Where earn-outs and deferred consideration across borders stands now

A deal that closes is not a deal that pays. For any acquisition where part of the purchase price depends on future performance, the real risk is not the headline number – it is what happens when the parties disagree on how that number was calculated, in which court, and under which law. Cross-border earn-outs sit at exactly that intersection.

Earn-outs and deferred consideration in cross-border transactions are contractual mechanisms under which part of the acquisition price is contingent on the target's post-closing financial or operational performance. In the Greater China corridor, and in any deal where the target, the buyer and the holding vehicle sit in different jurisdictions, the governing-law and dispute-resolution clauses are not boilerplate – they are the structural decision. The position in 2027 is that the governing-instrument choices made at signing determine whether a disappointed buyer or seller can actually enforce an earn-out obligation, whether through the Hong Kong courts, an arbitral tribunal, or a Mainland enforcement proceeding under the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Cap. 645), which came into force on 29 January 2024.

This analysis works through the commercial stakes, the cross-border interface, the comparative read across the principal deal jurisdictions, and our assessment of where the risk currently concentrates.

What is actually at stake: the commercial logic of deferred consideration

Earn-outs exist because buyers and sellers disagree on value. The seller believes tomorrow's earnings justify today's asking price. The buyer refuses to pay for a future it cannot verify. A deferred-consideration mechanism bridges that gap by tying part of the price to outcomes that neither party can yet observe.

That logic is rational. The execution risk is not. Once the business passes to the buyer, the seller loses control of the levers that drive the earn-out metric. Revenue recognition, cost allocation, intercompany pricing, capital expenditure decisions – all of these sit inside the buyer's operating authority after closing. In a single-jurisdiction deal between parties at arm's length, contract drafting disciplines that risk. In a cross-border deal, the question is how the contract is interpreted when a dispute arises, which tribunal applies which interpretive standard, and whether any award or judgment can be enforced where assets actually sit.

The financial exposure is asymmetric. A seller who has transferred ownership of the business depends entirely on the buyer's good-faith performance of the earn-out calculation. A buyer who miscalculates the earn-out mechanism faces a damages claim or an arbitral award at a time when integration is already underway. In our cross-border M&A practice, earn-out disputes are among the most intensely litigated post-closing matters we see – precisely because the stakes are high, the evidence is documentary, and the legal issues rarely resolve on their own.

What governing instruments apply – and why their selection matters more than most advisers acknowledge

No single instrument governs cross-border earn-outs. The mechanism is a creature of the acquisition agreement, which itself sits within a chosen governing law. The enforcement pathway then depends on the forum and on whatever mutual-recognition instruments run between the relevant jurisdictions.

For a deal involving a Hong Kong holding vehicle acquiring a Mainland-operating target, or a BVI or Cayman entity acquiring a Hong Kong company, the instrument choices stack up as follows.

First, the acquisition agreement's governing law. Hong Kong law, English law and New York law are the standard choices for international M&A. Each carries a different interpretive tradition for contingent payment clauses. Hong Kong and English law apply an objective standard of contractual interpretation focused on the reasonable meaning of the language in context. Courts in both traditions have consistently held that earn-out obligations must be read strictly against the plain words of the definition – and that implied obligations on the buyer to conduct the business in a particular way during the earn-out period will be imposed only where the language clearly supports them.

Second, the dispute-resolution clause. A Hong Kong-seated arbitration under the HKIAC Administered Arbitration Rules – the current edition being the 2024 Rules, effective 1 June 2024 – gives the parties access to the interim-measures Arrangement between the Mainland and Hong Kong, which has been in effect since 1 October 2019. That Arrangement allows a party to a Hong Kong-seated arbitration to apply to a Mainland people's court for interim measures, including asset freezing orders, before or during the arbitral proceedings. For a Mainland-operating seller who fears that the buyer may dissipate assets during an earn-out dispute, this is a material structural choice. A dispute-resolution clause that points to foreign court litigation – without an arbitration seat in Hong Kong – does not carry this benefit.

Third, the enforcement instrument. Since 29 January 2024, Cap. 645 allows effective Mainland judgments in civil and commercial matters to be registered with the Court of First Instance of the High Court in Hong Kong, and effective Hong Kong judgments to be used in the Mainland through a corresponding mechanism. Critically, the old exclusive-jurisdiction requirement – which confined the 2008 regime to cases where the parties had granted exclusive jurisdiction to one or the other court – has been replaced by a connection-based test under Cap. 645. This materially widens the population of judgments that can travel across the boundary. But Cap. 645 does not cover arbitral awards; those continue to run via the 1999 Arrangement and the 2020 Supplemental Arrangement, which since 2021 has permitted simultaneous enforcement applications on both sides.

The sequencing consequence is significant. A buyer or seller planning to use Hong Kong courts as the primary forum for an earn-out dispute must ensure that Cap. 645's scope covers the claim type and that no exclusion in Cap. 645 applies. A party planning to arbitrate must consider whether the HKIAC seat provides the interim-measures access needed given where the other side's assets are located.

The sequence above describes the standard instrument position. Your matter turns on the documents, the jurisdictions actually engaged, and the order of steps – which is where the route is won or lost.

For a structured assessment of your earn-out structure and the governing instruments across the relevant jurisdictions, write to us at info@lockhartyip.com.

How the cross-border interface bites: the Hong Kong–Mainland corridor in practice

For deals with a Mainland operating business, the earn-out tension is sharpest between the offshore holding layer and the wai shang touzi qiye (foreign-invested enterprise, the PRC-law entity category governing foreign-owned operating businesses in the Mainland). The earn-out metric typically references the financial results of the Mainland entity. But the Mainland entity's accounts are prepared under Chinese accounting standards, which differ from IFRS or US GAAP in areas that can directly affect earn-out calculations – revenue recognition timing, asset impairment standards, treatment of intercompany transactions.

The governing-law clause of the acquisition agreement does not resolve this mismatch. Even if Hong Kong law governs the contract, the financial statements used to measure earn-out performance are prepared by a Mainland entity under Mainland rules. The earn-out definition in the agreement must either adopt the Mainland accounting standard explicitly, or map the Mainland figures to a different standard through a conversion mechanism. Agreements that leave this ambiguous produce disputes at earn-out measurement time – and those disputes are expensive because they require expert evidence on accounting standards across two legal systems.

A second tension point involves management covenants. In deals where the seller retains management of the Mainland entity during the earn-out period, the buyer typically wants to impose restrictions on the seller's ability to run the business in ways that inflate earn-out metrics at the expense of sustainable performance. In deals where the buyer takes operating control, the seller wants corresponding protections against buyer conduct that suppresses the metrics. Under Mainland law, certain governance acts within a foreign-invested enterprise – including changes to registered capital, the business scope, or the legal representative – require regulatory approval through the PRC market regulator, the State Administration for Market Regulation. Contractual provisions that require the buyer or seller to take or refrain from certain management acts must therefore be calibrated against what is actually permissible and executable under Mainland corporate law, not just under the acquisition agreement's governing law.

This cross-border calibration is one area where counsel on our desk regularly see foreign advisers – acting on the offshore or HQ side of the deal – underestimate the implementation complexity. An earn-out structure that is perfectly coherent under New York or English law may be unenforceable in practice if the Mainland operating entity cannot implement the required governance steps within the applicable regulatory regime.

The comparative read: BVI and Cayman holding structures above a Hong Kong opco

The most common structural pattern in Asia-Pacific M&A places a BVI or Cayman Islands holding entity above a Hong Kong operating company, which in turn holds Mainland or Southeast Asian assets. When an earn-out is structured at the BVI or Cayman level, the acquisition agreement typically governs the transfer of shares in the BVI or Cayman entity. That structure has important consequences for the earn-out mechanics.

Stamp duty is one. A transfer of shares in a BVI or Cayman holding company generally does not attract Hong Kong stamp duty, because the shares transferred are not Hong Kong stock. But where the earn-out takes the form of additional shares in a company that holds Hong Kong-situated assets, the stamp-duty analysis needs to be reviewed on the specific facts. The general position under Hong Kong stamp duty is that a transfer of shares in a non-Hong Kong company holding no Hong Kong-situated assets is outside the charge – but the analysis is fact-sensitive, and parties should verify the current position before acting.

Economic substance is a second issue. Both the BVI and the Cayman Islands have enacted economic-substance regimes. Where the holding entity is the acquirer and the earn-out period extends over several years, the management and control of the holding entity needs to be maintained in a manner consistent with its substance requirements. An earn-out that runs for three years requires the holding entity to continue to exist and function at standard for three years. Counsel on our desk regularly advise on the substance requirements of BVI and Cayman holding entities in the context of extended post-closing periods, where the temptation to reduce corporate maintenance costs can create regulatory exposure.

A third consideration is the interaction between the BVI or Cayman holding level and the Hong Kong company law layer below. Where the earn-out metric is measured at the consolidated level, the Hong Kong operating company's accounts feed into the measurement. The Companies Ordinance (Cap. 622) governs the Hong Kong company, and any requirement in the earn-out documentation for the Hong Kong entity to produce specific accounts or to maintain certain financial structures must be consistent with Cap. 622 and the requirements of the Inland Revenue Department, which issues the first profits tax return for a new Hong Kong company approximately 18 months after incorporation.

For a practitioner's guide to the BVI target acquisition structure through a Hong Kong vehicle, see our guide at Acquiring a BVI Target through a Hong Kong Vehicle.

What foreign counsel and in-house teams frequently miscalculate

The most common structural error we encounter is treating the earn-out as a commercial negotiation question and deferring the legal-architecture questions to a later stage. By the time the headline numbers are agreed, the parties have limited appetite to reopen structural issues. The governing-law and dispute-resolution choices are typically set early in the term sheet phase, often without full analysis of the cross-border enforcement consequences.

A second recurring error involves the earn-out account mechanism – the process by which the buyer prepares a statement of the earn-out metric, gives notice to the seller, and the seller has a defined period to dispute the calculation. Under Hong Kong and English law, the consequences of failing to serve a dispute notice in time can be severe: courts have held in a range of cases that an earn-out statement served by the buyer becomes binding if the seller does not dispute it within the contractual period. Where the seller is a Mainland entity or an individual operating through a Mainland structure, language barriers, time-zone delays, and uncertainty about the applicable dispute deadline can all cause the seller to miss the window. The dispute mechanism must be drafted with the practical realities of a cross-border counterparty in mind.

Third, the definition of the earn-out metric itself is frequently insufficiently precise. Definitions that reference EBITDA, net profit, or revenue without specifying the accounting standard, the treatment of intercompany transactions, and the effect of buyer-directed capital expenditure decisions create interpretive disputes at measurement time. In our cross-border M&A practice, we regard the earn-out definition as the most legally consequential clause in the acquisition agreement – not the representations and warranties or the indemnity schedule, which are often negotiated more carefully.

A scenario from cross-border practice: Mainland seller, Hong Kong buyer, BVI holding layer

An Asia-based strategic buyer – operating through a Hong Kong entity with a BVI parent – acquired a Mainland services business in 2025. The acquisition agreement was governed by Hong Kong law. A two-year earn-out was structured at the BVI holding level, with performance measured by reference to the Mainland entity's adjusted EBITDA. The definition referenced IFRS but the Mainland entity maintained accounts under Chinese accounting standards only. No conversion mechanism was specified.

At the first earn-out measurement date, the buyer produced a statement showing that the earn-out target had not been met, in part because the buyer had allocated substantial central-service costs to the Mainland entity during the earn-out period. The seller disputed both the cost allocation and the accounting standard used. The agreement's dispute mechanism provided for expert determination by an independent accountant, but did not specify whether the accountant was to apply IFRS or Chinese accounting standards.

The seller served a dispute notice and appointed a co-expert. The independent accountant appointed under the clause was unable to proceed without first resolving the accounting-standard question, which the parties referred to the dispute-resolution clause – a Hong Kong-seated HKIAC arbitration. The arbitral tribunal, applying the 2024 HKIAC Rules, ordered interim measures including an injunction preventing further cost allocations during the proceeding, pending the outcome. The matter resolved in a mediated settlement approximately nine months after the dispute notice was served.

The lesson is structural: the failure to specify the accounting standard and the cost-allocation methodology in the earn-out definition created a dispute that the parties had to resolve through arbitration, at considerable cost and delay. The arbitration seat in Hong Kong gave the seller access to the interim-measures mechanism, which materially strengthened its position during the proceeding.

Where the risk concentrates now: our analytical read

The risk in cross-border earn-out structures is not evenly distributed. In our assessment, based on the current state of the governing instruments and the practical experience of our desk, three risk concentrations stand out.

The first is the accounting-standard interface. As Mainland entities increasingly transact with international buyers who apply IFRS or US GAAP, the conversion question is becoming a front-line issue rather than a technical footnote. The risk is asymmetric: a buyer who controls the post-closing accounts is better placed than a seller who must challenge a calculation prepared under standards the seller cannot verify directly. The mitigation is drafting precision and an independent mechanism that specifies the standard to be applied before the dispute arises.

The second is the enforcement sequencing question under Cap. 645. The reciprocal enforcement regime widens the scope of judgments that can travel between Hong Kong and the Mainland. But the regime applies to judgments of Mainland people's courts and of Hong Kong's Court of First Instance – not to arbitral awards, which remain in a separate track. A party designing an earn-out dispute mechanism in 2027 must therefore consciously choose between court litigation (with the benefit of Cap. 645 enforcement) and arbitration (with the benefit of the interim-measures Arrangement and the arbitral-award enforcement Arrangements). These are not equivalent. The choice depends on where assets are located, whether interim measures are likely to be needed, and the nature of the claim.

The third risk is the interaction between earn-out mechanics and the tax position of the holding vehicle. Under the Hong Kong foreign-sourced income exemption (FSIE) regime, which has been in force since 1 January 2023, foreign-sourced income received by a Hong Kong entity may be subject to profits tax unless the requisite economic-substance conditions are met. Where an earn-out payment flows through a Hong Kong entity, the FSIE analysis needs to be conducted before the structure is finalised. For in-scope multinational enterprise groups with consolidated revenue of EUR 750 million or more, the Pillar Two minimum top-up tax, effective for fiscal years beginning on or after 1 January 2025, also applies to the group's effective tax rate on the earn-out income.

If an earlier filing, structure or enforcement attempt in your earn-out matter produced an adverse or stalled result, a second analytical read can identify the strategic error and the routes still open.

To discuss how the earn-out mechanism and dispute route apply to your cross-border position, contact info@lockhartyip.com.

Decision matrix: governing law, forum, and enforcement route

The practical decision for a cross-border earn-out comes down to a sequence of structure choices. The following matrix describes the principal configurations and their trade-offs.

Situation A: Buyer is a Hong Kong entity; seller is a Mainland entity; assets are in the Mainland. The earn-out metric references Mainland financial performance. Governing law: Hong Kong law. Forum: HKIAC arbitration seated in Hong Kong. Interim-measures route: the 2019 Arrangement allows the seller to seek Mainland asset preservation before or during the arbitration. Enforcement of the award: the 1999/2020 Arrangements apply; simultaneous applications permitted since 2021. Tax consideration: profits-tax and FSIE analysis needed at the Hong Kong level. Risk: accounting-standard mismatch in the earn-out definition.

Situation B: Buyer is a BVI or Cayman entity; seller is a Hong Kong entity or individual; the operating business is in Hong Kong. Governing law: Hong Kong or English law. Forum: HKIAC arbitration or Hong Kong Court of First Instance. Enforcement of a Hong Kong judgment against BVI/Cayman assets: requires common-law enforcement; Cap. 645 does not apply. Stamp duty: shares transferred are BVI or Cayman shares – verify the position. Risk: buyer dissipation of BVI assets during the earn-out period; no interim-measures Arrangement for non-Hong Kong arbitration seats or court proceedings.

Situation C: A European or North American buyer acquires a Greater China group through a Singapore or Hong Kong acquisition vehicle; earn-out measured at the consolidated level. Governing law: English law or New York law. Forum: SIAC, HKIAC, or ICC seated in Hong Kong. Tax: Pillar Two applies if the group is in scope; FSIE analysis needed on earn-out flows through Hong Kong. Enforcement: Cap. 645 for any Mainland operating-level judgment; arbitral-award Arrangements for Hong Kong-seated arbitration awards. Risk: multi-level accounting consolidation creates earn-out measurement disputes at the BVI, Hong Kong, and Mainland layers simultaneously.

For a full analysis of the acquisition vehicle options for cross-border M&A through Hong Kong, see our practice page at M&A & Transactions.

The earn-out documentation checklist: what the file must contain

Earn-out files in cross-border transactions should contain, at minimum, the following structural elements. Each absence creates a potential dispute point.

• A precise earn-out definition specifying the financial metric, the accounting standard, the treatment of intercompany transactions, and the effect of buyer-directed decisions on the metric.
• A management-covenant clause specifying what the buyer can and cannot do during the earn-out period, calibrated against what is legally permissible under the governing law of the operating entity.
• An earn-out account mechanism with clear notice periods, a dispute-window specified in calendar days, and a defined consequence for failure to serve a dispute notice in time.
• An independent expert determination clause specifying the standard the expert is to apply and the process for appointing the expert where the parties cannot agree.
• A governing-law clause consistent with the seat of the dispute-resolution mechanism and the enforcement route.
• A dispute-resolution clause specifying arbitration or court jurisdiction, with an explicit analysis of which interim-measures route is available.
• A tax-review memo covering the FSIE and Pillar Two position of the holding entity for earn-out flows.
• Regulatory sign-off on any Mainland management covenants that require action by the foreign-invested enterprise within the PRC regulatory regime.

For a practitioner's account of cross-border security and financing structures in the M&A context, see our matter note at Financing an Acquisition: Cross-Border Security.

Related practices

• Holding Structures – structuring and maintaining cross-border holding vehicles above Greater China assets
• Tax Positions – FSIE regime, Pillar Two exposure, and treaty analysis for cross-border transactions

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• Financing Acquisition Cross Border Security Matter
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This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.