Deferred consideration: shares and securities: earn-out rights
In many cases involving the sale of shares there is deferred consideration that is unascertainable. Often the amount of the later payment will depend on the future profits of the company being sold. This arrangement may be referred to as an `earn-out’. Sometimes the shareholders in the company being acquired are also directors or employees who will stay with the company after it changes hands.
TCGA92/S138A (1) defines an “earn-out right” as so much of any right conferred on a person as is
- the whole or part of the consideration for the transfer by that person of shares or debentures of a company;
- a right to be issued with shares or debentures of another company;
- such that the value or quantity of the shares or debentures to be issued in pursuance of the right is unascertainable (see CG58024-27) at the time when the right is conferred; and
- not capable of being discharged otherwise than by the issue of shares or debentures.