Earnout Agreement for India

Earnout Agreement Template for India

An Earnout Agreement under Indian law is a critical document in merger and acquisition transactions that structures additional purchase price payments based on the target company's future performance. The agreement, governed by Indian contract law and corporate regulations, details the mechanism for calculating and paying earnout consideration, including specific performance metrics, measurement periods, and payment terms. It incorporates provisions for compliance with Indian regulatory requirements, including Companies Act, 2013, Income Tax Act, 1961, and where applicable, SEBI regulations and FEMA requirements for cross-border transactions.

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What is a Earnout Agreement?

An Earnout Agreement is utilized in merger and acquisition transactions where parties agree to defer a portion of the purchase price, making it contingent on the target business achieving specific performance metrics post-closing. This document is particularly relevant in the Indian market where business valuations may be uncertain or when there's a significant gap between buyer and seller price expectations. The agreement details the earnout mechanism, including performance targets, calculation methods, payment terms, and verification procedures, while ensuring compliance with Indian regulatory requirements including the Companies Act, 2013, Income Tax Act, and relevant SEBI regulations. It's commonly used in high-growth sectors, situations involving founder-led businesses, or when retention of key management is crucial to future success. The document must address specific Indian legal considerations regarding contract enforcement, corporate compliance, tax implications, and where applicable, foreign exchange regulations.

What sections should be included in a Earnout Agreement?

1. Parties: Identification of all parties to the agreement, including the buyer, seller, and any guarantors

2. Background: Context of the transaction, reference to the main purchase agreement, and purpose of the earnout arrangement

3. Definitions and Interpretation: Definitions of key terms including Earnout Period, Target Performance Metrics, Calculation Methods, and Payment Terms

4. Earnout Structure: Detailed explanation of the earnout mechanism, including performance metrics, targets, and calculation methodology

5. Payment Terms: Timing, method, and currency of earnout payments, including any minimum or maximum limits

6. Performance Measurement: Specific methods for measuring and verifying performance metrics, including accounting principles to be applied

7. Seller Protections: Provisions protecting the seller's interest in achieving earnout targets, including operational covenants

8. Verification and Audit Rights: Procedures for verifying calculations and rights to audit relevant financial information

9. Dispute Resolution: Process for resolving disputes related to earnout calculations or payment obligations

10. Tax Provisions: Treatment of earnout payments for tax purposes and allocation of tax responsibilities

11. Confidentiality: Provisions regarding the confidentiality of business information accessed during the earnout period

12. General Provisions: Standard clauses including notices, amendments, governing law, and jurisdiction

What sections are optional to include in a Earnout Agreement?

1. Foreign Exchange Compliance: Required when the agreement involves cross-border payments or foreign parties, detailing FEMA compliance

2. Securities Law Compliance: Necessary when either party is a listed company, addressing SEBI regulations and disclosure requirements

3. Industry-Specific Provisions: Additional provisions required for regulated industries like banking, insurance, or telecommunications

4. Parent Company Guarantee: Included when a parent company guarantee is required to secure earnout payments

5. Change of Control Provisions: Specific provisions addressing the impact of change in control during the earnout period

6. Employee Retention Provisions: Required when the earnout is linked to retention of key employees or management

7. Acceleration Events: Provisions for early payment or adjustment of earnout in specific circumstances like sale or IPO

What schedules should be included in a Earnout Agreement?

1. Schedule 1 - Performance Metrics Definition: Detailed definition and calculation methodology for each performance metric

2. Schedule 2 - Earnout Calculation Examples: Illustrative examples of earnout calculations under different scenarios

3. Schedule 3 - Form of Earnout Statement: Template for periodic earnout calculations and reporting

4. Schedule 4 - Accounting Principles: Specific accounting principles and policies to be applied in calculations

5. Schedule 5 - Excluded Events: List of events that are excluded from impacting earnout calculations

6. Schedule 6 - Key Employee Positions: List of key positions relevant to the earnout if applicable

7. Appendix A - Dispute Resolution Procedure: Detailed procedures for resolving disputes related to earnout calculations

8. Appendix B - Compliance Certificates: Forms of various compliance certificates required under the agreement

Authors

Alex Denne

Head of Growth (Open Source Law) @ Genie AI | 3 x UCL-Certified in Contract Law & Drafting | 4+ Years Managing 1M+ Legal Documents | Serial Founder & Legal AI Author

Jurisdiction

India

Publisher

Genie AI

Document Type

Payment Agreement

Sector

Banking

Cost

Free to use
Relevant legal definitions
Clauses
Relevant Industries

Technology

Manufacturing

Healthcare

Professional Services

Retail

E-commerce

Financial Services

Real Estate

Media and Entertainment

Telecommunications

Pharmaceutical

Consumer Goods

Industrial Products

Software and IT Services

Relevant Teams

Legal

Finance

Corporate Development

Mergers & Acquisitions

Tax

Compliance

Treasury

Corporate Strategy

Business Development

Operations

Financial Planning & Analysis

Integration

Relevant Roles

Chief Executive Officer

Chief Financial Officer

General Counsel

Head of Mergers & Acquisitions

Corporate Development Director

Finance Director

Legal Counsel

Investment Banking Director

Transaction Advisory Partner

Due Diligence Manager

Corporate Finance Manager

Tax Director

Integration Manager

Business Development Director

Commercial Director

Industries
Teams

Employer, Employee, Start Date, Job Title, Department, Location, Probationary Period, Notice Period, Salary, Overtime, Vacation Pay, Statutory Holidays, Benefits, Bonus, Expenses, Working Hours, Rest Breaks,  Leaves of Absence, Confidentiality, Intellectual Property, Non-Solicitation, Non-Competition, Code of Conduct, Termination,  Severance Pay, Governing Law, Entire Agreemen

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