Earn-out clauses

The buyer and seller entered into a share sale agreement, where part of the purchase price was made contingent on the company’s future earnings during an earn-out period of two years. To protect the seller’s interests, the agreement also contained restrictions on the transactions the company could undertake during the earn-out period. On the same day as the SPA was entered into, a shareholders' agreement was entered into.

The seller argued that two transactions carried out after the transfer, unlawfully reduced the company’s profits and thus the amount of the additional consideration, so that the seller suffered a loss.

One of the transactions concerned the sale of two shareholdings at a price well below cost, which resulted in an accounting loss for the company. The Supreme Court – unlike the Court of Appeal – found that the sale was an extraordinary transaction in breach of the restrictions in the agreement. Furthermore, it had not been established that the shareholdings were sold at market price. The seller was therefore entitled to have the additional consideration calculated as if this loss had not occurred.

The second transaction concerned the write-down of a shareholding. Like the Court of Appeal, the Supreme Court found that there was a sufficient accounting basis for the write-down. It was therefore not considered unlawful vis-à-vis the seller.

In assessing the transactions, the Supreme Court took, as its starting point, both the agreement and the fact that an earn-out agreement imposes a duty of loyalty on the buyer towards the seller. 

The Supreme Court started by "defining" the term "earn-out" as being commonly used for a consideration clause typically employed in business transfers, which entails that – normally in addition to a fixed amount – further consideration is payable if agreed conditions are met. It was further stated that the size of the earn-out is usually a function of one or more agreed variables, often a share of the profit in a given period in the company being transferred, and that such clauses are used to bridge the gap between what the seller and buyer respectively are willing to accept as a fixed amount, so that the buyer shares the risk of earnings capacity during the initial period with the seller. By starting its assessment with this definition, one will note that the Supreme Court laid the foundation for the use and importance of loyalty between the parties. 

The Supreme Court thereafter went on to state that to protect the seller’s interests, the contractual provisions will typically contain more or less detailed requirements regarding how the company is to be run during the relevant period. The core of these provisions typically stipulates that the business must be run in accordance with previous practice during the earn-out period, without significant changes to day-to-day operations, financing or accounting principles.

Next, the Supreme Court established that the interpretation of earn-out clauses follows the same principles of interpretation that otherwise apply to commercial agreements. Hence, as a starting point, they must be interpreted objectively, with great emphasis on the wording of the agreement. However, the purpose, structure and broader context of the agreement are also significant, whilst considerations of good faith may be taken into account.
In the latter regard (considerations of good faith) the Supreme Court referred to its judgement in Isola (HR-2026-280-A, paragraph 42) and further references and then went on to state that the Isola judgement was also the starting point regarding the content of the duty of loyalty. With reference to paragraph 53 in the said judgement, it was stated that in addition to considerations of loyalty constituting a factor in the interpretation of the agreement, the duty of loyalty may also constitute an independent legal basis for rights and obligations. It was also referred to paragraph 54 in Isola, from which it follows that the duty of loyalty "essentially … entails that the parties are, to a certain extent, obliged to safeguard the other party’s interests, even if this is at the expense of their own interests".

With reference to the Isola judgement paragraphs 55 and 56, the Supreme Court continued by saying that the scope of the duty of loyalty will vary from contract to contract, and certain circumstances may call for a stricter requirement of loyalty.

After laying down these general principles, and their application also to earn-out clauses, it was pointed out that earn-out clauses designed to safeguard the seller’s interests after the buyer has taken over the business will, in principle, entail a form of duty of care, which according to the Supreme Court gives rise to such a heightened requirement of loyalty.

More concretely, it was pointed out that once control over operations, accounting, etc. has been transferred to the buyer, the seller will not be able to influence decisions that could potentially reduce the consideration. The buyer, for their part, may have a self-interest in transactions that are likely to reduce the consideration without a corresponding reduction in the company’s real value, for example by deferring income or advancing expenses. This asymmetry between the parties’ positions therefore suggests, according to the Supreme Court, that the buyer may, to some extent, be obliged to safeguard the seller’s interests, even if this is at the expense of their own interests.

The Supreme Court then went on by stating that there are, however, limits to what can be inferred from the duty of loyalty. In this regard reference was given to the Isola judgement, paragraph 57. By further reference to paragraph 58 in Isola, it was stated that it must be expected that the parties themselves identify and set out key rights and obligations in the contract, and that the function of the duty of loyalty is therefore primarily to supplement the contract where it is silent. The Supreme Court added that the duty of loyalty cannot entail an obligation to disregard requirements under public law or company law, and that the same applies to the breach of agreements entered into with third parties.

As to the question of the burden of proof, the Supreme Court stated that it is the party alleging a breach of contract who, in principle, bears the burden of proof in this regard. However, it was added that considerations of preserving evidence may shift the burden of proof to the other party. The Supreme Court further said that where the question arises as to whether there has been a breach of the buyer’s obligations relating to the operation of the business during an earn-out period, and what consequences this has had, it may be the buyer who is best placed to secure the evidence. Here again the Supreme Court involved the duty of loyalty by stating that this duty may in itself require the buyer to ensure that the content and background of transactions that deviate from the norm during an earn-out period are well documented, and that any doubt works against the buyer.
 

Regarding what appears to be a fairly standard earn-out clause, the Supreme Court stated the following (paragraphs 43 and 44):

"My understanding is that the key obligation in this section of the shareholders’ agreement is a requirement that the company be run in the same manner as prior to the transfer – operations are to be continued ‘as they have been conducted to date’. This implies that the buyer is, in principle, obliged to refrain from extraordinary or unusual transactions without the seller’s consent. The obligation to maintain normal operations follows explicitly from the subsequent specification of the most common types of transactions: no material changes shall be made to day-to-day operations, financing, remuneration or accounting principles.

I further understand the provisions to allow for a certain degree of flexibility, in that only ‘significant’ changes are prohibited. It is natural to interpret clause 4.2 as meaning that the materiality threshold applies generally, i.e. not only to the transactions expressly mentioned in sub-clauses (a), (b) and (c)."

Following these statements, the Supreme Court then addressed the actual assessments of the earn-out provisions concerning the two transactions (the sale of shareholdings to related parties and the write-down of shareholding). The concrete outcome of these assessment have already been described in the introductory part of this article. As stated there, the sale was considered an extraordinary transaction in breach of the restrictions in the agreement causing a loss to the seller (as the shareholdings were not transferred at market value), while there was sufficient accounting basis for the write-down and this was therefore not considered unlawful vis-à-vis the seller.

The judgement discussed above appears to be the first judgement from the Norwegian Supreme Court concerning earn-out clauses and the duty of loyalty. In fact, the Supreme Court says the same in its judgement and refers to a judgement from Swedish law (NJA 2021, page 943) as an example from other Nordic countries.

As explained above, the Supreme Court uses the opportunity to make statements concerning the definition of the term "earn-out", how such clauses should be interpreted, the use, importance/extent (note in particular that "certain circumstances may call for a stricter requirement of loyalty") and the limits of the duty of loyalty, and the question of burden of proof (which can shift to the buyer) when assessing earn-out clauses.

^{[1] See HR-2026-1233-A (judgement dated 3 June 2026).}