Purchase Price Adjustment and Earn-Out Clause Pack - Arizona

PURCHASE PRICE ADJUSTMENT AND EARN-OUT CLAUSE PACK

State of Arizona

Prepared for Use in: Stock Purchase Agreements, Asset Purchase Agreements, Merger Agreements
Governing Law: State of Arizona
Date: [__/__/____]

PART I: OVERVIEW AND PURCHASE PRICE MECHANICS

Section 1.01 — Purchase Price Structure

The aggregate consideration for the Acquired Business (the "Purchase Price") shall consist of:

☐ (a) Base Cash Consideration. An amount equal to $[________________________________] (the "Base Purchase Price"), payable at the Closing by wire transfer of immediately available funds to an account designated by Seller, subject to adjustment as provided in Part II of this Clause Pack;

☐ (b) Closing Adjustment. A dollar-for-dollar adjustment to the Base Purchase Price based on the difference between Closing Net Working Capital and Target Net Working Capital, as set forth in Section 2.01;

☐ (c) Earn-Out Consideration. Contingent consideration in the form of one or more Earn-Out Payments, subject to and in accordance with Part III of this Clause Pack, in an aggregate maximum amount not to exceed $[________________________________] (the "Earn-Out Cap");

☐ (d) Seller Note. A promissory note in the principal amount of $[________________________________], bearing interest at [____]% per annum, payable on the terms set forth in Exhibit [____];

☐ (e) Equity Rollover. [________________________________] shares/units of Buyer or its parent entity, valued at $[________________________________] per share/unit, subject to the terms of the Rollover Agreement attached as Exhibit [____];

☐ (f) Escrow Amount. $[________________________________] of the Base Purchase Price shall be deposited in escrow with [________________________________] (the "Escrow Agent") to secure Seller's obligations under Article [____] (Indemnification) and Section 2.01 (Working Capital Adjustment), to be held and disbursed pursuant to the Escrow Agreement attached as Exhibit [____].

Section 1.02 — Funds Flow

At the Closing, the Base Purchase Price shall be disbursed in accordance with the funds flow memorandum (the "Funds Flow") to be agreed upon by the Parties not fewer than [____] Business Days prior to the Closing Date, which shall reflect the following:

(a) Payment of all Closing Indebtedness to the holders thereof;

(b) Payment of all unpaid Transaction Expenses to the payees thereof;

(c) Deposit of the Escrow Amount with the Escrow Agent;

(d) Payment of any estimated Closing adjustment amount pursuant to Section 2.02;

(e) Distribution of the remaining balance to Seller (or the equityholders of Seller, as applicable).

Section 1.03 — Cash-Free, Debt-Free Basis

The Purchase Price is calculated on the assumption that the Company will be delivered at Closing on a cash-free, debt-free basis, with a normalized level of Net Working Capital. Accordingly:

(a) Cash. All Cash of the Company as of the Effective Time shall be for the account of Seller and shall be distributed to Seller at or prior to Closing, or the Purchase Price shall be increased dollar-for-dollar by the amount of any Cash remaining in the Company at Closing;

(b) Indebtedness. All Closing Indebtedness shall be repaid at or prior to Closing from the Purchase Price, and the Purchase Price shall be reduced dollar-for-dollar by the amount of any Closing Indebtedness outstanding as of the Effective Time;

(c) Transaction Expenses. All unpaid Transaction Expenses shall be paid at or prior to Closing from the Purchase Price.

PART II: WORKING CAPITAL ADJUSTMENT

Section 2.01 — Target Net Working Capital

(a) The Parties agree that the target Net Working Capital of the Company is $[________________________________] (the "Target Net Working Capital"), which represents the normalized level of Net Working Capital necessary for the ordinary course operation of the Business.

(b) The Target Net Working Capital has been determined based on the average monthly Net Working Capital of the Company for the [____]-month period ending [__/__/____], calculated in accordance with the Accounting Principles and the Sample Working Capital Calculation set forth on Schedule [____].

Section 2.02 — Estimated Closing Statement

Not fewer than [____] Business Days prior to the anticipated Closing Date, Seller shall deliver to Buyer a good faith estimate of Closing Net Working Capital (the "Estimated Closing Net Working Capital"), together with a reasonably detailed calculation thereof (the "Estimated Closing Statement"), prepared in accordance with the Accounting Principles. The Base Purchase Price payable at Closing shall be:

(a) Increased dollar-for-dollar by the amount, if any, by which the Estimated Closing Net Working Capital exceeds the Target Net Working Capital; or

(b) Decreased dollar-for-dollar by the amount, if any, by which the Target Net Working Capital exceeds the Estimated Closing Net Working Capital.

Section 2.03 — Post-Closing Adjustment Procedures

(a) Closing Statement Delivery. Within [____] days after the Closing Date, Buyer shall prepare and deliver to Seller a statement (the "Closing Statement") setting forth Buyer's good faith calculation of:

• (i) Closing Net Working Capital;
• (ii) Closing Cash;
• (iii) Closing Indebtedness; and
• (iv) Transaction Expenses unpaid as of the Closing.

The Closing Statement shall be prepared in accordance with the Accounting Principles and in the same format as the Sample Working Capital Calculation.

(b) Review Period. Seller shall have [____] days after receipt of the Closing Statement (the "Review Period") to review the Closing Statement. During the Review Period, Buyer shall provide Seller and its Representatives with reasonable access during normal business hours to the books, records, work papers, and personnel of the Company as reasonably requested by Seller.

(c) Dispute Notice. If Seller disagrees with any item or amount set forth in the Closing Statement, Seller shall, on or before the last day of the Review Period, deliver to Buyer a written notice (the "Dispute Notice") specifying in reasonable detail:

• (i) Each item or amount in dispute;
• (ii) The amount of such dispute, item by item; and
• (iii) Seller's proposed resolution of each disputed item, together with reasonable supporting documentation.

Any items not specifically identified in the Dispute Notice shall be deemed accepted by Seller and shall be final and binding.

(d) Resolution Period. If a Dispute Notice is timely delivered, the Parties shall negotiate in good faith during a period of [____] days after Buyer's receipt of the Dispute Notice (the "Resolution Period") to resolve the disputed items. If the Parties are unable to resolve all disputed items within the Resolution Period, either Party may submit the remaining disputed items to the Independent Accountant for resolution in accordance with Section 6.01.

(e) Final Determination. The Closing Net Working Capital, as finally determined pursuant to this Section 2.03 (whether by failure to deliver a timely Dispute Notice, agreement of the Parties, or determination by the Independent Accountant), shall be the "Final Closing Net Working Capital."

Section 2.04 — True-Up Payment

(a) If the Final Closing Net Working Capital exceeds the Estimated Closing Net Working Capital, Buyer shall pay to Seller the amount of such excess (the "Upward Adjustment") within [____] Business Days after the final determination of the Closing Statement.

(b) If the Estimated Closing Net Working Capital exceeds the Final Closing Net Working Capital, Seller shall pay to Buyer the amount of such excess (the "Downward Adjustment") within [____] Business Days after the final determination of the Closing Statement.

(c) Any Downward Adjustment shall first be satisfied from the Escrow Amount, and any excess shall be paid directly by Seller to Buyer by wire transfer of immediately available funds.

(d) Any payment made pursuant to this Section 2.04 shall include interest at a rate equal to [____]% per annum, calculated from the Closing Date through the date of payment. Arizona's usury protections under A.R.S. § 44-1201 et seq. should be considered.

Section 2.05 — De Minimis Threshold

Notwithstanding anything to the contrary in this Part II, no adjustment payment shall be required if the absolute value of the difference between Final Closing Net Working Capital and Estimated Closing Net Working Capital is less than $[________________________________] (the "De Minimis Amount"). If the De Minimis Amount is exceeded, the full amount of the adjustment (not merely the excess) shall be payable.

PART III: EARN-OUT PROVISIONS

Section 3.01 — Earn-Out Milestones and Payment Schedule

Subject to the terms and conditions of this Part III, Buyer shall pay (or cause to be paid) to Seller the following contingent consideration amounts (each, an "Earn-Out Payment"):

☐ (a) Revenue-Based Earn-Out:

☐ (b) EBITDA-Based Earn-Out:

☐ (c) Milestone-Based Earn-Out:

☐ (d) Hybrid Earn-Out. A combination of financial and operational milestones as set forth on Schedule [____].

Section 3.02 — Earn-Out Definitions

For purposes of this Part III:

(a) "Earn-Out Revenue" means the net revenue of the Business recognized during the applicable Earn-Out Period, calculated in accordance with the Accounting Principles, excluding:

• (i) Revenue from acquisitions consummated by Buyer after the Closing Date, unless [________________________________];
• (ii) Intercompany revenue between the Business and Buyer or its Affiliates;
• (iii) Revenue from [________________________________] (one-time or non-recurring items);
• (iv) [________________________________].

(b) "Earn-Out EBITDA" means, for the applicable Earn-Out Period, the net income of the Business, calculated in accordance with the Accounting Principles, before deduction of:

• (i) Interest expense (net of interest income);
• (ii) Income tax expense (federal, state, and local);
• (iii) Depreciation expense;
• (iv) Amortization expense;

and further adjusted to exclude:

• (v) Any management fees, shared services charges, or corporate allocations charged by Buyer or its Affiliates in excess of the amounts set forth on Schedule [____];
• (vi) Any transaction costs, restructuring charges, or integration expenses incurred by Buyer;
• (vii) Any non-cash stock-based compensation expense;
• (viii) Any purchase accounting adjustments arising from the transactions contemplated by the Agreement;
• (ix) [________________________________].

(c) "Earn-Out Period" means each period identified in Section 3.01 during which performance is measured for purposes of determining whether an Earn-Out Payment has been earned.

Section 3.03 — Earn-Out Statement and Dispute Resolution

(a) Earn-Out Statement. Within [____] days after the end of each Earn-Out Period, Buyer shall prepare and deliver to Seller a written statement (each, an "Earn-Out Statement") setting forth Buyer's good faith calculation of the applicable performance metric for such Earn-Out Period, together with reasonable supporting detail.

(b) Access and Review. During the [____]-day period following delivery of each Earn-Out Statement (the "Earn-Out Review Period"), Buyer shall provide Seller and its Representatives with reasonable access during normal business hours to the books, records, work papers, and personnel of the Business.

(c) Earn-Out Dispute Notice. If Seller disagrees with any aspect of the Earn-Out Statement, Seller shall deliver to Buyer, within the Earn-Out Review Period, a written notice (the "Earn-Out Dispute Notice") specifying:

• (i) Each item in dispute and the dollar amount thereof;
• (ii) Seller's basis for each such dispute;
• (iii) Seller's proposed calculation of the applicable performance metric.

Any items not specifically identified in the Earn-Out Dispute Notice shall be deemed accepted by Seller.

(d) Resolution. The Parties shall negotiate in good faith for [____] days to resolve any disputes. Unresolved disputes shall be submitted to the Independent Accountant (for financial metrics) or to the dispute resolution process set forth in Part VI (for milestone-based disputes).

Section 3.04 — Payment of Earn-Out Amounts

(a) Each Earn-Out Payment, as finally determined, shall be paid by Buyer to Seller within [____] Business Days after the final determination of the applicable Earn-Out Statement, by wire transfer of immediately available funds.

(b) Each Earn-Out Payment shall be made without setoff, counterclaim, or deduction, except as expressly provided in Section 3.07.

(c) Late payments shall bear interest at the rate of [____]% per annum (or the maximum rate permitted by applicable Arizona law, whichever is less) from the date due until paid.

Section 3.05 — Acceleration Events

The entire unpaid Earn-Out Cap (less any Earn-Out Payments previously made) shall become immediately due and payable upon the occurrence of any of the following events (each, an "Acceleration Event"):

☐ (a) A Change of Control of Buyer or any direct or indirect parent entity of Buyer;

☐ (b) A sale of all or substantially all of the assets of the Business;

☐ (c) A merger, consolidation, or similar business combination involving the Business in which the Business is not the surviving entity;

☐ (d) A dissolution, liquidation, or winding-up of the Business;

☐ (e) A material breach by Buyer of Section 5.02 (Buyer Operational Covenants) that remains uncured for [____] days after written notice from Seller;

☐ (f) [________________________________] (additional acceleration triggers).

Acceleration Payment. Any Acceleration Payment shall be made within [____] Business Days after the occurrence of the applicable Acceleration Event, calculated as follows:

☐ (i) Full Acceleration: Payment of the Earn-Out Cap less previously paid Earn-Out Payments;

☐ (ii) Pro-Rata Acceleration: Payment based on the pro-rata achievement of the applicable performance metric through the date of the Acceleration Event, annualized for incomplete periods;

☐ (iii) Negotiated Formula: [________________________________].

Section 3.06 — Pro-Rata and Interpolated Earn-Out Payments

☐ (a) Linear Interpolation. If the applicable performance metric for an Earn-Out Period falls between the threshold and the target, the Earn-Out Payment for such period shall be calculated by linear interpolation between $[____] (for threshold performance) and $[____] (for target performance).

☐ (b) Tiered Achievement. The Earn-Out Payment shall be calculated on a tiered basis as set forth on Schedule [____].

☐ (c) All-or-Nothing. No Earn-Out Payment shall be payable for an Earn-Out Period unless the full target for such period is achieved.

Section 3.07 — Right of Setoff

☐ (a) No Setoff. Buyer shall have no right to set off, recoup, or reduce any Earn-Out Payment on account of any indemnification or other claim against Seller.

☐ (b) Limited Setoff. Buyer may set off against Earn-Out Payments only amounts in respect of:

• (i) Final and non-appealable indemnification determinations under Article [____];
• (ii) Claims for which Buyer has provided Seller with an indemnification claim notice at least [____] days prior to the date such Earn-Out Payment becomes due.

☐ (c) Full Setoff. Buyer may set off against Earn-Out Payments the full amount of any pending or resolved indemnification claims, subject to the limitations set forth in Article [____].

Setoff Procedure. Any setoff shall be exercised by written notice to Seller specifying the amount and basis of the setoff. Seller may dispute any setoff in accordance with the dispute resolution provisions of Part VI. Disputed setoff amounts shall be placed in escrow pending resolution.

PART IV: ACCOUNTING STANDARDS AND PRINCIPLES

Section 4.01 — Accounting Principles

For purposes of this Clause Pack, "Accounting Principles" means GAAP as in effect on the date of the Agreement, applied using the same accounting methods, practices, principles, policies, and procedures (including classification, judgment, and estimation methodology) used in the preparation of the Reference Financial Statements, applied on a basis consistent with the Reference Balance Sheet dated [__/__/____] (the "Reference Balance Sheet").

Section 4.02 — Hierarchy of Accounting Principles

In the event of any conflict among accounting standards, the following hierarchy shall apply:

(a) First, the specific accounting principles, methodologies, and sample calculations set forth on Schedule [____] (the "Agreed-Upon Procedures");

(b) Second, the accounting methods, practices, principles, policies, and procedures used in the preparation of the Reference Financial Statements (the "Historical Practices");

(c) Third, GAAP as in effect on the date of this Agreement.

Section 4.03 — GAAP Consistency Requirements

(a) All calculations under this Clause Pack shall be prepared in accordance with GAAP, consistently applied with the Historical Practices, and without giving effect to:

• (i) Any changes in GAAP occurring after the date of this Agreement;
• (ii) Any change in accounting methods implemented by Buyer after the Closing;
• (iii) Any purchase accounting adjustments or fair value adjustments arising from the transactions contemplated by the Agreement;
• (iv) Any new reserves or accruals not reflected in the Historical Practices;
• (v) Any write-downs or impairments of assets not consistent with Historical Practices.

(b) Non-GAAP Adjustments. The Parties acknowledge that the Agreed-Upon Procedures may include adjustments that depart from GAAP where such departures are expressly identified on Schedule [____]. In such event, the Agreed-Upon Procedures shall control.

Section 4.04 — Permitted Adjustments

The following adjustments shall be permitted in calculating Earn-Out EBITDA or Earn-Out Revenue (as applicable):

(a) Elimination of Buyer Overhead. Exclusion of any management fees, corporate allocations, or shared services charges imposed by Buyer or its Affiliates in excess of the amounts set forth on Schedule [____];

(b) Normalization of Related-Party Transactions. Adjustment of any transactions between the Business and Buyer or its Affiliates to reflect arm's-length terms;

(c) Exclusion of Non-Recurring Items. Exclusion of extraordinary, unusual, or non-recurring items, including litigation settlements, asset dispositions outside the ordinary course, and restructuring charges;

(d) Exclusion of Purchase Accounting Effects. Exclusion of any amortization of intangible assets, inventory step-up costs, or other adjustments arising from the application of ASC 805 (Business Combinations).

PART V: EARN-OUT PROTECTIONS AND OPERATIONAL COVENANTS

Section 5.01 — Implied Covenant of Good Faith and Fair Dealing

(a) Arizona Standard. The Parties acknowledge that Arizona law implies a covenant of good faith and fair dealing in every contract. Under Arizona law, the implied covenant prohibits a party from doing anything to prevent other parties to the contract from receiving the benefits and entitlements of the agreement. See Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986).

(b) Elements Under Arizona Law. To establish a breach of the implied covenant under Arizona law, the claimant must demonstrate: (i) express discretion was exercised in a way inconsistent with a party's reasonable expectations; and (ii) the act was not expressly excluded by the contract's terms but nonetheless bears adversely on the party's reasonably expected benefits of the bargain.

(c) Application to Earn-Out. Without limiting the generality of the foregoing, the Parties intend that Buyer shall not exercise any discretion granted under this Agreement in a manner that frustrates Seller's reasonable expectation of receiving Earn-Out Payments. Arizona courts apply the implied covenant with particular scrutiny when one party has discretionary power affecting the other party's rights — a situation inherent in most earn-out structures.

(d) Limitation. Nothing in this Section 5.01 shall be construed to require Buyer to operate the Business in a manner that is commercially unreasonable, to the detriment of Buyer's other businesses or investments, or to subordinate Buyer's legitimate business interests solely for the purpose of maximizing Earn-Out Payments.

PRACTICE NOTE (Arizona): Arizona's implied covenant is well-established but operates within the framework of the express contract terms. The Arizona Supreme Court in Rawlings v. Apodaca recognized both a contract-based and a tort-based duty of good faith, though the tort-based duty applies primarily in insurance contexts. In commercial M&A transactions, practitioners should draft specific operational covenants and rely on the express contract terms as the primary mechanism for protecting earn-out rights. The implied covenant serves as a backstop but will not override clear contractual language.

Section 5.02 — Buyer Operational Covenants

During each Earn-Out Period and for [____] days thereafter, Buyer covenants and agrees that, unless Seller provides prior written consent (not to be unreasonably withheld, conditioned, or delayed), Buyer shall:

☐ (a) Operate in Ordinary Course. Operate the Business in the ordinary course consistent with past practice and in substantially the same manner as conducted during the twelve (12) months prior to Closing;

☐ (b) Maintain Adequate Resources. Devote adequate financial, personnel, and operational resources to the Business, in a manner no less favorable than the resources devoted to the Business during the twelve (12) months prior to Closing;

☐ (c) Maintain Separate Books. Maintain separate books and records for the Business sufficient to permit the calculation of Earn-Out Revenue and Earn-Out EBITDA in accordance with the Accounting Principles;

☐ (d) Preserve Business Relationships. Use commercially reasonable efforts to preserve the relationships of the Business with customers, suppliers, vendors, licensors, and other business partners;

☐ (e) Retain Key Employees. Use commercially reasonable efforts to retain the Key Employees identified on Schedule [____] through the end of the applicable Earn-Out Period;

☐ (f) No Diversion. Refrain from intentionally diverting customers, contracts, revenue opportunities, or business lines from the Business to Buyer or any of its Affiliates for the primary purpose of reducing or avoiding Earn-Out Payments;

☐ (g) Pricing and Terms. Refrain from materially changing the pricing, terms of sale, or customer discount programs of the Business in a manner inconsistent with past practice, except as reasonably required by competitive conditions;

☐ (h) Capital Expenditures. Make capital expenditures for the Business at levels no less than the average annual capital expenditures during the [____]-year period preceding the Closing;

☐ (i) No Asset Stripping. Refrain from transferring, selling, or otherwise disposing of material assets of the Business outside the ordinary course;

☐ (j) No Unreasonable Charges. Refrain from imposing management fees, shared services charges, corporate allocations, or intercompany charges on the Business that exceed the amounts expressly agreed upon in Schedule [____];

☐ (k) Insurance. Maintain insurance coverage for the Business substantially equivalent to the coverage in effect as of the Closing Date;

☐ (l) Compliance. Operate the Business in compliance with all applicable Laws in all material respects.

Section 5.03 — Anti-Manipulation Provisions

(a) Prohibited Actions. The following actions shall constitute a breach of Buyer's obligations under this Part V if undertaken with the primary purpose of reducing or avoiding Earn-Out Payments:

• (i) Accelerating or deferring the recognition of revenue or expenses of the Business outside the ordinary course;
• (ii) Changing the fiscal year or accounting period of the Business;
• (iii) Causing the Business to enter into below-market transactions with Buyer or its Affiliates;
• (iv) Terminating or materially modifying material customer contracts without commercially reasonable justification;
• (v) Reassigning key personnel from the Business without commercially reasonable justification;
• (vi) Eliminating product lines or service offerings of the Business without commercially reasonable justification.

(b) Burden of Proof. In any dispute arising under this Section 5.03, Seller shall bear the initial burden of demonstrating that Buyer's actions were taken with the primary purpose of reducing or avoiding Earn-Out Payments. If Seller makes a prima facie showing, the burden shall shift to Buyer to demonstrate a legitimate business purpose.

Section 5.04 — Reporting and Transparency

During each Earn-Out Period, Buyer shall provide Seller with:

(a) Monthly financial statements of the Business within [____] days after the end of each calendar month;

(b) Quarterly summaries of the applicable performance metric within [____] days after the end of each calendar quarter;

(c) Prompt written notice of any event that could reasonably be expected to have a material adverse effect on the Business or the achievement of any Earn-Out milestone;

(d) Such additional information as Seller may reasonably request in connection with monitoring the Earn-Out.

Section 5.05 — Remedies for Breach of Earn-Out Covenants

(a) Specific Performance. The Parties acknowledge that the Business is unique and that a breach of the covenants in this Part V would cause irreparable harm not adequately compensable in money damages. Accordingly, Seller shall be entitled to seek equitable relief, including specific performance and injunctive relief, without the necessity of proving actual damages or posting a bond (to the extent permitted by Arizona law).

(b) Damages. Seller shall be entitled to recover actual damages resulting from Buyer's breach, including the amount of any Earn-Out Payment that would have been earned but for such breach.

(c) Acceleration. A material uncured breach of the covenants in this Part V shall constitute an Acceleration Event under Section 3.05(e).

PART VI: DISPUTE RESOLUTION

Section 6.01 — Independent Accountant

(a) Selection. If the Parties are unable to resolve any dispute relating to the Closing Statement or any Earn-Out Statement within the applicable Resolution Period, either Party may submit the unresolved items to a nationally recognized independent accounting firm mutually agreed upon by the Parties (the "Independent Accountant"). If the Parties are unable to agree within [____] days, either Party may request that the American Arbitration Association appoint the Independent Accountant.

(b) Scope. The Independent Accountant shall act as an expert (and not as an arbitrator) and shall determine only those items that remain in dispute. The Independent Accountant shall not assign a value to any disputed item that is greater than the highest value claimed by either Party or less than the lowest value claimed by either Party.

(c) Procedures. Each Party shall submit to the Independent Accountant, within [____] days of engagement, a written statement of its position on the disputed items. The Independent Accountant shall render its determination within [____] days of submission.

(d) Binding Effect. The determination of the Independent Accountant shall be final and binding on the Parties, absent manifest error or fraud.

(e) Fees and Expenses. The fees and expenses of the Independent Accountant shall be allocated between Buyer and Seller based on the proportion that the aggregate amount of disputed items resolved in favor of each Party bears to the total amount of disputed items.

Section 6.02 — Arbitration

☐ (a) Arbitration of Non-Accounting Disputes. Any dispute arising under or relating to this Clause Pack that is not subject to resolution by the Independent Accountant shall be resolved by binding arbitration administered by the American Arbitration Association ("AAA") in accordance with its Commercial Arbitration Rules.

(b) Arizona Revised Uniform Arbitration Act. Arbitration under this Section 6.02 shall be governed by the Arizona Revised Uniform Arbitration Act, A.R.S. § 12-3001 et seq. Arizona has adopted the Revised Uniform Arbitration Act, which provides a comprehensive framework for arbitration proceedings.

(c) Arbitrator Selection. The arbitration shall be conducted before a single arbitrator with substantial M&A experience, selected in accordance with the AAA rules.

(d) Location. The arbitration shall take place in [________________________________], Arizona.

(e) Discovery. Discovery shall be limited to document production and depositions of up to [____] witnesses per side.

(f) Award. The arbitrator shall issue a reasoned written award within [____] days of the close of the hearing. Judgment on the award may be entered in any court of competent jurisdiction in Arizona.

(g) Confidentiality. The arbitration proceedings shall be treated as confidential except to the extent disclosure is required by law.

(h) Fees. Each Party shall bear its own attorneys' fees and expenses, and the fees of the arbitrator and AAA shall be borne equally, unless the arbitrator determines otherwise.

Section 6.03 — Expert Determination

☐ (Alternative to Section 6.02) Any non-accounting dispute may be submitted for determination by an independent expert (the "Expert") with recognized expertise in the subject matter. The Expert shall be jointly selected by the Parties, or if unable to agree, by the presiding judge of the Superior Court of Maricopa County, Arizona. The Expert's determination shall be final and binding, absent manifest error.

Section 6.04 — Injunctive Relief and Provisional Remedies

Nothing in this Part VI shall prevent either Party from seeking injunctive or other equitable relief from a court of competent jurisdiction in Arizona to prevent irreparable harm pending the outcome of arbitration or other dispute resolution proceedings.

PART VII: TAX TREATMENT

Section 7.01 — Tax Treatment of Purchase Price and Earn-Out

(a) Installment Sale Treatment (IRC § 453). The Parties acknowledge that the Earn-Out Payments may constitute contingent consideration under Treas. Reg. § 15a.453-1(c). Unless the Parties agree otherwise, Seller shall report the Earn-Out Payments using the installment method under IRC § 453, subject to the following:

• (i) Maximum Selling Price. If the terms of this Agreement establish a maximum amount that may be paid as Earn-Out Payments (i.e., the Earn-Out Cap), such amount shall be treated as the maximum selling price for purposes of Treas. Reg. § 15a.453-1(c)(2);
• (ii) Fixed Period. If the Earn-Out Payments are payable over a fixed period not exceeding fifteen (15) years, Seller shall recover basis ratably over such period per Treas. Reg. § 15a.453-1(c)(3);
• (iii) No Maximum/No Fixed Period. If there is neither a maximum selling price nor a fixed payment period, Seller shall recover basis ratably over fifteen (15) years per Treas. Reg. § 15a.453-1(c)(4);
• (iv) Interest Charges. The Parties acknowledge that IRC § 453A may impose an interest charge on deferred tax liability arising from installment obligations in excess of $5,000,000 where the sales price exceeds $150,000.

(b) Open Transaction Doctrine. The Parties acknowledge that the IRS generally disfavors use of the open transaction doctrine for reporting contingent consideration.

(c) Characterization. The Parties shall treat all Earn-Out Payments as additional purchase price for the Acquired Business for all federal, state, and local tax purposes, except to the extent required otherwise by applicable Law.

Section 7.02 — IRC § 338 Elections

☐ (a) Section 338(h)(10) Election. If the transaction is structured as a qualified stock purchase, the Parties shall jointly make an election under IRC § 338(h)(10). The Parties shall cooperate in the preparation and timely filing of IRS Form 8023.

☐ (b) Section 338(g) Election. Buyer may, in its sole discretion, make a unilateral election under IRC § 338(g).

(c) Allocation. If a Section 338 election is made, the deemed asset sale price shall be allocated among the assets of the Company in accordance with IRC § 1060 and the residual method prescribed by Treas. Reg. § 1.338-6 and Treas. Reg. § 1.338-7.

(d) Earn-Out Impact. Any Earn-Out Payments made after the Closing shall be treated as adjustments to the deemed asset sale price, and the Parties shall file amended or supplemental IRS Forms 8594 to reflect such adjustments.

Section 7.03 — Purchase Price Allocation (IRC § 1060)

(a) The Purchase Price shall be allocated among the assets of the Acquired Business in accordance with IRC § 1060 and Treas. Reg. § 1.1060-1.

(b) The initial allocation shall be set forth on Schedule [____], to be agreed upon within [____] days after the Closing Date.

(c) Each Party shall file IRS Form 8594 with its federal income tax return for the tax year of Closing, and supplemental Forms 8594 for years in which Earn-Out Payments are made.

(d) Neither Party shall take any tax position inconsistent with the agreed-upon allocation, unless required by a final determination under IRC § 1313(a).

Section 7.04 — Golden Parachute Payments (IRC § 280G)

(a) If any payment to a "disqualified individual" (as defined in IRC § 280G(c)) would constitute an "excess parachute payment" subject to the excise tax imposed by IRC § 4999:

☐ (i) Gross-Up. Buyer shall pay an additional amount sufficient to place such individual in the same after-tax position as if no excise tax had been imposed;

☐ (ii) Cutback. Such payments shall be reduced to the extent necessary to avoid constituting excess parachute payments, if the net after-tax benefit after reduction exceeds the benefit without reduction;

☐ (iii) Shareholder Approval. The Parties shall use commercially reasonable efforts to obtain shareholder approval per Treas. Reg. § 1.280G-1, Q&A 7.

Section 7.05 — Arizona State Tax Considerations

(a) Arizona Income Tax. Arizona imposes an individual income tax (A.R.S. § 43-1011 et seq.) and a corporate income tax at 4.9% (A.R.S. § 43-1111). Gain from the sale of business assets or equity interests is generally subject to Arizona income tax to the extent attributable to Arizona sources.

(b) Arizona Transaction Privilege Tax (TPT). Arizona imposes a transaction privilege tax (the state's equivalent of a sales tax) on the privilege of conducting business in Arizona. The sale of tangible personal property in an asset sale may be subject to TPT (A.R.S. § 42-5061). The Parties should confirm whether the occasional sale exemption under A.R.S. § 42-5061(A)(1) applies.

(c) Bulk Sale Notice. Arizona has adopted bulk sale provisions under A.R.S. § 44-1001 et seq. If the transaction involves a bulk transfer of assets, the Parties should comply with applicable notification and filing requirements.

(d) Real Property Transfer. If the transaction involves the transfer of real property in Arizona, the Parties should consider whether an affidavit of property value must be filed under A.R.S. § 11-1133.

(e) Withholding Requirements. Arizona may impose withholding obligations on payments to nonresident Sellers. The Parties should confirm whether Arizona withholding applies under A.R.S. § 43-1091.

PART VIII: STATE-SPECIFIC CONSIDERATIONS — ARIZONA

Section 8.01 — Arizona Contract Law and Implied Covenant

(a) Comprehensive Implied Covenant. Arizona recognizes an implied covenant of good faith and fair dealing in every contract. The covenant prohibits a party from doing anything to prevent the other party from receiving the benefits of the agreement. See Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986).

(b) Two-Prong Test. To establish a breach of the implied covenant, the claimant must show: (i) express discretion was exercised inconsistently with a party's reasonable expectations; and (ii) the act was not expressly excluded by the contract's terms but nonetheless adversely affected the party's reasonably expected benefits.

(c) Discretionary Powers. Arizona courts apply the implied covenant with particular scrutiny when one party has discretionary power affecting the other party's rights. In the earn-out context, where Buyer controls the post-closing operations that determine whether Earn-Out milestones are achieved, Arizona's scrutiny of discretionary power is particularly relevant.

(d) Contract vs. Tort. Arizona distinguishes between contract-based and tort-based good faith claims. In Rawlings v. Apodaca, the Arizona Supreme Court recognized a tort-based duty of good faith in the insurance context. In commercial M&A transactions, the applicable duty is contract-based.

(e) Key Arizona Precedent:

• Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986) — foundational implied covenant case;
• Wells Fargo Bank v. Arizona Laborers, Teamsters and Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, 38 P.3d 12 (2002) — discussing the scope of the implied covenant in commercial contracts;
• Bike Fashion Corp. v. Kramer, 202 Ariz. 420, 46 P.3d 431 (Ct. App. 2002) — application of implied covenant to discretionary contract provisions.

Section 8.02 — Statute of Limitations

(a) The statute of limitations for breach of a written contract under Arizona law is six (6) years (A.R.S. § 12-548).

(b) The statute of limitations for breach of an oral contract under Arizona law is three (3) years (A.R.S. § 12-543).

(c) The limitations period commences when the cause of action accrues. For earn-out disputes, this is generally the date on which the Earn-Out Payment becomes due or the date on which the breach is discovered.

Section 8.03 — Choice of Law Considerations

(a) Arizona courts generally enforce choice-of-law provisions in commercial contracts, provided the chosen jurisdiction bears a reasonable relationship to the transaction.

(b) Arizona follows the Restatement (Second) of Conflict of Laws in determining which law governs in the absence of a valid choice-of-law clause.

(c) Practitioners should consider whether Arizona's transaction privilege tax or bulk sale requirements apply regardless of the choice-of-law provision.

Section 8.04 — Arizona Arbitration Framework

(a) Arizona has adopted the Revised Uniform Arbitration Act at A.R.S. § 12-3001 et seq. Arbitration clauses in M&A agreements are generally enforceable.

(b) Under A.R.S. § 12-3023, a court shall vacate an arbitration award only on limited grounds, including corruption, fraud, evident partiality, or the arbitrator exceeding the scope of the submission.

(c) Arizona courts have broad discretion in confirming, modifying, or vacating arbitration awards, consistent with the Revised Uniform Arbitration Act.

PART IX: PRACTICE NOTES AND DRAFTING GUIDANCE

Section 9.01 — Key Drafting Considerations

☐ Define All Financial Metrics Precisely. Ambiguity in the definition of Revenue or EBITDA is the greatest source of earn-out disputes. Include detailed calculation methodologies, sample calculations, and a reference balance sheet.

☐ Specify the Efforts Standard. If Buyer is required to use efforts to achieve Earn-Out milestones, specify the exact standard. In Himawan v. Cephalon, Inc., C.A. No. 2021-0459-LWW (Del. Ch. Apr. 30, 2024), the Delaware Court of Chancery held that "commercially reasonable efforts" is measured objectively. In Airborne Health, Inc. v. Squid Soap, LP, C.A. No. 4410-VCL (Del. Ch. 2010), the court found that an earn-out obligation did not require minimum spending where the agreement did not expressly require it.

☐ Address Common Manipulation Scenarios. Expressly address revenue shifting, acceleration or deferral of revenue recognition, changes in pricing, management fee and cost allocation, and asset transfers.

☐ Consider the Accounting Hierarchy. The Agreed-Upon Procedures should control over GAAP where they conflict.

☐ Coordinate with Indemnification. Determine whether indemnification claims may be set off against Earn-Out Payments.

☐ Address Change of Control. Determine whether a Change of Control of Buyer should accelerate or forfeit the Earn-Out.

☐ Tax Planning. Consult with tax counsel regarding characterization of Earn-Out Payments, installment sale treatment under IRC § 453, and the impact of IRC § 280G.

☐ Security for Payment. Consider requiring Buyer to establish an escrow, letter of credit, or other security.

Section 9.02 — Arizona-Specific Practice Considerations

☐ Implied Covenant Scrutiny of Discretion. Arizona courts are particularly attentive to the exercise of discretionary powers. Draft specific operational covenants that limit Buyer's discretion where it affects Earn-Out achievement.

☐ Transaction Privilege Tax. If the transaction is structured as an asset sale, confirm whether Arizona TPT applies and whether the occasional sale exemption is available.

☐ Bulk Sale Compliance. Arizona has bulk sale provisions under A.R.S. § 44-1001. Confirm compliance if the transaction involves a bulk transfer of assets.

☐ Nonresident Withholding. If Seller is not an Arizona resident, confirm whether Arizona withholding obligations apply.

☐ Six-Year Limitations Period. Arizona's six-year statute of limitations for written contracts provides a reasonable window for earn-out claims.

Section 9.03 — Due Diligence Checklist for Earn-Out Provisions

☐ Historical financial statements for the applicable measurement period
☐ Sample working capital calculations and reference balance sheet
☐ Customer concentration analysis
☐ Key employee identification and retention risk assessment
☐ Pending or threatened litigation
☐ Material contracts with change-of-control provisions
☐ Insurance policies and coverage adequacy
☐ Capital expenditure history and requirements
☐ Related-party transaction analysis
☐ Tax structure analysis (S corp, C corp, partnership, LLC)
☐ Arizona TPT and bulk sale compliance review

PART X: DEFINITIONS

Section 10.01 — Selected Definitions

"Acceleration Event" has the meaning set forth in Section 3.05.

"Accounting Principles" has the meaning set forth in Section 4.01.

"Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by, or is under common control with, such Person.

"Business" means [________________________________].

"Business Day" means any day other than a Saturday, Sunday, or day on which commercial banks in Phoenix, Arizona are authorized or required to be closed.

"Cash" means cash and cash equivalents of the Company as of the Effective Time, net of outstanding checks issued but not yet cleared, and including deposits in transit.

"Change of Control" means (i) any merger, consolidation, or similar transaction in which the equityholders of Buyer immediately prior to such transaction hold less than [____]% of the voting securities of the surviving entity, (ii) any sale of all or substantially all of the assets of Buyer, or (iii) any transaction in which a Person or group acquires beneficial ownership of more than [____]% of the outstanding voting securities of Buyer.

"Closing Indebtedness" means, without duplication, all outstanding: (i) indebtedness for borrowed money; (ii) obligations under capital leases; (iii) drawn and undrawn letters of credit; (iv) deferred purchase price obligations (other than trade payables in the ordinary course); (v) guarantees of the foregoing; (vi) accrued and unpaid interest; and (vii) prepayment premiums, penalties, and breakage costs payable at Closing.

"Company" means [________________________________].

"Effective Time" means 11:59 p.m. (Mountain Standard Time) on the Closing Date (or such other time as the Parties may agree).

"Independent Accountant" has the meaning set forth in Section 6.01.

"Key Employees" means the individuals listed on Schedule [____].

"Net Working Capital" means, as of any date of determination, the Current Assets of the Company minus the Current Liabilities of the Company, in each case calculated in accordance with the Accounting Principles and the line items set forth on Schedule [____], and excluding Cash, Closing Indebtedness, and Transaction Expenses.

"Person" means any individual, corporation, partnership, limited liability company, trust, governmental authority, or other entity.

"Representatives" means, with respect to any Person, such Person's officers, directors, managers, members, partners, employees, agents, advisors, and other representatives.

"Transaction Expenses" means, without duplication, all fees, costs, and expenses incurred by or on behalf of the Company or Seller in connection with the transactions contemplated by this Agreement, to the extent unpaid as of the Closing, including: (i) fees of investment bankers, financial advisors, brokers, finders, attorneys, and accountants; (ii) change-in-control payments, stay bonuses, and transaction bonuses triggered by the Closing; (iii) the employer's share of payroll taxes on the foregoing; (iv) any IRC § 280G gross-up amounts; and (v) [________________________________].

SOURCES AND REFERENCES

1. Arizona Statutes:
   - A.R.S. § 12-543 (Statute of Limitations — Oral Contracts)
   - A.R.S. § 12-548 (Statute of Limitations — Written Contracts)
   - A.R.S. § 12-3001 et seq. (Revised Uniform Arbitration Act)
   - A.R.S. § 42-5061 (Transaction Privilege Tax — Retail)
   - A.R.S. § 43-1011 et seq. (Individual Income Tax)
   - A.R.S. § 43-1091 (Withholding — Nonresidents)
   - A.R.S. § 43-1111 (Corporate Income Tax Rate)
   - A.R.S. § 44-1001 et seq. (Bulk Sales)
   - A.R.S. § 44-1201 et seq. (Interest and Usury)
   - A.R.S. § 47-1304 (Obligation of Good Faith — UCC)

2. Federal Tax Authorities:
   - IRC § 280G, § 338, § 453, § 453A, § 1060, § 4999
   - Treas. Reg. § 1.280G-1; § 1.338-4 through 1.338-7; § 1.1060-1; § 15a.453-1(c)
   - IRS Publication 537

3. Accounting Standards:
   - ASC 805 (Business Combinations)
   - ASC 480-10 (Distinguishing Liabilities from Equity)

4. Key Case Law:
   - Burnet v. Logan, 283 U.S. 404 (1931) (open transaction doctrine)
   - Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986) (implied covenant)
   - Wells Fargo Bank v. Arizona Laborers, 201 Ariz. 474, 38 P.3d 12 (2002) (commercial implied covenant)
   - Bike Fashion Corp. v. Kramer, 202 Ariz. 420, 46 P.3d 431 (Ct. App. 2002) (discretionary provisions)
   - Himawan v. Cephalon, Inc., C.A. No. 2021-0459-LWW (Del. Ch. Apr. 30, 2024) (commercially reasonable efforts)
   - Airborne Health, Inc. v. Squid Soap, LP, C.A. No. 4410-VCL (Del. Ch. 2010) (earn-out obligations)

5. Secondary Sources:
   - Jaburg Wilk, "The Implied Covenant of Good Faith and Fair Dealing" (Arizona analysis)
   - ABA Business Law Today, "The Ins and Outs of Earn-Outs: A Delaware Perspective" (March 2022)
   - Byron F. Egan, "Earnouts in M&A Transactions," Jackson Walker LLP (2020)

This template is provided by ezel.ai for informational purposes only and does not constitute legal advice. It must be reviewed and customized by a qualified attorney licensed in Arizona before use. Laws and regulations change frequently; verify all citations before relying on them.