EARN-OUTS AND DEFERRED CONSIDERATION IN KUWAIT M&A
Kuwaiti law has never stood in the way of the earn-out. It is the market practice that has simply been slower to embrace it. The Civil Code's conditional-obligation regime, the prohibition on interest, and a layered set of CMA controls each impose real structuring discipline on any earn-out intended to survive enforcement scrutiny. In our experience, earn-outs and deferred consideration remain the exception in Kuwaiti M&A Practice. That pattern reflects market convention rather than any prohibition under Kuwaiti law. For counsel advising on the next Kuwaiti-law share purchase agreement, understanding where these boundaries actually sit is a genuine point of differentiation. The Statutory Foundation: Price, Conditions, and the Sole-Will Limit Kuwaiti law does not require a share sale price to be fixed at signing. Article (459) of the Civil Code (Decree-Law No. 67 of 1980, as amended) allows the price to be determined by reference to valid, objective bases, including delegation to a third party; if that third party fails to fix the price, it defaults to fair market value. This is the doctrinal foundation for a Kuwaiti-law earn-out. The deferred amount must rest on a clear, external basis, not on one party's unilateral say-so. Articles (323 to 328) set the relevant boundary. An earn-out is essentially a suspensive condition: part of the purchase price that only becomes payable once a future, uncertain event happens. Article 325 sets the key limit on this: if that event is simply "whatever the obligor decides," no obligation ever arises at all. So, an earn-out payable "if the buyer decides the target performed satisfactory" fails, it depends entirely on the buyer's own say-so. However, one payable on audited EBITDA (i.e. earnings before interest, taxes, depreciation, and amortization) or revenue crossing a set threshold does not fail, because the trigger is objective and outside the buyer's control. That difference is what separates a payment obligation the seller can actually enforce from one that legally never existed in the first place. No Interest, and a Statutory Good-Faith Backstop Kuwaiti law prohibits interest, and any advantage granted to a creditor that is not matched by genuine value delivered is liable to be re-characterized as interest and struck down; deferred consideration should not carry an express interest coupon, with any true cost of deferral reflected in the headline price itself. However, this does not prevent parties from agreeing on the “commercial value” of a deferred payment structure as part of the overall transaction economics. Moreover, Kuwaiti law also supplies, by statute, much of what common-law earn-outs achieve through negotiated operating covenants. Article 197 of the Civil Code imposes a mandatory duty of good faith in contractual performance, and Article 30 codifies the prohibition on abuse of rights; neither is excludable by agreement. Together they give a seller a statutory basis, independent of the drafting, to challenge a buyer who manipulates results to suppress payment, though well-advised counsel will still draft explicit operating covenants rather than rely on the implied protection alone. Listed Targets: A Layered Set of CMA Controls For Boursa Kuwait-listed targets, Module Nine (M&A - Book) of the CMA's Executive Bylaws constrains deferred consideration on several fronts, not only through the cash-only requirement that attaches once the mandatory-offer threshold is crossed. First, disclosure obligations bear directly on how a deferred element must be presented. For mergers, item (8) of Article 2-6 requires the draft merger contract to state the consideration to be received by partners or shareholders, and the bases followed in determining it , a direct textual anchor for disclosing an earn-out's formula, not merely its target value. The acquisition-offer regime is less explicit: Article 3-3-1 requires disclosure of the total amount of the submitted offer among a twelve-item list, without a dedicated bases-of-determination requirement of its own. Counsel should nonetheless disclose an earn-out's calculation method in an acquisition offer document as a matter of prudent practice, even where Article 3-3-1 does not compel it as precisely as Article 2-6(8) does for mergers. Second, the equal-treatment principle in Article 3-1-2 requires the offeror to treat all shareholders within each separate category of shares equally and prohibits sharing information with some shareholders that is not made available to the rest during the offer period. Article 3-1-14 reinforces this: an offeror who buys shares above the offer price during the offer period must raise its own offer to match the highest price paid. A deferred payment made available only to major shareholders or incumbent management risks operating as an undisclosed price increase to a favored subset of sellers , precisely the outcome these two provisions are designed to prevent. Performance-linked payments to continuing management are accordingly best structured, and disclosed, as separate post-completion arrangements rather than as consideration for the shares. Third, the investment-advisor mechanism supplies an institutional check, even though it is not tailored to deferred consideration specifically. Article 3-1-5 requires the investment advisor to any party to the offer to be independent and free of conflicts, and Article 3-3-10 requires the offeree board's response to the Authority to incorporate that advisor's opinion before it goes to shareholders. Module Nine does not prescribe a bespoke fairness opinion for an earn-out or deferred element, but a genuinely independent advisor reviewing the offer as a whole is, in practice, the closest the Bylaws come to testing whether a deferred component is fair and its targets realistic. Fourth, and most restrictively, a mandatory acquisition offer must be a cash offer for the highest price under Article 3-5-2, once a person's ownership exceeds the 30% threshold that triggers the mandatory-offer obligation under Article 3-5-1, and a partial acquisition offer is subject to an analogous cash requirement under Article 4-1-4. The constraint runs deeper than price form: an earn-out is, in substance, a condition attached to part of the price, and the mandatory-offer regime leaves materially less room for conditional consideration than a voluntary offer under Article 3-8 (Non-Cash Voluntary Acquisition) of the Bylaws, or a private transaction that does not cross the mandatory-offer threshold. The CMA amends its Bylaws from time to time. As with any regulatory citation, the provisions referenced above should be checked against the version of Module Nine, and any subsequent CMA decisions, in force on the relevant transaction date. Structuring for Enforceability Three principal drafting disciplines should be observed. First, anchor the earn-out to an externally verifiable metric with independent-expert determination of disputes, mirroring Article 459's third-party pricing model. The earn-out consideration should be tied to an objectively measurable metric that is capable of independent verification. Second, any deferred consideration should preferably be secured through an escrow arrangement or contractual holdback, rather than documented by way of an interest-bearing promissory note or other debt instrument. Third, where the seller remains in a relationship with the company post-completion, any payments attributable to or arising from that continuing relationship should be documented separately and distinctly from the sale consideration. This separation is particularly important because applicable local-law rules may otherwise result in the earn-out payments being subjected to an unintended legal characterization or regulatory analysis. Dispute Resolution Deserves Equal Care Dispute-resolution provisions deserve particular attention because earn-out disputes often combine legal, accounting and valuation issues. Kuwait is a contracting state to the New York Convention, and foreign arbitral awards may be recognized and enforced in Kuwait subject to the applicable statutory and Convention requirements, including the relevant procedural conditions and mandatory public-policy considerations. Arbitration may nevertheless offer practical advantages for a disputed earn-out, particularly where the dispute involves confidential financial information, specialist accounting evidence, or a cross-border transaction , and, in the absence of published Kuwaiti case law addressing earn-outs specifically, it is generally the more predictable forum for a contested metric. A useful approach may be to distinguish between two categories of dispute: • disputes concerning the application of an agreed accounting methodology or the calculation of the relevant metric, which may be referred initially to an independent expert; and • wider disputes concerning contractual interpretation, alleged breach of operational covenants, or the validity of the earn-out provisions, which may be referred to arbitration or the agreed court forum. This division can materially reduce the scope and cost of a subsequent dispute. For cross-border transactions, the governing-law and dispute-resolution analysis should form part of the initial structuring exercise rather than being addressed only at the final stage of negotiation. The enforceability of the pricing mechanism, the location of relevant assets and parties, and the likely place of enforcement should all be considered together. Market practice bears this out: mid-to-upper-tier transactions involving a foreign party frequently opt for foreign governing law and arbitration altogether, with English law and London-seated arbitration among the more frequent choices, reserving Kuwaiti law mainly for purely domestic deals , a pattern drawn from deal practice rather than any published survey, and one counsel should treat as a starting point for negotiation rather than a rule. CONCLUSION Earn-out and deferred-consideration provisions though being in rise, they remain, on current market practice, relatively infrequent in Kuwaiti M&A. They occasionally surface to bridge valuation gaps or to account for forward-looking earnings after major disruptions, but completion accounts and locked-box pricing remain the default for many transactions. That is a market observation, not a legal constraint, and it does not mean that deferred consideration lacks a place in Kuwaiti dealmaking. For the transaction where a genuine valuation gap cannot otherwise be bridged, Kuwaiti law and CMA practice together provide a coherent, if unforgiving, framework for making deferred consideration work , provided the mechanism is built on objective metrics, expert determination, full disclosure of its basis, and a clear-eyed view of where the boundaries lie.