Lessons from a Private Equity Earn Out: How I Lost £550K Due to a Lowercase 'C'

>revenue must not have involvement with "connected parties."

>disclosed that two of my shareholders also worked at companies that were customers

...and surprise surprise the revenue gets disputed. Disclosing things doesn't invalidate pieces of the contract - if anything it strengthens it given solid evidence to the opposing party here.

That's it. End of story. And yes, good advice - lawyers may have saved this.

The rest reads like the result of a desperate laymans search for anything that might back an alternate interpretation....absolutely anything that might get these two obviously excluded revenue pieces back into scope. To call it a longshot would be generous:

>Had the "C" in "connected parties" been capitalized, it would have fallen under the HMRC Taxation of Chargeable Gains Act, which in the UK formally defines a Connected Party as a person who has control of a company, which was not the case with either of my shareholders.

Why would UK tax law definitions have any bearing on interpretation of what revenue is in scope for a valuation calculation?

But lets assume it somehow is via some unnamed mechanism. The act doesn't even mention "Connected Party" let alone define it. It does talk about connected persons but you'd need to squint pretty hard to turn party in persons via a capital C...and ignore the minor detail about it dealing with tax matters not M&A matters.

I'm gonna go out on a limb here and say there was no lawyer involved in the capital C part of the story at all.

Agreed. If "Connected Persons" in the UK tax law was intended to govern the contract's interpretation, that would have been explicitly called out in the contract. (Note: in the U.S., M&A law is part of tax law, but even in this context it is understood that a term has its common/dictionary meaning unless the language of the agreement specifically states that a statutory or regulatory meaning is intended.)

But also, capitalization isn't generally relevant for determining whether a noun refers to a defined term or not; for example "Connected Persons" "connected persons" and "CONNECTED PERSONS" are all read the same, unless there is something in the contract that specifically states otherwise. It used to be common for the first usage of a defined term to be all caps.

This story reads like someone thought they could save money by not having a (subject-matter competent) lawyer review everything and it came back to bite them in the ass.

This is because, unlike with punctuation, capitalization was not (and still is not) consistent across legal documents. Some people/firms use all caps for defined terms; others standard capitalization, and many don't capitalize at all on the grounds that a a defined term is not a proper noun unless it is a person, place, or thing.

But whether earnouts are good or bad for sellers is industry specific. I don't work for a tech company, and we don't deal with VC or PE firms at all. Our acquisitions are all companies with real revenue streams, established histories of revenue, and non-tech business models that don't require exponential growth or "scale", so earnouts are extremely straightforward.