Exclusivity Agreements

Also known as lock-out, shut-out or no-shop agreementsAgreements which are used to try to ensure that the other party to a prospective deal negotiates solely with the client for a period of time. They aim to give the client some protection from another party outbidding him.

A prospective buyer who is about to commit time and expense to due diligence and lengthy negotiations will be very keen to obtain protection against losing out to a rival bidder after spending time and money on negotiations. Exclusivity agreements are also known as lock-out, shut-out or no-shop agreements.

The purpose of an exclusivity agreement is to prevent the seller from negotiating with, or soliciting offers from, other parties for a fixed period, thereby providing a prospective buyer with a period of exclusivity in which to negotiate and hopefully complete the proposed transaction.

From the buyer's perspective, the case for having an exclusivity agreement is strong. While often the opening position will be to say no, whether the seller ultimately accepts a period of exclusivity will come down to the strength of its negotiating position. Generally, however, exclusivity agreements are becoming more and more common in acquisitions, where intricate due diligence and protracted negotiations are often the norm.

Key terms of an exclusivity agreement

An exclusivity agreement will usually be drafted by the buyer's lawyers and should include the following terms:

  •          The seller will immediately terminate any existing discussions with third parties.
  •          During the exclusivity period, which should usually be for a fixed period, the seller may not negotiate or enter into a transaction with a third party. This should be expressed as a negative covenant.
  •          A statement of the consideration. An exclusivity agreement should be supported by consideration or executed as a deed to be enforceable.

 

An exclusivity agreement prevents the seller from using the buyer's offer as equivalent to an insurance policy, enabling the seller to seek higher offers elsewhere. It will also allow the buyer a period in which to undertake due diligence and negotiate the deal without the constraints and pressures that would exist if there were competing buyer.