In times of increasingly flourishing businesses and economy it is not unusual for sellers or exiting shareholders to use many tools in their proverbial toolbox to negotiate the best deal possible. One of those is insisting for an anti-embarrassment clause. But what is it?
It is a clause inserted into an agreement that is recording on what terms a shareholder leaves a company, or if entire company shares are being sold to a third party. The main purpose of it is to prevent that seller of their shares being ‘embarrassed’ in the future if the buyer was to then sell the shares in a set period of time, at a higher price. It is therefore a clause to protect the seller, rather than the buyer. Sometimes it is used as a tool when business relationships have broken down, and the true intention or motivation behind a sale is just not clear. This way the seller can have some sort of guarantee of receiving a better price for the shares in the future.
They are however important to get right, and are often subject to a lot of debate and negotiation between the parties. A buyer would prefer to avoid an anti-embarrassment clause in its entirety, so a fine balance. The drafting of an anti-embarrassment clause has to be very carefully considered and is not straightforward. There are many options when drafting, including how to calculate any uplift on the sale price to provide the seller with the additional consideration or, a seller may even be able to retain an interest in a sale asset or take a charge if there was enough bargaining power, although this is unusual.
Another difficulty in drafting the clause is that its difficult to predict the future events that may occur. Because of this, any good anti-embarrassment clause should have a number of obligations on the buyer to allow the seller to know about any possible sale in the set time period. This includes:
- Ensuring the buyer acts in good faith; and
- Informing the seller of any trigger event or potential sale negotiations or warranties that the buyer has no intention to sell during a certain time following completion of the sale.
It is therefore very important to make sure that you get appropriate advice at the outset on the options you may have to get the best deal.
In order to avoid being embarrassed by any lack of including an anti-embarrassment clause, get in touch with our Business Law team today by contacting 01279 755777.