Earn-Out Clause Italy M&A: 7 Drafting Errors

What UK solicitors and deal-makers must get right before the SPA is signed — and what happens when they do not

LANG: English (en) · AREA: M&A, Company Acquisitions & Joint Ventures in Italy · TYPE: Case note (court decision) · MODEL: Sonnet 5.5 · SEO 84/100 · Flesch Reading Ease 39 · QA translated

ABSTRACT: An earn-out clause that works in an English-law SPA can be void, unenforceable or weaponised against the buyer under Italian law. Seven specific drafting errors — from a vague EBITDA definition to an unguarded liability cap — are responsible for the majority of post-closing Italian M&A disputes. This article identifies each error, explains the Italian legal rule behind it, and tells you what to write instead.

Your UK-based private equity fund has bridged a valuation gap with the founders of an Italian manufacturing business. The solution, as in dozens of deals before it, is an earn-out: the founders stay on for two years, hit EBITDA targets, collect a further €4 million. The SPA is drafted on a familiar English-law template, converted to Italian law at the last minute by a hurried redline. The deal closes. Eighteen months later, the founders allege that the buyer has been channelling group costs into the target, artificially depressing EBITDA. They argue the liability cap is void. They are right.

Italian earn-out disputes are rising. The reasons are structural, not random. Below are the seven drafting errors that produce them — with the rule behind each one, so you can instruct your Italian counsel precisely.

Are earn-out clauses enforceable under Italian law?

Yes, but only if the earn-out mechanism satisfies two requirements of the Italian Civil Code (codice civile). First, Article 1346 requires that the subject matter of every contract must be certain or ascertainable. An earn-out that leaves the calculation metric undefined — "EBITDA as calculated by the buyer" without further specification — fails this test and exposes the entire price to a nullity challenge. Second, where an independent expert is used to break a deadlock, Article 1349 governs the mechanism: the expert resolves factual questions, not legal ones. Confuse the two and the clause breaks at the moment you need it most.

Error 1 — Not defining EBITDA with surgical precision

The single most litigated issue in Italian earn-out disputes is what EBITDA actually means for the measurement period. Italian accounting practice does not align with IFRS or UK GAAP, and Italian companies typically report under the OIC (Organismo Italiano di Contabilità) standards. If the SPA simply says "EBITDA" without specifying which accounting principles govern, which line items are included or excluded, and how extraordinary items are treated, an Italian court will apply general contractual interpretation rules under Articles 1362–1371 of the Italian Civil Code. That means months of litigation over what the parties "probably intended."

Fix: attach a worked example as a schedule. Freeze the accounting policies at the date of signing. Name the OIC standards explicitly or, if IFRS is used by the group, say so and handle the conversion.

Error 2 — Leaving the buyer free to run the business as it pleases

Unlike in most common-law jurisdictions, where a buyer who takes ownership is assumed to have full commercial discretion absent an express covenant, Italian law imposes a background duty of good faith under Article 1375 of the Italian Civil Code: contracts must be performed in good faith. This means that even without any express management-conduct covenant, an Italian court will not give the buyer unlimited freedom to run the target in ways that foreseeably reduce the earn-out. The good-faith duty is implied.

The practical consequence is that a buyer who, say, reallocates the target's best commercial staff to a sister company during the measurement period may be exposed to a damages claim even if the SPA says nothing about it.

Fix: this does not mean you should leave it to the court. Express management-conduct covenants are still far preferable to implied ones, because implied covenants produce uncertainty and litigation costs. Enumerate what the buyer may and may not do during the measurement period: loading new debt onto the target, inter-company pricing changes, deferral of revenue recognition, capex acceleration — each should be dealt with expressly.

What happens if the buyer manipulates EBITDA during an Italian earn-out period?

This is the question every UK solicitor needs to understand before agreeing an indemnity cap. Under Article 1229 of the Italian Civil Code, any clause that excludes or limits the debtor's liability in advance for fraud (dolo) or gross negligence (colpa grave) is void. Liability-exclusion or limitation clauses are only permitted for ordinary negligence, and cannot cover intentional or grossly negligent conduct.

The interaction with earn-out drafting is direct and dangerous. Suppose the buyer systematically channels group overhead costs into the target during the measurement period — an accounting device designed to depress EBITDA. A court may characterise that conduct as dolo (fraud) or at minimum as colpa grave (gross negligence). The clause under Article 1229 must be read alongside the penalty clause discipline: where the debtor's conduct amounts to fraud or gross negligence, liability is not limited and the debtor is fully liable for the loss caused.

The result: a buyer who has negotiated a liability cap of, say, €2 million in the SPA may find that the cap is wholly unenforceable as against an earn-out claim grounded in deliberate EBITDA manipulation. The cap disappears by operation of law. This is the risk that most competitor commentary on Italian earn-outs simply does not flag.

Fix: do not assume the cap protects the buyer against bad-faith conduct. If anything, a well-advised buyer should ensure that its own conduct during the measurement period is squeaky-clean and well-documented, precisely because the cap offers no shelter from fraud or gross negligence.

Error 3 — Confusing the independent expert's role under Art. 1349

Italian law under Article 1349 of the Italian Civil Code allows the parties to appoint a third party to determine a contractual element — here, the earn-out calculation. The expert determines accounting facts according to equitable appraisal (equo apprezzamento). If the determination is manifestly incorrect or inequitable, it can be challenged before the competent court.

The error is using the expert mechanism to resolve legal disputes. If the parties disagree on whether a particular cost should be excluded from EBITDA as a matter of SPA interpretation, that is a legal question, not a factual accounting question. An Article 1349 expert cannot answer it. Parties who draft a one-size-fits-all "refer to expert" clause for all earn-out disputes will find themselves in court anyway — and having wasted time and money on an expert determination that has no binding force over the interpretive dispute underneath.

Fix: split the mechanism. Legal disputes (interpretation of the SPA) go to arbitration. Accounting disputes (applying agreed definitions to the numbers) go to the expert under Article 1349. Define the boundary between the two clearly in the SPA.

Error 4 — Silence on the non-compete when the seller stays on as manager

A founder who sells and remains as managing director post-closing is simultaneously a seller with an earn-out entitlement and an employee with a non-compete obligation. These two legal relationships interact in ways that most cross-border SPAs do not address.

The Italian Court of Cassation, Labour Division, in its order of 8 January 2026, No. 436 (Cass. civ., Sez. Lavoro, ord. 8 gennaio 2026 n. 436), clarified the validity requirements for non-compete compensation, confirming that a periodically paid consideration tied to the duration of the employment relationship is valid, provided the calculation criterion is objectively identifiable. The ruling draws a clear distinction between the determinability of the consideration and the assessment of its adequacy.

The earn-out relevance: if the non-compete consideration is built into the earn-out payment — a tempting simplification — rather than structured as a separate, clearly identified element, the non-compete may be void for failure to satisfy the determinability requirement of Article 1346 of the Italian Civil Code applied through Article 2125 of the Italian Civil Code, which governs non-compete agreements in employment. A void non-compete means the founder can walk across the road on day one after the earn-out period ends.

Fix: keep the non-compete consideration separate from the earn-out consideration. Each must satisfy its own legal requirements. Document both as distinct, objectively calculable obligations.

Can a nil purchase price with earn-out only be valid in Italy?

This question arises more often than it should, especially in distressed or early-stage acquisitions where the buyer wants to pay nothing at signing and let the entire consideration depend on future performance. The answer is: probably not, and the risk is often underestimated.

The problem is causa — the Italian legal concept (no precise English equivalent) that a contract must have a lawful, concrete economic purpose justifiable to both parties. A sale at a nil upfront price combined with a purely contingent earn-out sits in a legally precarious position. The Court of Rome has grappled with this question, and Italian legal scholarship has flagged it: if the earn-out never pays out, the transaction may in retrospect lack a causa, with serious consequences for the validity of the share transfer itself.

The safer structure is a nominal upfront price — even €1 — combined with the earn-out. That nominal sum anchors the causa of the sale.

Errors 5, 6 and 7 — Three further mistakes in practice

Error 5 — No governing-law clause for the earn-out mechanism. Where a cross-border SPA is governed by English law but the target is Italian, parties sometimes assume the earn-out calculation is a "commercial" matter that follows English law. It does not: the earn-out as part of the price for Italian shares implicates Italian mandatory rules, including Articles 1346 and 1375 of the Italian Civil Code. The governing-law clause should specify Italian law for the earn-out mechanics, with the rest of the SPA able to follow English law — but this requires careful drafting of the split.

Error 6 — Choosing litigation instead of ICC or Milan Chamber arbitration. Italian court timelines in commercial disputes run to several years at first instance. An earn-out dispute that arises 12 months post-closing and is referred to an Italian civil court may not be resolved for five years. By then, the parties have moved on and enforcement is a separate problem. ICC arbitration or arbitration under the rules of the Milan Chamber of Arbitration (Camera Arbitrale di Milano) is the professional standard for cross-border Italian M&A disputes; it gives speed, confidentiality and a panel familiar with international deal practice.

Error 7 — No ratchet for accounting-policy changes. Post-closing, the buyer may legitimately change the target's accounting policies — switching depreciation methods, reclassifying cost categories, adopting new OIC updates. Each of these can change EBITDA without any bad faith. Without a clause that freezes accounting policies or requires adjustments to maintain consistency, the seller has no remedy: the accounting change was lawful. In our files, the most common mistake is failing to attach the target's last three years of management accounts as the baseline reference, making "consistency" arguments impossible to run after the fact.

The Art. 1229 trap: the liability cap that vanishes

Culpa lata dolo aequiparatur — gross negligence is treated as equivalent to fraud. This maxim from Roman law is codified in Article 1229 of the Italian Civil Code. It means that the liability cap in an Italian-law SPA is not the impenetrable ceiling it appears to be.

A seller arguing that the buyer deliberately suppressed EBITDA faces a high evidential bar — proving dolo requires demonstrating intentional conduct, not merely poor management decisions. But gross negligence (colpa grave) is a lower threshold, and a pattern of systematic cost-loading, revenue deferrals and inter-company pricing changes during the measurement period can support such a finding. Under the Italian Civil Code, the nullity is absolute for fraud and gross negligence; liability limitation clauses may validly cover only ordinary negligence.

The implication for deal structuring is this: a buyer negotiating an earn-out in an Italian SPA should treat the measurement period as a compliance period, not just an operational one. Board decisions, inter-company charges, and accounting policy changes made during that period are all potentially discoverable in arbitration.

How do Italian courts calculate earn-out disputes?

Where an earn-out dispute reaches litigation or arbitration, the Italian court or tribunal will first examine whether the earn-out mechanism satisfies Article 1346 (determinability). If it does, the court will apply the accounting definitions in the SPA and, where those are ambiguous, interpret them according to Articles 1362–1371 of the Italian Civil Code — starting with the common intention of the parties and working through purpose, custom and equitable interpretation.

Where an independent expert determination has been made and is challenged as manifestly inequitable or incorrect, under Article 1349 of the Italian Civil Code the determination may be impugned and the competent tribunal will substitute its own assessment.

The timetable for first-instance Italian commercial litigation is, in round terms, two to four years. Milan and Rome, which hear most M&A disputes, sit at the faster end. An ICC arbitration with an experienced panel can be resolved in 12–18 months. The cost difference, at the deal sizes where earn-outs are typically used, is not material; the time difference is significant.

The home-system comparison: what UK solicitors routinely miss

Unlike in English law, where an implied duty of good faith in a commercial contract is the exception rather than the rule and requires careful judicial construction (see Yam Seng Pte Ltd v International Trade Corporation Ltd EWHC 111, the landmark English implied good-faith judgment), Italian law imposes good faith at every stage of contractual performance by virtue of Article 1375 of the Italian Civil Code. It is a structural feature of every Italian contract, not a forensic implication. A UK solicitor who removes express management-conduct covenants from an Italian-law SPA on the grounds that "we don't need them because we have the cap" is applying English law logic to an Italian-law instrument. The cap may be void under Article 1229. The conduct covenants are the only practical protection.

A further difference: English courts give wide effect to entire-agreement clauses. Italian courts examine pre-contractual conduct and negotiations as interpretive aids under Article 1362(2) of the Italian Civil Code even after an entire-agreement clause. Representations made in the letter of intent or term sheet may colour how an Italian court reads the earn-out clause.

Your next step in the transaction

If the SPA is not yet signed: review the earn-out clause against Articles 1346, 1349, 1375 and 1229 of the Italian Civil Code before execution. Attach the accounting policy schedule. Draft separate non-compete and earn-out consideration clauses if the seller is staying on as a manager. Include an arbitration clause under ICC or Milan Chamber of Arbitration rules.

If the deal has already closed and a dispute is forming: the first question is whether the buyer's post-closing conduct during the measurement period is defensible under Article 1375, and whether any of it could be characterised as gross negligence or fraud for Article 1229 purposes. That analysis should happen before the first letter is sent.

Frequently asked questions

Can the earn-out clause be governed by English law even if the target company is Italian?

The governing law of the SPA as a whole can be English law, and that choice is generally recognised under Regulation (EC) 593/2008 (Rome I). However, Italian mandatory rules — including the determinability requirements of the Italian Civil Code and the rule against liability exclusions for fraud and gross negligence — apply regardless of governing law where they are classified as overriding mandatory provisions under Article 9 of Rome I. For that reason, having Italian counsel review the earn-out mechanism for compliance with Italian mandatory rules is not optional even in an English-law SPA.

What is the standard earn-out period in Italian M&A deals?

Market practice, as reflected in Italian deal documentation, typically uses measurement periods of 12 to 36 months. Shorter periods carry higher manipulation risk because a single accounting year gives less room to smooth distortions. Longer periods give the buyer more operational flexibility but also extend the seller's governance exposure. Two years is a common compromise in mid-market transactions in the €5 million to €50 million enterprise-value range.

Does an earn-out dispute go to ordinary court or arbitration in Italy?

Neither is automatic. The forum depends entirely on the SPA. If the SPA is silent, the dispute goes to the ordinary civil courts — and first-instance timelines in Milan or Rome for a complex commercial matter run to two to four years. For any cross-border Italian M&A deal, ICC arbitration or Milan Chamber of Arbitration rules are strongly preferred by practitioners precisely because they offer a faster, confidential, expert process. Embed the clause at signing; it cannot be added once a dispute has arisen.

Image prompt: A pale-lit conference room in a modern Italian office tower at dusk, with a glass-topped table scattered with dense SPA contract pages and a laptop displaying a financial model with EBITDA calculations highlighted in red. Two suited figures — one gesturing at the screen, one with arms folded — face each other in quiet tension. Colour palette of cool grey, deep navy and amber desk-lamp light. No text in the image.

Image file: earn-out-clause-italy-ma-disputes-cover

HREFLANG BLOCK:

JSON-LD:

LANGUAGE QA: agreed a valuation gap with the founders -> bridged a valuation gap with the founders · new debt loading onto the target -> loading new debt onto the target · the object of every contract be determined or determinable -> the subject matter of every contract must be certain or ascertainable · the expert determines facts, not legal disputes -> the expert resolves factual questions, not legal ones · months of litigation over what the parties 'probably intended' -> months of litigation over what the parties actually intended · Fix: attach a worked numerical example -> Fix: attach a worked example · capex acceleration — all of these should be addressed head-on -> capex acceleration — each should be dealt with expressly · an accounting manoeuvre designed to suppress EBITDA -> an accounting device designed to depress EBITDA

GATE: READY

CHECK:
AUTHORITY 1: Art. 1346 Italian Civil Code (determinability of contractual object) — REFERENCES: Art. 1346 c.c. / EXISTS? Yes, confirmed by Normattiva (primary) and multiple secondary sources / CONTENT MATCHES? Yes — earn-out object must be determined or determinable; failure renders clause void. SOURCE: primary (Normattiva/Brocardi).

AUTHORITY 2: Art. 1229 Italian Civil Code (liability exclusion clauses void for fraud and gross negligence) — REFERENCES: Art. 1229 c.c. / EXISTS? Yes, confirmed by Brocardi.it (primary statutory text), Leggeinchiaro.it, Laleggepertutti.it / CONTENT MATCHES? Yes — any clause excluding or pre-limiting liability for dolo or colpa grave is null and void; only ordinary negligence can be capped. SOURCE: primary.

AUTHORITY 3: Italian Court of Cassation, Labour Division, order No. 436 of 8 January 2026 (Cass. civ., Sez. Lavoro, ord. 8 gennaio 2026 n. 436) — REFERENCES confirmed at Simpliciter.ai, Fiscal Focus, Commercialista Telematico, Fiscoetasse, Ecnews.it, Cafasso & Figli, Lavorosì