Price is often one of the most difficult issues to reslove in any negotiated sale. When buying a business, a person is sometimes willing to pay more if the business performs as well as the seller claims during the negotiation. A solution that would appear win-win is to agree on a base purchase price for the business that can be increased or decreased depending on the performance of the business in the ensuing year (or some other period). The additional amount paid by the buyer if the agreed-upon milestones are met is sometimes referred to as a supplemental purchase price (sw tilläggsköpeskilling).
The potential problem with this arrangement is illustrated by a recent ruling from a Swedish Court of Appeals. In the case, the seller sold shares in a joint venture that was formed to devlope a parcel of real estate into residential housing. The share price was to be increased (and a supplemental purchase price paid), if the project reached certain milestones. Following the share transfer, changes occured in the project leading to higher costs and lower profits. The seller claimed that the buyer violated a duty of loyalty to the seller in deliberately driving up the costs of the project to reduce profits and avoid payment of the supplemental purchase price.
The court acknowledged that Swedish law does impose a duty of loyalty among contracting parties. But the duty of loyalty is greater in some contexts and lesser in other contexts. When it comes to real estate development, the court reasoned, there are numerous variables that can effect the success of the project. Real estate development is risky business. And the builder owes loyalties of various degrees to various parties. In this context, the duty of loyalty between contracting parties is diluted, and it would take more than simply showing that the actual results of the project fell short of the projected results before a court will find a breach of the duty of loyalty. The seller lost the case.
The moral of the story: supplemental purchase prices are nice in theory, but in practice difficult to achieve, unless you're willing to draft a long and complicated share purchase agreement that regulates in detail how the business will be conducted during the earn-out period.
Hovrätten för nedre norrland, mål T 1364-10, den 12 januari 2012
