Contingent consideration in schemes: bridging the valuation gap

1. The valuation gap

Where a target’s value turns on future events like the execution of a pending contract, the resolution of pending litigation or a regulatory milestone, a bidder and a target may well reach an impasse on the target's valuation.

Contingent consideration can break the deadlock: the bidder will pay a price for the business as it stands today, while the target's shareholders will have a potential right to receive further consideration depending on the outcome of specified future events.

2. The structuring menu

Contingent consideration mechanisms such as earn-outs are of course a well-known feature of unregulated corporate transactions. While they may be less common in listed company deals, the Australian public M&A market has seen a variety of contingent consideration structures successfully employed over the years, including:

The above table setting out more recent examples of contingent consideration structures focuses on the (positive) outcomes of future events, but contingent consideration in Australian schemes has also in the past been structured to provide downside price protection to target shareholders.

For example, in Wesfarmers’ ~$20 billion acquisition of Coles Group in 2007 (the largest Australian scheme at the time), Wesfarmers issued ASX-quoted ‘partially protected shares’ designed to compensate target shareholders if the two-month VWAP of Wesfarmers shares fell below $45.

Similarly, four years later, Yancoal adopted a similar approach in its acquisition of Gloucester Coal, issuing ASX-quoted redeemable preference shares with a right to additional scrip or cash (up to $3.00 per share) if Yancoal’s market price fell below $6.96 within 18 months of implementation.

3. The latest views from Australian courts

In March 2026, Justice Neskovcin of the Federal Court made orders convening a scheme meeting for the proposed acquisition by way of scheme of Cannatrek Limited, an unlisted company, by the ASX-listed Little Green Pharma Limited. The consideration comprised: (1) ordinary shares in Little Green Pharma; and (2) contingent value shares, which were convertible into ordinary shares at a ratio based on a contingent amount (being the difference between certain liabilities of each party).

Similarly, in March 2026, Justice Black of the Supreme Court of New South Wales made orders convening the scheme meeting for the proposed acquisition by way of scheme of Blue Ocean Monitoring Limited, also an unlisted company, by Helsing. The scheme contemplated a base cash consideration of $3.00 per share, but also earn-out consideration payable if certain government defence contracts were entered into by Helsing – specifically:

• up to an additional $0.80 per share upon entry into a 'Scoping Contract' by 30 June 2027; and
• up to an additional $3.20 per share (more than the base cash consideration alone) upon entry into a 'Delivery Contract'.

As Justice Black stated clearly in his judgment, “The fact that there is a contingent element to part of the scheme consideration does not of itself weigh against approval of the convening of the scheme meeting”.

Evidently, Australian courts are not troubled by the concept of contingent consideration in Australian schemes. They are, however, focused on a few key considerations:

• Can the base consideration stand on its own? In both Cannatrek and Blue Ocean Monitoring, the non-contingent component of the consideration was itself within the independent expert’s valuation range for the target – that is, even assuming the contingent component had nil or nominal value, the relevant experts were satisfied that the scheme was fair and reasonable. Justice Black explicitly stated that the case for approving a scheme subject to contingent consideration is "stronger" where the independent expert has expressed the view that the scheme consideration (even disregarding the contingent component) is fair and reasonable and therefore in the best interests of shareholders. Clearly, bridging the valuation gap through contingent consideration can only be taken so far.
• Is there sufficient disclosure? The scheme booklet needs to clearly explain how the contingent consideration works, what it might be worth, when it might crystallise, and what happens if the trigger is never satisfied. Relevantly, Justice Black referred to the fact that the Blue Ocean Monitoring scheme booklet disclosed that there was a risk that the earn-out consideration would not be paid to scheme participants at all, and accepted that this disclosure was "sufficient to warn BLM shareholders of the risk of non-performance". The Centrebet scheme booklet devoted an entire section to its litigation claim rights, complete with a payment waterfall diagram, risk factors and a worked example of how proceeds would flow through the collection agent and unit trust structure.
• What mechanisms are required to enforce the payment? In the Blue Ocean Monitoring scheme, the bidder was only required to pay the further cash payments into trust once the relevant contracts were entered into – more on this below. By contrast, in the Silver Chef scheme, an independent custodian (Melbourne Securities Corporation Limited) was appointed as note trustee to hold the contingent value notes on trust until the earlier of termination and redemption / cancellation in accordance with their terms.

4. A question of character: share, debenture, or something else?

It is important to consider the legal nature of the contingent consideration, as it determines the mechanisms that are required to be in place and the related disclosures required to be made to target shareholders.

Essentially, if the contingent consideration is characterised as a debenture,² Chapter 2L of the Corporations Act may apply, meaning that there needs to be an independent trustee, a trust deed, and ongoing reporting and enforcement obligations.

Comparatively, if the contingent consideration is simply a contractual right (a promise to pay if an event occurs, particularly where the event may never occur), the structure may be considerably simpler.

Specifically, in Blue Ocean Monitoring, the parties took the position that the earn-out was not a debenture: no defence contracts had been awarded yet, so there was no present debt owed to shareholders.

Justice Black said that argument had "considerable force" but stopped short of deciding the point definitively as there were no objectors.

5. Getting it right: a practical checklist

Set out below is a practical checklist if you are considering a contingent consideration structure in a take-private transaction:

• Define the contingent trigger precisely. Courts and shareholders will be more comfortable with objective, verifiable events (e.g. awards of contracts and settlements of disputes). Subjective or imprecise triggers may invite challenges.
• Separate the base consideration from the contingent consideration. If the independent expert can opine that the base consideration is fair and reasonable without the contingent component, the court’s task is considerably simpler and the scheme is more resilient to challenge.
• Consider characterisation early. The question of the legal characterisation of the contingent consideration drives the compliance and documentation pathway.
• Disclose clearly. Clearly explain the mechanics, timing and risks of the contingent consideration in the disclosure documents.
• Address tax consequences early. Contingent consideration can create unexpected tax consequences for shareholders.

The bottom line

Australian courts will accommodate contingent consideration in schemes of arrangement, and the Australian public M&A market is structuring it in increasingly creative ways. If the market volatility and complexity that characterises the current macroeconomic environment continues, and valuation gaps persist, we expect that these structures will become a more regular feature of Australian take-private transactions.