Contingent payment (earn-out) clauses: translating the payment threshold

In a share acquisition, the stock purchase agreement (SPA) sets out the price and payment terms agreed by the parties. Translating an earn-out clause providing for contingent consideration requires reading the payment threshold together with its definitions and calculation criteria.

In the example below, part of the purchase price depends on the acquired company’s Net Profit during a period after closing. The difference examined is whether the exact amount the parties set as the threshold is included or excluded.

This exercise is limited to comparing that numerical condition across languages.

Simplified hypothetical example

Assume that a U.S. company acquires from the selling shareholders all the shares of a Mexican software development company. As part of the purchase price, the sellers may receive a USD 5 million earn-out if Year 1 Net Profit is equal to or greater than USD 20 million. In this exercise, Year 1 is the first fiscal year after closing.

The original Spanish provision states:

An English translation that preserves the inclusive threshold would be:

This version includes the exact threshold amount. Compare it with a hypothetical incorrect English translation that excludes it:

What happens at the threshold

At the end of Year 1, the acquired company records Net Profit of exactly USD 20 million.

The Spanish phrase “iguales o superiores” includes the specified threshold amount. With Net Profit of exactly twenty million, the numerical condition is satisfied. The English wording “equal to or greater than” preserves that reading.

The English verb “exceeds” requires a strictly higher amount. The version using that verb therefore excludes Net Profit of exactly twenty million.

The difference changes the literal reading of the numerical condition associated with the USD 5 million payment. The table shows a discrepancy between versions but does not, by itself, resolve its legal consequences. If it is not detected before the translation is finalised, clarifying it may take time from the parties and their advisers and generate review costs.

The review should also identify and reproduce the governing-language clause, if there is one. That clause must be read alongside the other relevant contractual provisions and applicable rules. Identifying the governing language does not replace correcting the discrepancy between versions.

What to check in the clause and its definitions

Comparison. Preserve the distinction between a threshold that includes equality and one that requires a higher amount. Check the reading against values below, exactly at and above the threshold.

Amounts and currency. Distinguish the USD 20 million Net Profit threshold from the USD 5 million contingent payment. Check the figures, amounts written in words, currency and any agreed limits.

Periods. Review the definition of Year 1, its start and end dates and the period covered by the financial measure used. A full fiscal year must be distinguished from a partial period after closing.

Definitions. Keep “Net Profit,” “Year 1” and “Earn-Out Payment” consistent with the contract, including their references and the same terminology in every related document.

Calculation criteria. Revenue, income and profit are not automatically interchangeable. The financial measure defined in the agreement, its accounting policies and the agreed adjustments and exclusions must be identified. Where the calculation refers to International Financial Reporting Standards (IFRS), Mexican Financial Reporting Standards (NIF) or another accounting framework, the translation preserves that reference and the relation established by the agreement between that accounting framework and the specific calculation rules. The procedure for determining the amount, objection deadlines and dispute resolution mechanism must also be checked.

Conclusion

In clauses that make a payment conditional on a financial threshold, including contingent payment (earn-out) clauses, the translation must preserve what is measured, how it is calculated, the relevant period and the conditions that trigger payment.

When the original contains inconsistencies or does not make it possible to identify one of those elements, the question should be raised with the team responsible for the contract before finalising the translation.

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