THE BOTTOM LINE
- Contracts Are King: A commitment made in a Share Purchase Agreement (SPA) to convert part of an earn-out into a loan is binding, even if a separate loan document is never signed. The SPA itself creates the obligation.
- Subordination Bites: When a vendor loan is subordinated to senior bank debt, a “stop payment” instruction from the senior lender will be upheld. Sellers accept this risk when they agree to the deal structure.
- High Bar for “Unfairness” Claims: A court is highly unlikely to set aside clear contractual terms based on claims of “reasonableness and fairness,” especially in a sophisticated M&A transaction. Disappointment with a buyer’s post-acquisition performance is not sufficient grounds.
THE DETAILS
This case before the Amsterdam District Court provides a sharp reminder for parties structuring M&A deals, particularly those involving vendor loans and earn-outs. The dispute arose after a company sale where the seller ([eiser] B.V.) provided financing to the buyer (UNSPI), a private equity-backed company. A portion of the purchase price was converted into an initial vendor loan (“Loan 1”), and it was agreed that 50% of a future earn-out payment would be converted into a second vendor loan (“Loan 2”). Critically, both loans were subordinated to senior financing provided by Rabobank. When the buyer’s financial performance faltered, the bank issued a “stop payment notice,” prohibiting the buyer from making any payments on the seller’s subordinated loans.
The seller launched legal action, attempting to bypass the agreed structure. It argued that Loan 2 was never formally created because the final document wasn’t signed, meaning the second half of the earn-out was due immediately in cash. Furthermore, the seller claimed the buyer had breached the terms of Loan 1, making it immediately repayable (as soon as the subordination ended). The seller contended that holding it to the original terms was unreasonable, blaming the buyer’s new management for the poor performance that triggered the payment stop. The court, however, was not persuaded and sided firmly with the buyer.
In its ruling, the court focused on the clear intentions laid out in the original Share Purchase Agreement. The court found that the obligation to create Loan 2 was an integral and inseparable part of the overall M&A deal. The terms were agreed upon in the SPA and its annexes, creating a binding agreement from the outset. The lack of a subsequent signature on a standalone loan document was deemed irrelevant. Regarding the alleged breaches of Loan 1, the court dismissed them one by one, finding no evidence of default. The court reinforced the power of the subordination agreement, noting that the seller knowingly accepted the risk that payments could be blocked by the senior lender. The seller’s appeal to “reasonableness and fairness” was also rejected, as the court found insufficient proof that the buyer’s performance issues were solely the result of mismanagement, thereby failing to meet the very high threshold required to set aside a clear contractual clause.
SOURCE
Source: Rechtbank Amsterdam (Amsterdam District Court)
