As part of our discussion of letters of intent (hereinafter referred to as the “Letter” or “Letters“) in commercial transactions involving the sale of shares (https://endlex.ca/letter-of-intent-definition-and-purpose/), we take a closer look at the exclusivity clause and its purpose.
1.Definition
The exclusivity clause in a Letter states that the buyer benefits from exclusive negotiations with the seller concerning the proposed transaction, usually for a defined period starting from the signing of the Letter. In other words, for the period defined in the Letter, the seller undertakes to deal exclusively with the buyer concerning the current transaction, and not to solicit offers from other potential buyers, nor enter into discussions or negotiations in this respect with third parties.
The period of exclusivity varies according to the negotiations between the parties and the circumstances of the transaction. In some cases, it may be for a defined period (e.g., 3 months from the signing of the Letter). However, since this period depends on several factors, it is often advisable to define the end of said period according to the earliest date of several subsequent events, including the end of due diligence, the deadline for confirmation of buyer financing (if applicable), or the closing date of the transaction.
2.Purpose
This clause is naturally very important for the buyer, who is likely to spend a considerable amount of fees on the due diligence review of the target company (this topic will be covered in future articles).
The clause thus offers a certain peace of mind to the buyer, who can rest assured that the seller is not negotiating with several buyers at the same time. The buyer’s situation could be particularly precarious in the context of a non-binding letter without an exclusivity clause (https://endlex.ca/letter-of-intent-and-binding-nature/), as the seller can terminate the current transaction (sometimes in the middle of due diligence) if he finds a buyer with terms that are more advantageous to him.
It is therefore in the buyer’s interest to negotiate so that the exclusivity clause remains binding even in the context of a non-binding Letter.
It is generally not in the seller’s interest to have an exclusivity clause, especially in the context of a non-binding Letter. Consequently, when such a clause is negotiated to be included in the Letter, it is very important for the seller to clearly define the duration and end of the exclusivity period, as the more vague these terms are, the more likely it is to lead to a grey area that is to the buyer’s advantage.
3.Conclusion
The exclusivity clause is an important addition to the Letter, mainly to protect the buyer’s interests in a commercial transaction, and a well-drafted clause can prevent many misunderstandings in the transaction to follow. Contact us to find out more!
Information provided in this article is intended as general introductory information only. The information provided in this article is not legal advice. It should not be construed as legal advice and should not be relied upon as such. Should you want legal advice regarding the information provided in this article, please contact one of our lawyers.
