The Bottom Line
- A buyer’s post-acquisition mismanagement can lead a court to force a buyout at an adjusted, higher price, protecting the seller from a devalued earn-out.
- Courts may establish a ‘fair increase’ to a contractually agreed price by considering what the company’s performance should have been without the buyer’s failures.
- Non-compete clauses imposed on key employees or minority shareholders during a sale can be nullified if they were not directly involved in the negotiations and were unfairly burdened.
The Details
This case serves as a critical warning for any company involved in a phased acquisition or earn-out structure. The dispute began after an investment firm, United Zero B.V., acquired a 51% majority stake in two successful installation companies from their founder. Under the deal, United Zero was set to purchase the founder’s remaining 49% stake over four years. The price for these future payments was directly tied to the company’s performance, based on a formula using the average EBITDA of the preceding three years. However, the promised ‘buy and build’ growth strategy never materialized. Instead, the company’s EBITDA plummeted, relationships soured, and United Zero ultimately defaulted on its obligation to buy the first tranche of shares.
The Amsterdam Enterprise Chamber placed the blame for the failed partnership squarely on the buyer. The court found that United Zero was primarily responsible for the company’s downturn and the breakdown in trust. Key failings included a failure to produce contractually required business plans, mismanaging cash flow while continuing to extract funds for its own loan repayments, and failing to take sufficient action to release the founder’s personal mortgages, which guaranteed the company’s bank debt. Critically, United Zero lost its own financing from its backers after failing to provide them with required financial reports. This made it impossible to fund the share purchase and sealed the company’s financial fate.
In a decisive remedy, the court ordered United Zero to complete the buyout of the remaining shares but refused to apply the contractual price formula to the now-depressed performance figures. The court ruled that the seller was entitled to a ‘fair increase’ to compensate for the value destroyed by the buyer’s mismanagement. It instructed an expert to calculate a new, higher price based on an adjusted EBITDA—effectively averaging the poor actual results with the hypothetical results that would likely have been achieved had the partnership succeeded. In a significant side ruling, the court also voided a non-compete clause imposed on a key employee and minority shareholder. It found he had agreed to it under a legal mistake (‘dwaling’), as he was not involved in the negotiations and the clause was unfairly prejudicial to his career.
Source
Amsterdam Court of Appeal, Enterprise Chamber
