PURCHASE PRICE ADJUSTMENT AND EARN-OUT CLAUSE PACK

State of Texas

Prepared for Use in: Stock Purchase Agreements, Asset Purchase Agreements, Merger Agreements
Governing Law: State of Texas
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 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"). The Base Purchase Price payable at Closing 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 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. Texas usury limits under Tex. Fin. Code § 302.001 et seq. (18% per annum for most commercial transactions) should be considered.

Section 2.05 — De Minimis Threshold

No adjustment if the absolute difference is less than $[________________________________]. If exceeded, the full amount shall be payable.

Section 2.06 — Collar Mechanism

☐ (Optional) No adjustment within a collar of plus or minus $[________________________________]. If the difference exceeds the collar, the full amount is 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 Texas 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 specifying amount and basis; disputed amounts escrowed pending resolution.

TEXAS PRACTICE NOTE: Because Texas does not impose a general implied covenant of good faith in commercial contracts, contractual setoff provisions will be enforced as written. Sellers should carefully negotiate setoff limitations to avoid a situation where Buyer can unilaterally withhold Earn-Out Payments based on speculative indemnification claims.

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 — Good Faith and Fair Dealing Under Texas Law

(a) No General Implied Covenant. The Parties acknowledge that, unlike many other jurisdictions, Texas does not impose a general implied covenant of good faith and fair dealing in commercial contracts. Under Texas law, the implied duty of good faith is not a standalone obligation but is limited to specific relationships deemed "special" — principally the insurer-insured relationship. See English v. Fischer, 660 S.W.2d 521 (Tex. 1983); Crim Truck & Tractor Co. v. Navistar Int'l Transp. Corp., 823 S.W.2d 591 (Tex. 1992).

(b) UCC Good Faith. Where the transaction involves the sale of goods, Tex. Bus. & Com. Code § 1.304 imposes an obligation of good faith ("honesty in fact and the observance of reasonable commercial standards of fair dealing") in the performance and enforcement of every contract or duty within the UCC. However, this provision applies only to UCC-governed transactions and may not extend to the earn-out provisions of an SPA/APA.

(c) Critical Implication for Sellers. Because Texas law does not provide a general implied covenant of good faith as a backstop, the express operational covenants set forth in Section 5.02 are the primary — and potentially the only — mechanism for protecting Seller's earn-out rights. Sellers should negotiate detailed, specific, and enforceable operational covenants. Vague commitments or general statements of intent will not provide meaningful protection under Texas law.

(d) Express Good Faith Covenant. In light of the foregoing, the Parties expressly agree that Buyer shall exercise any discretion granted under this Agreement in good faith and shall not take any action, or fail to take any action, with the primary purpose of reducing or avoiding payment of any Earn-Out Payment. This express covenant is intended to provide protections comparable to those afforded by the implied covenant in other jurisdictions.

CRITICAL TEXAS PRACTICE NOTE: Texas is an outlier among U.S. jurisdictions in not recognizing a general implied covenant of good faith and fair dealing in commercial contracts. This creates a significant risk for Sellers in Texas-law earn-out transactions: if the express covenants are inadequate, Seller may have no recourse against Buyer conduct that frustrates the earn-out but does not violate a specific contractual provision. The express good faith covenant in Section 5.01(d) is intended to address this gap, but practitioners should recognize that Texas courts may interpret such a provision narrowly. Sellers should consider whether Delaware or another jurisdiction's law would provide better protection. See Byron F. Egan, "Earnouts in M&A Transactions," Jackson Walker LLP (2020), for an extensive discussion of Texas earn-out issues.

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 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 [____] or that are disproportionate to the services provided;

☐ (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;

☐ (m) Minimum Marketing and Sales Support. Maintain marketing and sales expenditures for the Business at levels no less than [____]% of Earn-Out Revenue (or $[________________________________] per year, whichever is greater), measured on an annual basis;

☐ (n) No Change to Key Contracts. Not terminate, materially modify, or fail to renew any material contract of the Business listed on Schedule [____] without Seller's prior written consent.

TEXAS DRAFTING NOTE: Because Texas law does not provide a general implied covenant, the operational covenants in this Section 5.02 should be drafted with maximum specificity and detail. Every material aspect of Buyer's post-closing operations that could affect the Earn-Out should be expressly addressed. The more specific the covenants, the more enforceable they will be under Texas law.

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 for the 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;
• (vii) Reducing marketing, sales, or operational support below the minimums set forth in Section 5.02(m).

(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.

(c) Texas Standard. Under Texas law, intent is generally required to establish that a party acted for the purpose of frustrating a contractual obligation. Mere negligence or poor business judgment will generally not be sufficient to establish a breach of the operational covenants.

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. Under Texas law, specific performance is available when (i) there is a valid and enforceable contract, (ii) the plaintiff has performed or tendered performance, (iii) the defendant has breached, and (iv) the legal remedy is inadequate. The Parties agree 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.

(b) Damages. Seller shall be entitled to recover actual damages, including the amount of any Earn-Out Payment that would have been earned but for such breach. Under Texas law, the measure of damages for breach of contract is the benefit-of-the-bargain measure. See Walden v. Affiliated Computer Servs., Inc., 97 S.W.3d 303 (Tex. App.—Houston [14th Dist.] 2003, pet. denied).

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

(d) Attorneys' Fees. Under Tex. Civ. Prac. & Rem. Code § 38.001, a party that prevails in a breach of contract claim is entitled to recover reasonable attorneys' fees from the breaching party, in addition to other damages.

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. Under Texas law, expert determinations are generally enforceable if the parties have agreed to be bound by them. The distinction between expert determination and arbitration affects the scope of judicial review.

(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) Texas Arbitration Act. Governed by Tex. Civ. Prac. & Rem. Code § 171.001 et seq. (Texas General Arbitration Act) and, to the extent applicable, the Federal Arbitration Act, 9 U.S.C. § 1 et seq. Texas law strongly favors arbitration. See In re Poly-America, L.P., 262 S.W.3d 337 (Tex. 2008).

(c) Arbitrator Selection. Single arbitrator with substantial M&A experience, selected per AAA/JAMS rules.

(d) Location. [________________________________], Texas (typically Dallas, Houston, or Austin).

(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 Texas.

(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. However, the prevailing party may be entitled to attorneys' fees under Tex. Civ. Prac. & Rem. Code § 38.001.

Section 6.03 — 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 Texas to prevent irreparable harm pending 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, except as required by applicable Law.

Section 7.02 — IRC § 338 Elections

☐ (a) Section 338(h)(10) Election. Joint election; IRS Form 8023.

☐ (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 — Texas State Tax Considerations

(a) No Personal Income Tax. Texas does not impose a personal income tax on individuals (Tex. Const. art. VIII, § 24-a). Individual Sellers will not incur Texas state income tax on the Purchase Price or Earn-Out Payments. This is a significant advantage for Texas-based transactions.

(b) Texas Franchise Tax (Margin Tax). Texas imposes a franchise tax (commonly called the "margin tax") on taxable entities doing business in Texas (Tex. Tax Code § 171.001 et seq.). Key considerations:

• The tax rate is 0.75% for most taxable entities, and 0.375% for entities primarily engaged in retailing or wholesaling (Tex. Tax Code § 171.002);
• The No Tax Due threshold is $2,470,000 for reports due in 2024 and 2025;
• The tax is based on the entity's "margin," calculated as total revenue minus the greater of: (i) cost of goods sold, (ii) compensation, (iii) 30% of total revenue, or (iv) $1 million (Tex. Tax Code § 171.101);
• The Parties should consider the franchise tax impact of the transaction structure, including whether the gain from the sale is included in the selling entity's total revenue for franchise tax purposes;
• Texas uses single-factor apportionment based on gross receipts (Tex. Tax Code § 171.106).

(c) Texas Sales and Use Tax. The sale of tangible personal property in connection with an asset sale may be subject to Texas sales tax at 6.25% (Tex. Tax Code § 151.051), plus applicable local taxes (up to 2% additional, for a combined rate of up to 8.25%). The occasional sale exemption under Tex. Tax Code § 151.304 may apply if the seller makes no more than two sales of taxable items during a twelve-month period.

(d) Texas Comptroller Considerations. The Texas Comptroller of Public Accounts administers the franchise tax and sales tax. The Parties should consider:

• Whether the Buyer should request a tax clearance letter from the Comptroller to avoid successor liability for the Seller's unpaid franchise taxes;
• Whether the transaction constitutes a "bulk sale" requiring notification to the Comptroller under Tex. Tax Code § 111.020;
• Whether the allocation of purchase price among asset classes affects the franchise tax calculation.

(e) No Bulk Sales Act. Texas has repealed UCC Article 6 (Bulk Sales). However, the Comptroller notification requirement under Tex. Tax Code § 111.020 for bulk sales of business assets remains in effect. Failure to comply may result in the purchaser becoming liable for the seller's unpaid taxes.

(f) Real Property Transfer. Texas does not impose a real property transfer tax or documentary stamp tax. However, if the transaction involves Texas real property, the Parties should consider property tax implications and the filing of deed documents with the county clerk.

PART VIII: STATE-SPECIFIC CONSIDERATIONS — TEXAS

Section 8.01 — Texas Contract Law and Good Faith

(a) No General Implied Covenant. Texas does not impose a general implied covenant of good faith and fair dealing in commercial contracts. This is one of the most significant distinctions between Texas law and the law of many other states.

(b) Limited Application. The duty of good faith and fair dealing under Texas law is imposed only in specific "special relationships" — principally:

• (i) The insurer-insured relationship (Arnold v. Nat'l County Mut. Fire Ins. Co., 725 S.W.2d 165 (Tex. 1987));
• (ii) Formal fiduciary relationships (attorney-client, trustee-beneficiary, principal-agent);
• (iii) Certain other relationships deemed "special or confidential" by Texas courts.

(c) No Application to Ordinary Commercial Contracts. Texas courts have repeatedly held that the implied duty of good faith does not apply to ordinary commercial contracts, including contracts between sellers and buyers in business transactions. See English v. Fischer, 660 S.W.2d 521 (Tex. 1983); Crim Truck & Tractor Co. v. Navistar Int'l Transp. Corp., 823 S.W.2d 591 (Tex. 1992).

(d) UCC Exception. Tex. Bus. & Com. Code § 1.304 imposes an obligation of good faith in the performance of every UCC-governed contract. For M&A transactions, this provision is of limited relevance because the earn-out provisions of an SPA/APA are generally not UCC-governed.

(e) Key Texas Precedent:

• English v. Fischer, 660 S.W.2d 521 (Tex. 1983) — no general implied covenant in commercial contracts;
• Crim Truck & Tractor Co. v. Navistar Int'l Transp. Corp., 823 S.W.2d 591 (Tex. 1992) — reaffirming no general implied covenant;
• Arnold v. Nat'l County Mut. Fire Ins. Co., 725 S.W.2d 165 (Tex. 1987) — duty of good faith in insurance context;
• In re Poly-America, L.P., 262 S.W.3d 337 (Tex. 2008) — enforceability of arbitration agreements.

Section 8.02 — Texas Contract Interpretation

(a) Plain Meaning Rule. Texas courts interpret contracts according to the plain meaning of the language used. If the contract is unambiguous, the court will enforce it as written without resort to extrinsic evidence. See Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323 (Tex. 2011).

(b) Context and Surrounding Circumstances. Unlike New York's strict "four corners" approach, Texas courts may consider the surrounding circumstances known to the parties at the time of contracting to determine whether the contract is ambiguous. However, extrinsic evidence is not admissible to contradict clear and unambiguous language.

(c) Construction Against Drafter. Ambiguities may be construed against the drafter, but this rule is applied only as a last resort after all other rules of interpretation have been exhausted.

Section 8.03 — Statute of Limitations

(a) The statute of limitations for breach of a written contract under Texas law is four (4) years (Tex. Civ. Prac. & Rem. Code § 16.004).

(b) The statute of limitations for breach of an oral contract is four (4) years (Tex. Civ. Prac. & Rem. Code § 16.004).

(c) The limitations period commences when the cause of action accrues. Under the discovery rule, the accrual date may be delayed until the plaintiff knew or should have known of the facts giving rise to the claim, but the discovery rule is applied narrowly in Texas contract cases.

Section 8.04 — Choice of Law Considerations

(a) Texas courts generally enforce choice-of-law provisions in commercial contracts, subject to certain limitations.

(b) Texas follows the Restatement (Second) of Conflict of Laws in the absence of a valid choice-of-law clause. See DeSantis v. Wackenhut Corp., 793 S.W.2d 670 (Tex. 1990).

(c) Delaware Law Alternative. Because Texas does not impose a general implied covenant, Sellers in Texas M&A transactions frequently negotiate for Delaware law as the governing law. Delaware provides: (i) a well-developed body of earn-out case law; (ii) the implied covenant of good faith as a gap-filling mechanism; and (iii) the Court of Chancery as a specialized forum. Practitioners should carefully evaluate whether Texas or Delaware law better protects the parties' interests in the earn-out context.

Section 8.05 — Texas Arbitration Framework

(a) The Texas General Arbitration Act at Tex. Civ. Prac. & Rem. Code § 171.001 et seq. provides a comprehensive framework for arbitration.

(b) Under Tex. Civ. Prac. & Rem. Code § 171.088, a court shall vacate an arbitration award on limited grounds, including corruption, fraud, or misconduct; evident partiality; or the arbitrator exceeding the scope of the submission.

(c) Texas law strongly favors arbitration. See In re Poly-America, L.P., 262 S.W.3d 337 (Tex. 2008).

Section 8.06 — Texas Attorneys' Fees

Under Tex. Civ. Prac. & Rem. Code § 38.001, a party that prevails in a breach of contract claim is entitled to recover reasonable attorneys' fees from the breaching party. This statutory right applies automatically to contract claims and provides Sellers with an additional enforcement tool.

PART IX: PRACTICE NOTES AND DRAFTING GUIDANCE

Section 9.01 — Key Drafting Considerations

☐ Express Covenants Are Everything in Texas. Because Texas does not provide a general implied covenant of good faith, the express operational covenants in Section 5.02 are the primary (and potentially only) mechanism for protecting Seller's earn-out rights. Draft with maximum specificity.

☐ 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. 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.

☐ Include Express Good Faith Covenant. Section 5.01(d) includes an express good faith covenant to fill the gap left by Texas's lack of a general implied covenant. This express covenant creates a contractual obligation that Texas courts will enforce.

☐ Address Common Manipulation Scenarios. Expressly address revenue shifting, revenue recognition timing, pricing changes, management fees, and asset transfers. Under Texas law, if a scenario is not expressly addressed, Seller may have no recourse.

☐ Include Minimum Spending Provisions. Section 5.02(m) includes a minimum marketing and sales support covenant. This is particularly important under Texas law, where the lack of an implied covenant means there is no general obligation to support the business.

☐ Coordinate with Indemnification. Determine setoff rights.

☐ Consider Delaware Governing Law. The absence of a general implied covenant under Texas law makes Delaware law an attractive alternative for Sellers.

☐ Attorneys' Fees. Tex. Civ. Prac. & Rem. Code § 38.001 provides a statutory right to recover attorneys' fees for prevailing in a breach of contract claim.

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

Section 9.02 — Texas-Specific Practice Considerations

☐ No Personal Income Tax. Texas's lack of personal income tax is a significant advantage. Federal tax is the primary consideration.

☐ Franchise Tax (Margin Tax). The Texas franchise tax applies to entities doing business in Texas. Consider the franchise tax impact on the transaction structure, including whether gain is included in total revenue.

☐ No Tax Due Threshold. Entities with total revenue below $2,470,000 owe no franchise tax. This may benefit small businesses.

☐ Sales Tax on Asset Sales. Combined state and local rates up to 8.25%. Confirm whether the occasional sale exemption applies.

☐ Comptroller Notification. Under Tex. Tax Code § 111.020, the purchaser should notify the Comptroller of a bulk purchase of business assets to avoid successor liability.

☐ No Transfer Tax. Texas does not impose a real property transfer tax or documentary stamp tax, which simplifies real property components of asset sales.

☐ No General Implied Covenant. The most critical Texas-specific consideration for earn-out transactions. Draft detailed express covenants.

☐ Statutory Attorneys' Fees. Tex. Civ. Prac. & Rem. Code § 38.001 provides a statutory entitlement to attorneys' fees for the prevailing party in a breach of contract claim.

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)
☐ Texas franchise tax compliance and total revenue analysis
☐ Sales tax review (asset sale vs. stock sale)
☐ Comptroller tax clearance status

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 Houston, Texas (or Dallas, Texas) 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. (Central 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 of the transactions, 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. Texas Statutes:
   - Tex. Const. art. VIII, § 24-a (No Personal Income Tax)
   - Tex. Bus. & Com. Code § 1.304 (Obligation of Good Faith — UCC)
   - Tex. Bus. & Com. Code § 2.103 (Good Faith in Sale of Goods)
   - Tex. Civ. Prac. & Rem. Code § 16.004 (Statute of Limitations — Contracts)
   - Tex. Civ. Prac. & Rem. Code § 38.001 (Attorneys' Fees)
   - Tex. Civ. Prac. & Rem. Code § 171.001 et seq. (Texas Arbitration Act)
   - Tex. Civ. Prac. & Rem. Code § 171.088 (Vacating Arbitration Awards)
   - Tex. Fin. Code § 302.001 et seq. (Usury)
   - Tex. Tax Code § 111.020 (Bulk Sale Notification)
   - Tex. Tax Code § 151.051 (Sales Tax Rate)
   - Tex. Tax Code § 151.304 (Occasional Sale Exemption)
   - Tex. Tax Code § 171.001 et seq. (Franchise Tax / Margin Tax)
   - Tex. Tax Code § 171.002 (Franchise Tax Rates)
   - Tex. Tax Code § 171.101 (Margin Calculation)
   - Tex. Tax Code § 171.106 (Apportionment)

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)
   - English v. Fischer, 660 S.W.2d 521 (Tex. 1983) (no general implied covenant)
   - Crim Truck & Tractor Co. v. Navistar Int'l Transp. Corp., 823 S.W.2d 591 (Tex. 1992) (no general implied covenant)
   - Arnold v. Nat'l County Mut. Fire Ins. Co., 725 S.W.2d 165 (Tex. 1987) (insurance good faith)
   - Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323 (Tex. 2011) (contract interpretation)
   - In re Poly-America, L.P., 262 S.W.3d 337 (Tex. 2008) (arbitration)
   - Walden v. Affiliated Computer Servs., Inc., 97 S.W.3d 303 (Tex. App. 2003) (contract damages)
   - 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:
   - Byron F. Egan, "Earnouts in M&A Transactions," Jackson Walker LLP (2020) — comprehensive Texas-focused analysis
   - ABA Business Law Today, "The Ins and Outs of Earn-Outs: A Delaware Perspective" (March 2022)
   - Texas Bar Journal, "Good Faith Revisited" (analysis of Texas good faith doctrine)

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