Drafting Drag along Triggers in International Shareholders Agreements
Drafting cross-border drag-along triggers requires verifiable voting thresholds, explicit cash valuation floors, and deeded power-of-attorney execution clamp mechanics.
Earn-out Caps
Meaning
Monetary ceiling placed on the contingent payments that a seller can receive after the closing of an acquisition. Earn-out caps protect the buyer from paying an unlimited amount of money if the target business performs far better than expected during the earn-out period.
Incentive Boundary
The cap is negotiated as a fixed dollar amount or a percentage of the total purchase price. While the earn-out itself encourages the seller to stay involved and grow the business, the cap ensures that the total cost of the acquisition stays within the budget of the buyer.
Payment Calculation
The agreement defines the financial targets, such as gross revenue or net profit, that trigger the contingent payments. Accountants from both sides review the year end results to determine how close the business came to the targets and whether the cap has been reached. If the calculated payment exceeds the limit, the buyer only pays the capped amount and retains the rest of the profit.
This mechanism provides a clear maximum exposure for the investment team and allows for better financial planning. It also simplifies the calculation of the final settlement by providing a definitive upper limit for the payout.
Risk Mitigation
Setting a maximum payment reduces the potential for disputes over accounting methods used to inflate the results of the company. It also prevents the seller from taking extreme risks to hit massive targets that might harm the long term health of the business.