Not every share sale can fix its price on signing day. When the seller insists the company will grow strongly while the buyer trusts only audited figures, that valuation gap is usually bridged by two contract mechanisms: the earn-out — part of the price paid later, depending on the company’s actual post-deal performance — and conditions precedent (CPs) — the list of events that must occur for the transaction to complete. This article explains both mechanisms, how they interact with the legal effectiveness of share transfers in Vietnam, and how tax treats earn-out price paid in instalments.
1. What an earn-out is and when to use one
An earn-out is an agreement under which part of the share purchase price is not fixed at signing, but computed and paid later based on the enterprise’s financial indicators over a post-deal period (usually 1–3 years): revenue, EBITDA, net profit, or operating milestones (signing a key contract, obtaining a licence, launching a product). The mechanism fits three situations: the enterprise has high forecast growth not yet proven by historical figures (the seller wants paying for the future, the buyer only when the future happens); part of the enterprise’s value depends on the seller staying on to manage through the transition (the earn-out ties the seller’s income to proper handover and operations in the transition period); and where the parties cannot agree a valuation but both want the deal done now. The earn-out’s downside must be faced squarely: it prolongs the financial relationship between seller and buyer for years after ownership has moved, and it creates a reverse incentive — post-deal the enterprise is controlled by the buyer, while the seller depends on how the buyer operates and books revenue/expenses to compute the earn-out metric. A good earn-out clause therefore always comes with three things: a self-contained metric formula (the applicable accounting standard, adjustments excluding extraordinary transactions and transactions with the buyer’s related parties), the seller’s information access and books-inspection rights during the earn-out period, and an independent-audit dispute mechanism for figure disagreements (expert determination) before court/arbitration.
2. Conditions precedent: the usual catalogue in Vietnamese share transfers
Conditions precedent are the events a contract lists that must be satisfied (or waived by the entitled party) before a deadline (the long-stop date) for the completion obligation to arise — the conditional civil transaction regime recognised by the Civil Code 91/2015. In share transfers at Vietnamese enterprises, the typical CP catalogue includes: investment registration authority approval of the foreign investor’s share/capital acquisition where the deal falls in a market-access-conditioned category (Law on Investment 143/2025/QH15); internal approvals of both sides (General Meeting/Board per each company’s charter) and — for founding shareholders’ shares in the first 3 years — the target General Meeting’s approval under Article 119(2) of the Law on Enterprises 59/2020/QH14; waivers of pre-emption/refusal rights of existing shareholders or members under the charter; lender consent where the target’s credit agreements carry a change-of-control clause; accuracy of representations and warranties at completion; no material adverse change in the target’s finances or legal position since signing; and completion of the documentation steps (shareholder register entry, change registration, investment certificate amendment) at closing. Each CP must state clearly: which party is entitled to it (and may waive it), the satisfaction deadline, and the parties’ cooperation duties to make the CP occur.
3. If a condition precedent fails, what happens to the contract?
A conditional contract does not “auto-cancel” vaguely — its fate is predetermined in the CP clause itself, and a well-drafted contract anticipates three scenarios. Scenario 1 — the CP is waived: the CP-entitled party (usually the buyer for buyer-protective CPs) may waive a specific CP and proceed to closing without it occurring — but note that legally mandatory CPs (state capital acquisition approval where the category requires it) cannot be waived by agreement, because state recognition is a condition of the deal’s register entry/registration. Scenario 2 — the long-stop date passes with the CP unsatisfied: the party not at fault for the CP’s failure may terminate the contract under the termination clause, the parties return what they received (deposits, documents) per the agreed restitution mechanism, and neither owes the other the unpaid purchase price — the deal dies before ownership moves. Scenario 3 — the CP fails due to a party’s fault (for example the seller withholds due diligence files, the buyer never files for approval): the faulty party bears liability under the penalty/damages clauses and the Civil Code’s general principle on cooperation duties in conditional transactions — a party deliberately preventing a condition from occurring is treated as if the condition had occurred, under Article 120 of the Civil Code 91/2015. The cardinal distinction to remember: before closing, the shares have not moved — the seller remains the shareholder with the company’s full rights and risks; earn-outs and CPs must never be used to “hang” a registered deal with an unclear price, because the shareholder register records ownership, not pricing mechanisms.
4. Tax on earn-out pricing: income is determined per amount actually received
Vietnam’s capital transfer tax is computed on the transaction’s actual income, and the earn-out structure poses a timing problem: at signing, part of the price is unknown. The treatment consistent with per-transaction declaration and the actual-income principle is: the fixed price portion is declared and taxed at completion like an ordinary transfer (cost basis deducted in this transaction); earn-out amounts arising later are declared and taxed additionally when the earn-out amount is determined and paid in each instalment — at each instalment, the amount actually received is added to the original transaction’s transfer price to determine the incremental taxable income, with additional withholding through the payer/related organisation per the seller’s category (resident individuals 20% PIT on income, organisations 20% CIT under the Law on Personal Income Tax 109/2025/QH15 and the Law on Corporate Income Tax 67/2025/QH15). Three practical drafting consequences: the agreement must state the price structure — fixed portion and earn-out portion with its formula — so the initial return reflects the deal’s true nature instead of a nominal price figure; the tax clause must allocate the earn-out supplementary declaration duty (seller declares, or buyer withholds at each payment instalment) and the accompanying documents; and the parties should not expect the tax authority to accept “deferring all tax until the earn-out finalises” — the fixed portion that transferred ownership must be declared at closing. Designed correctly in the agreement, an earn-out is a healthy valuation risk-sharing tool; designed vaguely on tax, it becomes an assessment waiting in the next finalisation cycle.
What is the earn-out mechanism in a share sale agreement, and when should it be used?
An earn-out is an agreement that part of the share purchase price is computed and paid later, based on the enterprise’s actual financial indicators over a post-deal period (revenue, EBITDA, profit over 1–3 years). Use it where seller and buyer diverge on growth expectations, where enterprise value depends on the seller staying to manage the transition, or where both want the deal done now despite an unsettled valuation. A good earn-out clause defines the metric self-containedly, gives the seller access and books-inspection rights, and sets an independent audit mechanism for figure disputes.
What do conditions precedent in a transfer agreement usually include?
Typical conditions precedent (CPs) in Vietnamese share transfers: investment registration authority approval of the share/capital acquisition in the conditioned category (Law on Investment 143/2025/QH15); internal approvals of both sides and of the target General Meeting for founders’ shares in the first 3 years (Article 119(2) of the Law on Enterprises 59/2020/QH14); charter pre-emption waivers; lender consent where change-of-control clauses exist; accuracy of representations and warranties at completion; and no material adverse change since signing.
If a condition precedent does not occur, how is the contract handled — can it be cancelled?
Per the CP clause itself: the entitled party may waive CPs that are not legally mandatory and still complete; if the long-stop date passes with a CP unsatisfied, the non-faulty party may terminate the contract, the parties return what they received, and since the shares never moved no share restitution arises. If the CP fails because a party deliberately prevented it, Article 120 of the Civil Code 91/2015 treats the condition as having occurred and the faulty party bears damages/penalties per the agreement.
How is tax computed when the price is paid gradually under an earn-out?
Capital transfer tax is computed on actual income: the fixed price portion is declared and taxed at completion as usual; each earn-out amount is declared and taxed additionally when determined and paid in its instalment, adding the amount actually received to the original transaction’s transfer price to compute the incremental income, with additional withholding through the payer per the seller’s category (resident individuals: 20% PIT on income — Law 109/2025; organisations: 20% CIT — Law 67/2025). The agreement must state the price structure clearly and allocate this supplementary declaration duty.
