Purchase and Sale of Equity Interests with Clawback Clause: Validity, Modalities, and Legal Risks

This article analyzes the clawback clause — also referred to as a reversion clause — applied to the purchase and sale of equity interests, especially in investment agreements or corporate reorganization transactions. It is a contractual mechanism that allows for the restitution of amounts or assets transferred if certain future conditions are not fulfilled. The study explores its legal nature, validity under the Brazilian Civil Code, contractual limitations, modalities, and key legal risks, with support from legal doctrine and recent case law.

The purchase and sale of corporate quotas often involve conditional or resolutory clauses, used to allocate risk between the parties based on the company’s post-transaction performance. Among these, the clawback clause stands out.

This clause enables the seller or investor to recover part of the transferred equity or paid amount if the buyer or the company fails to meet pre-established targets — whether financial, strategic, or regulatory.

However, its use requires legal caution, as it may be deemed null, abusive, or even fraudulent if not aligned with the principles of good faith, proportionality, and the social function of contracts.

2. Concept and Legal Nature of the Clawback Clause

The clawback clause is an accessory contractual provision, legally characterized as:

·       A resolutory condition (Articles 121 and 127 of the Civil Code), whereby the contract is undone if the agreed-upon event occurs; or

·         A conditional obligation to partially return the price or equity, based on future non-performance.

Its structure is grounded in private autonomy (Article 421 of the Civil Code) and the freedom of the parties to modulate contractual effects based on the business risks undertaken.

3. Purpose and Common Use Cases

Clawback clauses are used to:

·         Protect the seller when the purchase price is contingent upon future performance assumptions;

·         Ensure reversibility of the transaction where there is uncertainty about hidden liabilities;

·         Protect the investor if the financial statements misrepresent the company’s actual financial condition;

·         Correct post-sale distortions due to late disclosures, unexpected litigation, or loss of strategic contracts.

4. Common Modalities of Clawback Clauses

Modality	Characteristics
Proportional price refund	A portion of the purchase price is refunded if revenue or profit targets are not met.
Equity reversion	Equity interests are returned to the seller, fully or partially, upon breach.
Automatic price adjustment	The deal value is reassessed based on post-closing adjustments.
Compensatory indemnification	The buyer agrees to compensate for hidden liabilities or underperformance.

5. Legal Validity Requirements

To be valid, the clawback clause must meet the following requirements:

1.       The future and uncertain event must be clearly defined (objective condition);

2.       A reasonable time frame must be set for verifying the condition;

3.       The clause must not result in unjust enrichment or unilateral excessive burden;

4.       The right to due process must be ensured in verifying the condition (e.g., right to accounting expertise or access to records);

5.       The clause must be duly recorded in the articles of association when involving equity in limited liability companies.

6. Case Law on Clawback Clauses

"A contractual clause that provides for proportional refund of the purchase price of corporate quotas is valid when it is proven that the financial statements provided by the seller did not reflect the company’s actual condition." (São Paulo Court of Appeals, Civil Appeal No. 1002891-42.2021.8.26.0100, judgment dated 07/12/2023)

"Clawback clauses must be interpreted restrictively; generic default or subjective dissatisfaction is not presumed." (STJ – Superior Court of Justice, REsp 1.809.871/SP, Reporting Justice Ricardo Villas Bôas Cueva, judgment dated 05/10/2021)

"As long as expressly agreed upon, the clawback clause is effective in ensuring the financial balance of equity purchase and sale transactions." (Minas Gerais Court of Appeals, Civil Appeal No. 1.0000.21.127671-2/001, judgment dated 11/14/2022)

7. Legal Risks and Drafting Considerations

·         Generic clauses may be deemed void due to uncertainty or abusiveness;

·         Clauses allowing unilateral reversion without objective criteria are likely to be disregarded by courts;

·         Lack of clarity regarding deadlines and performance indicators leads to litigation and legal uncertainty;

·         Any penalty or default clause must be reasonable and proportionate, pursuant to Article 413 of the Civil Code.

8. Contractual Best Practices

·         Use auditable financial indicators (e.g., EBITDA, net revenue);

·         Provide for technical verification mechanisms, such as accounting expertise or specialized arbitration;

·         Set a clear deadline for the resolution condition to be verified;

·         Register the clause in the articles of association, when dealing with corporate equity;

·         Avoid subjective language, such as “at the sole discretion of the buyer” or “if dissatisfied.”

9. Final Considerations

The clawback clause is a valuable tool for risk allocation and contractual balance in equity transactions. However, its enforceability depends on technical drafting, objectivity, and proportionality — failure to observe these may result in disputes or invalidation.

Preventive legal counsel is essential to structure clear, auditable, and legally effective clauses, ensuring predictability for the parties and avoiding conflicts over targets, timeframes, and the economic consequences of the transaction.