The two forum reality
UAE M&A transactions can land in three potential dispute fora: DIFC Courts (English-style common law, English precedent persuasive), ADGM Courts (English common law applied directly, English precedent persuasive), and the UAE federal/local courts (Arabic-language civil-law system applying the UAE Civil Code, Commercial Transactions Law and Companies Law).
Most cross-border PE and trade-sale transactions in the UAE choose DIFC or ADGM courts (or DIFC-LCIA / ADGM arbitration) for exactly this reason: predictability of common-law enforcement. But many domestic deals — especially family-business sales — remain under federal jurisdiction. Earnout and MAC drafting must work in whichever forum you have chosen.
Earnouts in the UAE
The legal foundation
An earnout is a deferred component of purchase consideration conditional on post-completion performance — typically EBITDA or revenue targets over a defined post-completion period. Under UAE Civil Code Article 154, a contractual obligation can be conditional on a future uncertain event, and the parties can agree the formula. Articles 246 (good faith) and 318 (no unjust enrichment) overlay the conditional obligation.
The drafting blocks that survive
| Earnout element | Best practice in UAE |
|---|---|
| Trigger metric | Audited EBITDA / Revenue from the target audited financial statements, with defined accounting policies appended as a schedule |
| Calculation period | 1-3 fiscal years post-completion, with quarterly progress reporting |
| Independent verification | Required — Big-4 or agreed mid-tier accountant verifies the earnout calculation |
| Dispute resolution | Independent Expert Determination by named accountant, decision final and binding subject to manifest error |
| Conduct-of-business covenant | Required — buyer must operate the target in the ordinary course and not take steps that frustrate the earnout |
| Cap and floor | Cap on maximum payable; floor at zero or at a defined threshold below which no payment |
| Acceleration on default | Earnout accelerated to maximum on buyer breach of conduct-of-business covenant — strong deterrent |
The "frustration of earnout" problem
The most litigated earnout fact pattern in any jurisdiction: buyer takes control, then makes decisions that crush the metric — folds the target into a wider business, transfers customers, increases central allocations. The selling shareholders cry foul. The cure: an explicit conduct-of-business covenant requiring the buyer to operate the target on a standalone basis during the earnout period, with specific prohibitions on inter-company allocations, customer transfers, change in product mix, and so on. Pair with an acceleration clause that pays the full earnout if the covenant is breached.
MAC clauses in the UAE
What a MAC clause does
A MAC ("material adverse change") clause permits the buyer to terminate the SPA or refuse to complete if, between signing and completion, an adverse event materially affects the target. It is the principal escape route from the deal for a buyer.
The DIFC/ADGM approach
DIFC and ADGM courts apply MAC clauses on English-law lines. The settled English position (from Grupo Hotelero Urvasco and Akorn v Fresenius) is that MAC requires: (i) the change must be substantial — typically a multi-year impact on earnings power, not a short-term blip; (ii) the change must not be merely an outturn of risks already in the target's business; (iii) buyer carries the burden of proof on a high evidentiary standard.
The onshore approach
UAE federal courts apply MAC clauses through the lens of Civil Code Article 248 (frustration / impossibility) and Article 246 (good faith). The clauses are enforceable but the federal court will look hard at:
- Whether the MAC definition is sufficiently specific (objective triggers preferred over subjective standards).
- Whether the buyer has acted in good faith — calling a MAC opportunistically to renegotiate price is exposed.
- Whether the change is genuinely material on the target's long-term value, not just a short-term hit.
Drafting techniques
Five drafting choices that survive across UAE fora:
- Objective threshold MAC. Define MAC as a quantified threshold — e.g. "any event or circumstance resulting in a reduction of forecast Run-Rate EBITDA by more than 25%". Numbers are testable.
- Carve-out market-wide events. Exclude general market downturns, industry-wide developments, geopolitical events, pandemics, regulatory changes affecting the industry — so the buyer cannot claim a MAC on macro factors.
- Specific events list. Include a list of specific MAC triggers (loss of a key customer accounting for >30% of revenue; loss of a key licence; criminal conviction of a key person; uninsured loss above a threshold). Removes subjectivity.
- Cure period. Build in a 30-60 day cure period during which the seller can remediate the MAC.
- Independent expert. If the parties disagree on whether a MAC has occurred, an independent expert (often the SPA's nominated accountant or a senior commercial barrister) determines on the contemporaneous evidence.
The interaction with completion accounts
Both earnouts and MACs benefit from disciplined completion-accounts mechanics. A robust completion-accounts process — with defined accounting policies, a working-capital adjustment, and a price-allocation methodology — gives both sides a documentary trail that supports earnout calculation and MAC determination.
Where Neo Legal adds value
We have drafted, negotiated and litigated earnout and MAC provisions across DIFC, ADGM and UAE-onshore deals since 2016. We bring the English drafting tradition (Harly trained in Australia, with extensive English-precedent practice) into UAE forums that expect English-style precision but require Civil Code awareness in the onshore overlay.
