• At Kemp Little, we are known for our ability to serve the very particular needs of a large but diverse technology client base. Our hands-on industry know-how makes us a good fit with many of the world's biggest technology and digital media businesses, yet means we are equally relevant to companies with a technology bias, in sectors such as professional services, financial services, retail, travel and healthcare.
  • Kemp Little specialises in the technology and digital media sectors and provides a range of legal services that are crucial to fast-moving, innovative businesses.Our blend of sector awareness, technical excellence and responsiveness, means we are regularly ranked as a leading firm by directories such as Legal 500, Chambers and PLC Which Lawyer. Our practice areas cover a wide range of legal issues and advice.
  • Our Commercial Technology team has established itself as one of the strongest in the UK. We are ranked in Legal 500, Chambers & Partners and PLC Which Lawyer, with four of our partners recommended.
  • Our team provides practical and commercial advice founded on years of experience and technical know-how to technology and digital media companies that need to be alert to the rules and regulations of competition law.
  • Our Corporate Practice has a reputation for delivering sound legal advice, backed up with extensive industry experience and credentials, to get the best results from technology and digital media transactions.
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  • At Kemp Little, we advise clients in diverse sectors where technology is fundamental to the ongoing success of their businesses.They include companies that provide technology as a service and businesses where the use of technology is key to their business model, enabling them to bring their product or service to market.
  • We bring our commercial understanding of digital business models, our legal expertise and our reputation for delivering high quality, cost-effective services to this dynamic sector.
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  • We advise at the forefront of the technological intersection between life sciences and healthcare. We advise leading technology and data analytics providers, healthcare institutions as well as manufacturers of medical devices, pharmaceuticals and biotechnological products.
  • For clients operating in the online sector, our teams are structured to meet their commercial, financing, M&A, competition and regulatory, employment and intellectual property legal needs.
  • Our focus on technology makes us especially well positioned to give advice on the legal aspects of digital marketing. We advise on high-profile, multi-channel, cross-border cases and on highly complex campaigns.
  • The mobile and telecoms sector is fast changing and hugely dependent on technology advances. We help mobile and wireless and fixed telecoms clients to tackle the legal challenges that this evolving sector presents.
  • Whether ERP, Linux or Windows; software or infrastructure as a service in the cloud, in a virtualised environment, or as a mobile or service-oriented architecture, we have the experience to resolve legal issues across the spectrum of commercial computer platforms.
  • Our clients trust us to apply our solutions and know-how to help them make the best use of technology in structuring deals, mitigating key risks to their businesses and in achieving their commercial objectives.
  • We have extensive experience of advising customers and suppliers in the retail sector on technology development, licensing and supply projects, and in advising on all aspects of procurement and online operations.
  • Our legal professionals work alongside social media providers and users in relation to the commercial, privacy, data, advertising, intellectual property, employment and corporate issues that arise in this dynamic sector.
  • Our years of working alongside diverse software clients have given us an in-depth understanding of the dynamics of the software marketplace, market practice and alternative negotiating strategies.
  • Working with direct providers of travel services, including aggregators, facilitators and suppliers of transport and technology, our team has developed a unique specialist knowledge of the sector
  • Your life as an entrepreneur is full of daily challenges as you seek to grow your business. One of the key strengths of our firm is that we understand these challenges.
  • Kemp Little is trusted by some of the world’s leading luxury brands and some of the most innovative e-commerce retailers changing the face of the industry.
  • HR Bytes is an exclusive, comprehensive, online service that will provide you with a wide range of practical, insightful and current employment law information. HR Bytes members get priority booking for events, key insight and a range of employment materials for free.
  • FlightDeck is our portal designed especially with start-up and emerging technology businesses in mind to help you get your business up and running in the right way. We provide a free pack of all the things no-one tells you and things they don’t give away to get you started.

Earn-outs - the court fills the gaps...


Earn-out mechanisms are commonly used in M&A transactions involving the sale of shares or assets where the price (or part of it) is determined by reference to the future performance of the target company or business. There are as many earn-out formulations as there are transactions, but arguably the most common determinant is profits (as opposed to, say, turnover or net assets). Since earn-outs are commonplace, there is a substantial body of knowledge and experience about the key commercial issues and these are always hotly negotiated by sellers and buyers and their respective advisers. However, there has been scant judicial precedent on earn-outs. Until, that is, the recent High Court decision in Porton Capital Technology Funds v 3M UK Holdings Ltd.

Cutting through the detail, the earn-out provision under dispute imposed an obligation on the buyer to “diligently” seek regulatory approval and “actively” market the target’s products. However, as it turned out, the buyer decided to terminate the target business after it acquired it, as it was unprofitable. As a consequence of the termination, no earn out payments were made to the sellers, hence the claim brought by them for breach of the obligations just referred to.
 
The court agreed that the buyer did not “diligently” seek regulatory approval, as it failed the objective test of reasonable application, industry and perseverance. The court also took the view that the buyer did not “actively” market the products, since this required its efforts to be backed by action, i.e. an element of proactivity was needed, which was missing.
 
The final point considered was whether the sellers had acted unreasonably in withholding their consent to the termination by the buyer of the target business. The court, applying established case law, concluded that the sellers had acted reasonably; the sellers were entitled to have regard to their own interests in maximising the earn-out payment and did not need to balance their own interests with those of the buyer.
 
What can we take away from this? Essentially, in order to mitigate the risk of a dispute of this nature arising, parties to an earn-out provision should ensure that the earn-out obligations are drafted as specifically as possible. For example, if the buyer agreed that it will “diligently” undertake some course of action in order to protect the earn-out for the sellers, then the agreement should define what, precisely, this means in the context of the transaction. Don’t leave it to the courts to fill the gaps….
 
For further information, please contact Glafkos Tombolis