Purchase Price Adjustment and Earn-Out Clause Pack - New York

PURCHASE PRICE ADJUSTMENT AND EARN-OUT CLAUSE PACK

State of New York

Prepared for Use in: Stock Purchase Agreements, Asset Purchase Agreements, Merger Agreements
Governing Law: State of New York
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, reflecting:

(a) Payment of all Closing Indebtedness;

(b) Payment of all unpaid Transaction Expenses;

(c) Deposit of the Escrow Amount;

(d) Payment of any estimated Closing adjustment amount;

(e) Distribution of the remaining balance to Seller.

Section 1.03 — Cash-Free, Debt-Free Basis

The Purchase Price is calculated on a cash-free, debt-free basis with a normalized level of Net Working Capital. Cash shall be for Seller's account; Closing Indebtedness and Transaction Expenses shall be netted 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"), representing the normalized level of Net Working Capital necessary for ordinary course operations.

(b) The Target has been determined based on the average monthly Net Working Capital for the [____]-month period ending [__/__/____], calculated per the Accounting Principles and 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"), with a reasonably detailed calculation (the "Estimated Closing Statement"). The Base Purchase Price shall be:

(a) Increased dollar-for-dollar if the Estimated Closing Net Working Capital exceeds the Target; or

(b) Decreased dollar-for-dollar if the Target 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 deliver to Seller a Closing Statement setting forth Buyer's good faith calculation of Closing Net Working Capital, Closing Cash, Closing Indebtedness, and unpaid Transaction Expenses, prepared per the Accounting Principles.

(b) Review Period. Seller shall have [____] days (the "Review Period") to review, with reasonable access to books, records, work papers, and personnel.

(c) Dispute Notice. Seller must deliver a Dispute Notice on or before the last day of the Review Period specifying:

• (i) Each disputed item and amount;
• (ii) The amount of each dispute;
• (iii) Seller's proposed resolution with supporting documentation.

Undisputed items become final and binding.

(d) Resolution Period. Good faith negotiation for [____] days. Unresolved disputes submitted to the Independent Accountant per Section 6.01.

(e) Final Determination. The Closing Net Working Capital, as finally determined, shall be the "Final Closing Net Working Capital."

Section 2.04 — True-Up Payment

(a) Upward Adjustment paid by Buyer to Seller within [____] Business Days of final determination.

(b) Downward Adjustment paid by Seller to Buyer within [____] Business Days, first from Escrow.

(c) Interest at [____]% per annum from the Closing Date. New York's usury limits (N.Y. Gen. Oblig. Law § 5-501; N.Y. Banking Law § 14-a — 16% per annum for civil usury, 25% for criminal usury) should be considered.

Section 2.05 — De Minimis Threshold

No adjustment if the absolute difference is less than $[________________________________]. If exceeded, the full amount (not just 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 to Seller the following (each, an "Earn-Out Payment"):

☐ (a) Revenue-Based Earn-Out:

☐ (b) EBITDA-Based Earn-Out:

☐ (c) Milestone-Based Earn-Out:

☐ (d) Hybrid Earn-Out. As set forth on Schedule [____].

Section 3.02 — Earn-Out Definitions

(a) "Earn-Out Revenue" means the net revenue of the Business for the applicable Earn-Out Period, calculated per the Accounting Principles, excluding: (i) post-Closing acquisition revenue; (ii) intercompany revenue; (iii) non-recurring items; (iv) [________________________________].

(b) "Earn-Out EBITDA" means net income before interest, taxes, depreciation, and amortization, further adjusted to exclude: (v) excess management fees and corporate allocations; (vi) transaction and integration expenses; (vii) non-cash stock-based compensation; (viii) purchase accounting adjustments; (ix) [________________________________].

(c) "Earn-Out Period" means each period identified in Section 3.01.

Section 3.03 — Earn-Out Statement and Dispute Resolution

(a) Earn-Out Statement. Within [____] days after each Earn-Out Period, Buyer shall deliver an Earn-Out Statement with supporting detail.

(b) Access. During the [____]-day Earn-Out Review Period, Buyer shall provide Seller reasonable access to books, records, and personnel.

(c) Earn-Out Dispute Notice. Seller shall deliver any dispute notice within the Earn-Out Review Period.

(d) Resolution. Good faith negotiation for [____] days, then to the Independent Accountant (financial) or Part VI (milestone/covenant disputes).

Section 3.04 — Payment of Earn-Out Amounts

(a) Payment within [____] Business Days of final determination.

(b) Without setoff except per Section 3.07.

(c) Late payment interest at [____]% per annum, subject to New York usury limits.

Section 3.05 — Acceleration Events

Unpaid Earn-Out Cap becomes due upon:

☐ (a) Change of Control of Buyer;
☐ (b) Sale of all or substantially all Business assets;
☐ (c) Merger where Business is not the survivor;
☐ (d) Dissolution or liquidation;
☐ (e) Material uncured breach of Section 5.02 after [____] days' notice;
☐ (f) [________________________________].

Acceleration Payment: ☐ Full; ☐ Pro-Rata; ☐ Negotiated Formula: [________________________________].

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

☐ (a) Linear Interpolation; ☐ (b) Tiered Achievement; ☐ (c) All-or-Nothing.

Section 3.07 — Right of Setoff

☐ (a) No Setoff; ☐ (b) Limited Setoff (final determinations only); ☐ (c) Full Setoff.

Setoff Procedure. Written notice; disputed amounts escrowed pending resolution.

NEW YORK PRACTICE NOTE: New York courts will enforce clear setoff provisions as written under the "four corners" rule. Draft setoff provisions precisely to avoid disputes about whether setoff is permitted or limited. General references to "setoff rights" without specific parameters may be interpreted broadly.

PART IV: ACCOUNTING STANDARDS AND PRINCIPLES

Section 4.01 — Accounting Principles

"Accounting Principles" means GAAP as in effect on the date of the Agreement, applied using the same methods, practices, principles, policies, and procedures used in the Reference Financial Statements, on a basis consistent with the Reference Balance Sheet dated [__/__/____].

Section 4.02 — Hierarchy of Accounting Principles

(a) First, Agreed-Upon Procedures on Schedule [____];
(b) Second, Historical Practices;
(c) Third, GAAP.

Section 4.03 — GAAP Consistency Requirements

All calculations shall be without giving effect to: (i) post-Agreement GAAP changes; (ii) post-Closing accounting method changes by Buyer; (iii) purchase accounting adjustments; (iv) new reserves not in Historical Practices; (v) write-downs inconsistent with Historical Practices.

Section 4.04 — Permitted Adjustments

(a) Elimination of excess Buyer overhead;
(b) Normalization of related-party transactions to arm's length;
(c) Exclusion of non-recurring items;
(d) Exclusion of ASC 805 purchase accounting effects.

PART V: EARN-OUT PROTECTIONS AND OPERATIONAL COVENANTS

Section 5.01 — Implied Covenant of Good Faith and Fair Dealing (New York)

(a) New York Standard. Under New York law, all contracts imply a covenant of good faith and fair dealing in the course of performance. The covenant is breached where one party to a contract seeks to prevent its performance by, or to withhold its benefits from, the other. See Dalton v. Educ. Testing Serv., 87 N.Y.2d 384 (1995).

(b) Four Corners Rule. New York is a "four corners" jurisdiction. Courts interpret contracts based on the plain language of the document, looking to the agreement itself to determine meaning. Extrinsic evidence is inadmissible to alter or add a provision to a clear and unambiguous written agreement. See Greenfield v. Philles Records, Inc., 98 N.Y.2d 562 (2002).

(c) No Implied Obligations Inconsistent with Express Terms. Under New York law, no obligation may be implied by the covenant of good faith and fair dealing that would be inconsistent with other terms of the contractual relationship. The covenant cannot be used to rewrite the agreement or to impose obligations that the parties did not bargain for. See 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144 (2002).

(d) Specific Implied Obligation Required. To state a cognizable claim for breach of the implied covenant under New York law, a plaintiff must allege a specific implied contractual obligation and allege how the violation of that obligation denied the plaintiff the fruits of the contract. General allegations of bad faith are insufficient.

(e) Application to Earn-Out. The Parties acknowledge that:

• (i) Buyer shall not exercise discretion granted under this Agreement in a manner that seeks to prevent Seller from receiving the benefit of the Earn-Out;
• (ii) The implied covenant supplements but does not override the express terms of this Agreement;
• (iii) The express operational covenants in Section 5.02 define the scope of Buyer's obligations with respect to post-Closing operations;
• (iv) Where this Agreement is silent on a particular matter, the implied covenant may fill gaps consistent with the parties' reasonable expectations at the time of contracting.

NEW YORK PRACTICE NOTE: New York's approach to the implied covenant is text-focused. Courts will not use the implied covenant to add terms the parties did not include. This makes express operational covenants (Section 5.02) critically important for Sellers. Conversely, for Buyers, clear language preserving business judgment and discretion will generally be enforced as written. Note that many M&A transactions involving New York parties are actually governed by Delaware law, which has its own body of earn-out case law (including Himawan v. Cephalon and Airborne Health v. Squid Soap). Practitioners should carefully consider the governing law's impact on earn-out protections.

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;

☐ (b) Maintain Adequate Resources. Devote adequate financial, personnel, and operational resources;

☐ (c) Maintain Separate Books. Maintain separate books and records for Earn-Out calculations;

☐ (d) Preserve Business Relationships. Use commercially reasonable efforts to preserve customer, supplier, and vendor relationships;

☐ (e) Retain Key Employees. Use commercially reasonable efforts to retain Key Employees on Schedule [____];

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

☐ (g) Pricing and Terms. Refrain from materially changing pricing or customer terms inconsistent with past practice, except as competitively required;

☐ (h) Capital Expenditures. Make capital expenditures at levels no less than the [____]-year pre-Closing average;

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

☐ (j) No Unreasonable Charges. Refrain from imposing excessive management fees or corporate allocations;

☐ (k) Insurance. Maintain substantially equivalent insurance coverage;

☐ (l) Compliance. Operate 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 if undertaken with the primary purpose of reducing or avoiding Earn-Out Payments:

• (i) Accelerating or deferring revenue or expense recognition outside the ordinary course;
• (ii) Changing the fiscal year or accounting period;
• (iii) Below-market transactions with Buyer or its Affiliates;
• (iv) Terminating material customer contracts without commercially reasonable justification;
• (v) Reassigning key personnel without commercially reasonable justification;
• (vi) Eliminating product lines or service offerings without commercially reasonable justification.

(b) Burden of Proof. Seller bears the initial burden; if a prima facie showing is made, the burden shifts 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 within [____] days of month-end;
(b) Quarterly performance metric summaries within [____] days of quarter-end;
(c) Prompt notice of material adverse events;
(d) Additional information as reasonably requested.

Section 5.05 — Remedies for Breach of Earn-Out Covenants

(a) Specific Performance. 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 New York law).

(b) Damages. Seller shall be entitled to recover actual damages, including lost Earn-Out Payments.

(c) Acceleration. Material uncured breach constitutes an Acceleration Event under Section 3.05(e).

PART VI: DISPUTE RESOLUTION

Section 6.01 — Independent Accountant

(a) Selection. Unresolved accounting disputes shall be submitted to a nationally recognized independent accounting firm (the "Independent Accountant") mutually agreed by the Parties.

(b) Scope. Expert determination (not arbitration). Limited to disputed items. No value outside the range of the Parties' positions.

(c) Procedures. Submissions within [____] days; determination within [____] days.

(d) Binding Effect. Final and binding, absent manifest error or fraud.

(e) Fees. Allocated proportionally based on relative merit.

Section 6.02 — Arbitration

☐ (a) Arbitration. Non-accounting disputes shall be resolved by binding arbitration administered by the American Arbitration Association ("AAA") under its Commercial Arbitration Rules, or by JAMS under its Comprehensive Arbitration Rules.

(b) New York Arbitration Law. Governed by N.Y. C.P.L.R. § 7501 et seq. and, to the extent applicable, the Federal Arbitration Act, 9 U.S.C. § 1 et seq.

(c) Arbitrator Selection. Single arbitrator with substantial M&A experience.

(d) Location. [________________________________], New York (typically Manhattan).

(e) Discovery. Limited to document production and [____] depositions per side.

(f) Award. Reasoned written award within [____] days. Judgment may be entered in any court of competent jurisdiction in New York.

(g) Confidentiality. Proceedings and materials shall be confidential.

(h) Fees. Each Party bears its own attorneys' fees; arbitrator fees split equally unless the arbitrator determines otherwise.

(i) New York Fee-Shifting. Under New York law, each party generally bears its own attorneys' fees (the "American Rule") unless a contract or statute provides otherwise.

Section 6.03 — New York Commercial Division

☐ (Alternative to Arbitration) The Parties consent to exclusive jurisdiction of the Commercial Division of the Supreme Court of the State of New York, [________________________________] County, for all disputes arising under this Clause Pack. The Commercial Division provides expedited procedures and specialized judicial expertise for complex commercial disputes.

Section 6.04 — Injunctive Relief and Provisional Remedies

Nothing in this Part VI shall prevent either Party from seeking injunctive relief from a court of competent jurisdiction in New York to prevent irreparable harm pending the outcome of arbitration.

PART VII: TAX TREATMENT

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

(a) Installment Sale Treatment (IRC § 453). The Earn-Out Payments may constitute contingent consideration under Treas. Reg. § 15a.453-1(c). Seller shall report using the installment method under IRC § 453:

• (i) Maximum selling price per Treas. Reg. § 15a.453-1(c)(2);
• (ii) Ratable basis recovery per Treas. Reg. § 15a.453-1(c)(3)-(4);
• (iii) IRC § 453A interest charges on obligations exceeding $5,000,000.

(b) Characterization. All Earn-Out Payments shall be treated as additional purchase price for all tax purposes.

Section 7.02 — IRC § 338 Elections

☐ (a) Section 338(h)(10) Election. Joint election; IRS Form 8023 and applicable New York forms.

☐ (b) Section 338(g) Election. Unilateral Buyer election.

(c) Allocation. Per IRC § 1060 and Treas. Reg. § 1.338-6 and 1.338-7.

Section 7.03 — Purchase Price Allocation (IRC § 1060)

(a) Allocation per IRC § 1060 and Treas. Reg. § 1.1060-1.

(b) IRS Form 8594 for each Party; supplemental forms for Earn-Out years.

(c) No inconsistent tax positions absent a final determination under IRC § 1313(a).

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

☐ (i) Gross-Up; ☐ (ii) Cutback; ☐ (iii) Shareholder Approval per Treas. Reg. § 1.280G-1, Q&A 7.

Section 7.05 — New York State and City Tax Considerations

(a) New York State Personal Income Tax. New York imposes a personal income tax with a maximum rate of 10.9% (N.Y. Tax Law § 601). Capital gains are taxed at ordinary income rates under New York law — there is no preferential capital gains rate. Individual Sellers who are New York residents will owe New York state income tax on the full amount of gain regardless of where the Business is located.

(b) New York City Personal Income Tax. Individuals who are residents of New York City are also subject to the New York City personal income tax, with a maximum rate of 3.876% (N.Y.C. Admin. Code § 11-1701 et seq.). This brings the combined maximum state and city rate to approximately 14.776% for New York City residents.

(c) New York State Corporate Franchise Tax. New York imposes a corporate franchise tax on corporations doing business in New York (N.Y. Tax Law § 209 et seq.). The tax is the highest of: (i) a tax on business income at 7.25% (6.5% for qualified manufacturers); (ii) a tax on business capital at 0.1875% (capped at $5 million); or (iii) a fixed dollar minimum tax based on receipts.

(d) New York Sales and Use Tax. The sale of tangible personal property in connection with an asset sale may be subject to New York sales tax at 4% state rate (N.Y. Tax Law § 1105), plus applicable local taxes (up to 4.875% local, for a combined rate of up to 8.875% in New York City). The occasional sale exemption under N.Y. Tax Law § 1101(b)(5) may apply.

(e) Real Property Transfer Tax. If the transaction involves New York real property:

• New York State imposes a real property transfer tax at $2 per $500 of consideration (N.Y. Tax Law § 1402);
• The "mansion tax" applies at 1% on residential property transfers exceeding $1 million (N.Y. Tax Law § 1402-a);
• New York City imposes an additional real property transfer tax under N.Y.C. Admin. Code § 11-2102 (1% on residential up to $500,000; 1.425% above; commercial rates of 1.425% up to $500,000 and 2.625% above).

(f) New York Bulk Sales. New York has adopted UCC Article 6 (Bulk Sales) as modified. Compliance with the bulk sale notification requirements under N.Y. U.C.C. § 6-101 et seq. may be required if the transaction constitutes a bulk transfer.

(g) Nonresident Withholding. New York requires estimated income tax payments from nonresidents on the sale of real property located in New York. For other asset sales, New York withholding requirements under N.Y. Tax Law § 658 may apply.

(h) IRC § 453 Conformity. New York generally conforms to federal installment sale treatment under IRC § 453 for purposes of the state income tax.

PART VIII: STATE-SPECIFIC CONSIDERATIONS — NEW YORK

Section 8.01 — New York Contract Law and Implied Covenant

(a) Four Corners Rule. New York courts interpret contracts based on the plain meaning of the language used. "Whether there is ambiguity is determined by looking within the four corners of the document, not to outside sources." See W.W.W. Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157 (1990).

(b) No Parol Evidence. Extrinsic evidence is generally inadmissible to alter or add provisions to a clear and unambiguous written agreement. This principle underscores the importance of precise drafting in earn-out provisions.

(c) Implied Covenant Scope. The implied covenant under New York law supplements but does not override express contract terms. No obligation may be implied that would be inconsistent with the contractual relationship. See 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144 (2002).

(d) Specific Obligation Required. A claim for breach of the implied covenant requires a specific implied obligation and a showing of how its violation denied the plaintiff the fruits of the contract. See Spinelli v. Nat'l Football League, 903 F.3d 185 (2d Cir. 2018) (applying New York law).

(e) Delaware Law Frequently Governs. Many M&A transactions involving New York parties select Delaware law as the governing law. Delaware's well-developed body of earn-out case law (including Himawan v. Cephalon and Airborne Health v. Squid Soap) may provide more predictable outcomes for earn-out disputes. Practitioners should carefully consider whether Delaware or New York law better serves the parties' interests.

(f) Key New York Precedent:

• Dalton v. Educ. Testing Serv., 87 N.Y.2d 384 (1995) — implied covenant requires good faith exercise of discretion;
• W.W.W. Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157 (1990) — four corners rule;
• Greenfield v. Philles Records, Inc., 98 N.Y.2d 562 (2002) — contract interpretation; parol evidence;
• 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144 (2002) — implied covenant limitations;
• Mulacek v. ExxonMobil Corp., 2024 N.Y. Slip Op. 02724 (May 16, 2024) — New York Court of Appeals enforced clear contractual language in contingent resource payment dispute similar to earn-out.

Section 8.02 — Statute of Limitations

(a) The statute of limitations for breach of a written contract under New York law is six (6) years (N.Y. C.P.L.R. § 213(2)).

(b) The statute of limitations for breach of an oral contract under New York law is six (6) years (N.Y. C.P.L.R. § 213(2)).

(c) The limitations period generally commences upon the occurrence of the breach, not upon discovery. New York generally does not apply a discovery rule for contract claims.

Section 8.03 — Choice of Law Considerations

(a) Under N.Y. Gen. Oblig. Law § 5-1401, parties to a contract involving an aggregate consideration of at least $250,000 may agree that New York law shall govern. This provision makes New York law a popular choice even for transactions without a substantial New York nexus.

(b) Under N.Y. Gen. Oblig. Law § 5-1402, parties to such a contract may also consent to the jurisdiction of New York courts.

(c) New York's well-developed commercial law and the availability of the Commercial Division of the Supreme Court make it an attractive forum for complex M&A disputes.

(d) Practitioners should consider whether Delaware law (which is more commonly chosen in M&A transactions) or New York law better serves the parties' interests, particularly regarding the implied covenant.

Section 8.04 — New York Arbitration Framework

(a) New York's arbitration statute is found at N.Y. C.P.L.R. § 7501 et seq. Arbitration clauses are generally enforceable.

(b) Under N.Y. C.P.L.R. § 7511, a court may vacate an arbitration award on limited grounds, including corruption, fraud, or misconduct; evident partiality; or the arbitrator exceeding his or her power.

(c) The Federal Arbitration Act may preempt state law restrictions where the transaction involves interstate commerce.

(d) New York courts strongly favor arbitration. See Matter of Smith Barney Shearson Inc. v. Sacharow, 91 N.Y.2d 39 (1997).

PART IX: PRACTICE NOTES AND DRAFTING GUIDANCE

Section 9.01 — Key Drafting Considerations

☐ Four Corners Precision. New York courts will enforce clear, unambiguous language as written. Draft all financial definitions, operational covenants, and earn-out mechanics with maximum precision. Avoid vague terms like "reasonable" without further definition.

☐ Specify the Efforts Standard. In Himawan v. Cephalon, Inc., C.A. No. 2021-0459-LWW (Del. Ch. Apr. 30, 2024), the court held that "commercially reasonable efforts" is measured objectively and may permit a buyer to cease development if continuation is not commercially reasonable. In Airborne Health, Inc. v. Squid Soap, LP, C.A. No. 4410-VCL (Del. Ch. 2010), the court found no obligation to spend minimum amounts where the agreement did not expressly require it.

☐ Address the Implied Covenant Carefully. Because New York's implied covenant is narrower than California's, Sellers should not rely on it as a primary protection. Include detailed express operational covenants.

☐ Address Common Manipulation Scenarios. Expressly address revenue shifting, revenue recognition timing, pricing changes, management fees, and asset transfers.

☐ Coordinate with Indemnification. Determine setoff rights.

☐ Tax Planning. New York's combined state and city income tax rates (up to approximately 14.776% for NYC residents) make tax planning essential. Capital gains are taxed at ordinary income rates.

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

☐ Consider Delaware Governing Law. Many New York M&A practitioners select Delaware law for the governing law provision due to Delaware's well-developed body of M&A case law.

Section 9.02 — New York-Specific Practice Considerations

☐ High Tax Rates. New York's combined state, city, and federal rates can exceed 50% for individual Sellers. Plan accordingly.

☐ Commercial Division. Consider the New York Commercial Division as an alternative to arbitration for complex earn-out disputes.

☐ Six-Year Limitations Period. New York's six-year statute of limitations (no discovery rule for contract claims) provides a reasonable but fixed window.

☐ Gen. Oblig. Law § 5-1401. New York law can be chosen as governing law for transactions exceeding $250,000 even without a New York nexus.

☐ Sales Tax on Asset Sales. Combined state and local sales tax rates up to 8.875% in New York City. Confirm whether the occasional sale exemption applies.

☐ Real Property Transfer Taxes. Multiple layers of transfer tax in New York (state, city, mansion tax). Plan for these costs.

☐ Bulk Sales. Comply with New York UCC Article 6 bulk sale notification requirements if applicable.

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)
☐ New York and NYC tax impact analysis
☐ Real property transfer tax and mortgage recording tax analysis
☐ 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 New York, New York 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 and including deposits in transit.

"Change of Control" means (i) any merger or consolidation where Buyer's equityholders hold less than [____]% of voting securities post-transaction, (ii) any sale of all or substantially all Buyer assets, or (iii) any acquisition of more than [____]% of Buyer's voting securities.

"Closing Indebtedness" means all outstanding: (i) borrowed money; (ii) capital lease obligations; (iii) letters of credit; (iv) deferred purchase price obligations; (v) guarantees; (vi) accrued interest; and (vii) prepayment premiums and breakage costs.

"Company" means [________________________________].

"Effective Time" means 11:59 p.m. (Eastern Time) on the Closing Date.

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

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

"Net Working Capital" means Current Assets minus Current Liabilities per the Accounting Principles and Schedule [____], excluding Cash, Closing Indebtedness, and Transaction Expenses.

"Person" means any individual, corporation, partnership, LLC, trust, governmental authority, or other entity.

"Representatives" means officers, directors, managers, members, partners, employees, agents, advisors, and other representatives.

"Transaction Expenses" means all unpaid fees, costs, and expenses, including: (i) professional advisory fees; (ii) change-in-control and transaction bonuses; (iii) employer payroll taxes; (iv) IRC § 280G gross-up amounts; and (v) [________________________________].

SOURCES AND REFERENCES

1. New York Statutes:
   - N.Y. C.P.L.R. § 213(2) (Statute of Limitations — Contracts)
   - N.Y. C.P.L.R. § 7501 et seq. (Arbitration)
   - N.Y. C.P.L.R. § 7511 (Vacating Arbitration Awards)
   - N.Y. Gen. Oblig. Law § 5-501 (Usury)
   - N.Y. Gen. Oblig. Law § 5-1401 (Choice of Law for Contracts over $250,000)
   - N.Y. Gen. Oblig. Law § 5-1402 (Choice of Forum)
   - N.Y. Banking Law § 14-a (Maximum Interest Rate)
   - N.Y. Tax Law § 209 et seq. (Corporate Franchise Tax)
   - N.Y. Tax Law § 601 et seq. (Personal Income Tax)
   - N.Y. Tax Law § 658 (Withholding)
   - N.Y. Tax Law § 1101(b)(5) (Occasional Sale Exemption)
   - N.Y. Tax Law § 1105 (Sales Tax)
   - N.Y. Tax Law § 1402 (Real Property Transfer Tax)
   - N.Y. Tax Law § 1402-a (Mansion Tax)
   - N.Y. U.C.C. § 1-304 (Obligation of Good Faith)
   - N.Y. U.C.C. § 6-101 et seq. (Bulk Sales)
   - N.Y.C. Admin. Code § 11-1701 et seq. (NYC Personal Income Tax)
   - N.Y.C. Admin. Code § 11-2102 (NYC Real Property Transfer Tax)

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)
   - Dalton v. Educ. Testing Serv., 87 N.Y.2d 384 (1995) (implied covenant — discretion)
   - W.W.W. Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157 (1990) (four corners rule)
   - Greenfield v. Philles Records, Inc., 98 N.Y.2d 562 (2002) (contract interpretation)
   - 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144 (2002) (implied covenant limitations)
   - Mulacek v. ExxonMobil Corp., 2024 N.Y. Slip Op. 02724 (May 16, 2024) (contingent payment enforcement)
   - Matter of Smith Barney Shearson Inc. v. Sacharow, 91 N.Y.2d 39 (1997) (arbitration)
   - 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:
   - 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)
   - Skadden, "Interplay of Good Faith and Fair Dealing and Breach of Contract Claims" (2022)

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 New York before use. Laws and regulations change frequently; verify all citations before relying on them.