You probably missed this headline about being exclusive, and in fairness, it would not interest many people. But for the purposes of this article, it does illustrate the amount of money that can be tied up in an exclusivity agreement. Bahamas Petroleum announced in Shares Magazine in August 2018 that a major oil company had decided against extending its exclusivity agreement with the organisation. This meant Bahamas Petroleum would no longer receive the $US1 million in exclusivity payments but would be free to re-engage in negotiations with third-parties – something the exclusivity agreement had thus-far prevented.
Another example of the high-stakes involved in exclusivity agreements is that of UK developer of cell-based therapeutics, ReNeuron Group, which in July 2018, signed an exclusivity agreement with a US-based specialty pharma company in connection with the potential out-licensing of its hRPC retinal stem cell technology and therapeutic programmes. The terms of the agreement state that ReNeuron will receive a $US2.5 million cash payment from the US company in return for the three-month exclusivity period. A further $US2.5 million will be payable following the completion of certain due diligence checks. What are these so-called ’exclusivity agreements’ in which millions of pounds can rest?
Exclusivity agreements, also known as a ‘lock-out’, or ‘no-shop’ agreements, are commonly used during important or sensitive negotiations between parties contemplating sale and purchase, business acquisition, distribution, goods, contracts, and property transactions. It is a restrictive agreement, giving an exclusive fixed period in which to negotiate and progress a transaction without involvement from competitive third parties. A buyer is given “breathing space” to carry out due diligence and protection from being outbid, as a seller is prevented from talking to other interested parties during the lock-out period. Uninterrupted negotiations can lead to the best offers, best prices and best deals for all involved. A well-drafted exclusivity agreement can be extended if necessary.
When to take advantage of an exclusive relationship
Forming an exclusive relationship can enable businesses to take advantage of commercial opportunities in creative ways that may not otherwise be possible, for example:
- Forming special relationships that competitors cannot reciprocate; a farmer may exclusively supply a successful local restaurant in exchange for marketing on menus and online pages. The restaurant gains a unique selling point over competitors attracting customers, and the farmer enhances publicity and provides an efficient supply chain.
- In a business acquisition, an acquiring company can ask its target to sign an exclusivity agreement preventing it from entertaining offers from competitors giving the buyer protection from wasted costs and reassurance during a due diligence process. As a result of the enhanced relationship, the seller may be able to attract a higher offer from the buyer.
- Retail stores use exclusive strategies to increase their competitive edge. Striking an exclusive deal with a new local designer allows a shop to set profitable price points without being undersold by nearby competitors carrying the same product line whilst giving the new designer credibility and increased publicity.
- Product exclusivity drives sales. Retailers give exclusive products more attention, dedicated advertising, in-store demonstrations and prominent shelf space. If it is a highly anticipated product, the retailer may have a captured market.
- Where a deal is too good to lose, and competitors are also interested, an exclusivity agreement can shut out the competition, stabilise costs and allow for increased confidence in investment.
Not always a good match
Before embarking on an exclusive relationship, the downsides must be considered. Such pre-contract arrangements could distract from making progress with the main transaction, unless particularly straightforward. It is also imperative that the parties understand such agreements do not guarantee a deal will be done. It is a lock-out agreement; not a lock-in. Agreements stating parties will commit to negotiating with each other until a deal is reached are unenforceable in the UK.
Could you get a better offer? Before giving exclusivity, you need to be confident you have found “the one” who can deliver to your expectations on favourable terms and conditions. This is particularly important when launching new products.
Consider the fallout from a broken relationship, especially if you want to continue doing business in the future.
Enforceability and remedies for breach
A jilted buyer is unlikely to obtain an injunction preventing a sale to a third party. The remedy for breaching an agreement is damages, but the buyer will not be able to force a sale or agreement.
Loss of any potential profit is generally not recoverable, as a Court would deem this unquantifiable. A party breaching the agreement is usually liable for the other party’s costs.
The deposit paid should be refundable if a materially adverse effect (a major factor which makes the purchase less attractive) is discovered during the due diligence process
Exclusivity agreements can be useful in taking your business relationship or property purchase to the next level of commitment. An open and honest approach, setting out clear intentions and benefits for each party will enhance an exclusive relationship. Keeping the agreement simple so that both parties know where they stand is more likely to be successful.
Saracens Solicitors is a multi-service law firm based in Central London. We have dedicated and highly experienced commercial law team who can advise and represent you on exclusivity agreements. For more information, please call our office on 020 3588 3500.
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