L 237/460
EN
Official Journal of the European Union
26.9.2023
Arrangements for contingent payments to employees or selling shareholders (application of paragraph 52(b)) B54
Whether arrangements for contingent payments to employees or selling shareholders are contingent consideration in the business combination or are separate transactions depends on the nature of the arrange­ ments.
Understanding the reasons why the acquisition agreement includes a provision for contingent payments, who initiated the arrangement and when the parties entered into the arrangement may be helpful in assessing the nature of the arrangement.
B55
If it is not clear whether an arrangement for payments to employees or selling shareholders is part of the exchange for the acquiree or is a transaction separate from the business combination, the acquirer should consider the following indicators: (a) Continuing employment— The terms of continuing employment by the selling shareholders who become key employees may be an indicator of the substance of a contingent consideration arrangement.
The relevant terms of continuing employment may be included in an employment agreement, acquisition agreement or some other document.
A contingent consideration arrangement in which the payments are automatically forfeited if employment terminates is remuneration for post-combination services.
Arrangements in which the contingent payments are not affected by employment termination may indicate that the contingent payments are additional consideration rather than remuneration.
(b) Duration of continuing employment— If the period of required employment coincides with or is longer than the contingent payment period, that fact may indicate that the contingent payments are, in substance, remuneration.
(c) Level of remuneration— Situations in which employee remuneration other than the contingent payments is at a reasonable level in comparison with that of other key employees in the combined entity may indicate that the contingent payments are additional consideration rather than remuneration.
(d) Incremental payments to employees— If selling shareholders who do not become employees receive lower contingent payments on a per-share basis than the selling shareholders who become employees of the combined entity, that fact may indicate that the incremental amount of contingent payments to the selling shareholders who become employees is remuneration.
(e) Number of shares owned— The relative number of shares owned by the selling shareholders who remain as key employees may be an indicator of the substance of the contingent consideration arrangement.
For example, if the selling shareholders who owned substantially all of the shares in the acquiree continue as key employees, that fact may indicate that the arrangement is, in substance, a profit-sharing arrangement intended to provide remuneration for post-combination services.
Alternatively, if selling shareholders who continue as key employees owned only a small number of shares of the acquiree and all selling share­ holders receive the same amount of contingent consideration on a per-share basis, that fact may indicate that the contingent payments are additional consideration.
The pre-acquisition ownership interests held by parties related to selling shareholders who continue as key employees, such as family members, should also be considered.
(f) Linkage to the valuation— If the initial consideration transferred at the acquisition date is based on the low end of a range established in the valuation of the acquiree and the contingent formula relates to that valuation approach, that fact may suggest that the contingent payments are additional consideration.
Alternatively, if the contingent payment formula is consistent with prior profit-sharing arrangements, that fact may suggest that the substance of the arrangement is to provide remuneration.
(g) Formula for determining consideration— The formula used to determine the contingent payment may be helpful in assessing the substance of the arrangement.
For example, if a contingent payment is determined on the basis of a multiple of earnings, that might suggest that the obligation is contingent consideration in the business combination and that the formula is intended to establish or verify the fair value of the acquiree.
In contrast, a contingent payment that is a specified percentage of earnings might suggest that the obligation to employees is a profit-sharing arrangement to remunerate employees for services rendered.