance of the legal personality of the transferred company through its absorption, while the transfer agreement specified that it should retain its legal personality for a certain period, wrongfully creates the conditions for a significant loss of chance for the transferors to receive an additional price.

Cass. com., 19 January 2010, LawLex202300001057JBJ.

EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization, that is to say, in French, Bénéfice avant intérêts, impôts, dépréciation et amortissement.

Cass. com., 21 April 2022, LawLex202300000654JBJ, JCP G 2022, No 777, note PILLET; Rev. sociétés 2022, 546, note SAINTOURENS.

Company Law (en cours)

301. Characteristics and operation.(1)

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Les décisions de justice citées dans ce paragraphe :

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301. Characteristics and operation.(1)

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