We are pleased to share the November 2023 issue of Japan Corporate & Finance Insights. This newsletter is designed to keep you current on what we consider to be important recent legal developments involving Japanese corporate and finance matters.

＜TOPICS＞
Features in the use of Earn-out Clauses in Japan (By Yusuke Hayashi, Kota Fujii, and Natsumi Tonedachi)

This article introduces and explores the main features of an earn-out clause in M&A transactions, primarily in the context of target companies incorporated in Japan.

An earn-out clause is a provision under which the buyer pays the seller an additional amount of money or any other type of assets (the “Earn-out Consideration”) as part of the acquisition consideration if the acquired company or business achieves a specific goal within a certain period after the closing of the M&A transaction. Such Earn-out Consideration can take the form of a fixed amount or an amount calculated by a predetermined formula.

An earn-out clause is mainly used to: (1) bridge the gap in valuations of the target company/business between the seller and the buyer and (2) incentivize the seller to cooperate with the transition of the target’s operation and management, and maximize the enterprise value of such target after the closing by itself or making someone remain in the target company/business. Therefore, the use of earn-out clause is often considered in acquisition deals of start-up companies or companies undergoing turnaround, where it is difficult to estimate the corporate value.