Malcolm ZoppiWed Oct 18 2023

Understanding the Anti-Embarrassment Clause in UK Agreements

The anti-embarrassment clause is a crucial provision in many UK agreements, particularly in share purchase agreements. This clause ensures that the seller receives a fair price for the sale of their shares, even after the completion of the original transaction. The anti-embarrassment clause is often used in joint venture agreements, where two or more parties […]

anti-embarrassment clause

The anti-embarrassment clause is a crucial provision in many UK agreements, particularly in share purchase agreements. This clause ensures that the seller receives a fair price for the sale of their shares, even after the completion of the original transaction. The anti-embarrassment clause is often used in joint venture agreements, where two or more parties agree to act in good faith and fulfill their legal obligations.

Commercial lawyers play a vital role in drafting and structuring the anti-embarrassment clause. This provision should be carefully crafted to prevent any possible ambiguity or confusion. Additionally, anti-avoidance measures should be considered to ensure that the clause is not circumvented. In the event of dispute resolution or litigation, the dominant purpose of the clause must be established to prevent reducing payments to the original seller.

The market value of the asset is a critical consideration when drafting the anti-embarrassment clause. This principle is relevant in sales agreements, where the seller believes that they can obtain a better price for their shares outside of the agreed-upon terms. In such cases, the anti-embarrassment clause requires that the seller be compensated for any difference in the sale price.

Key Takeaways

  • Anti-embarrassment clause is essential in UK agreements, particularly in share purchase agreements.
  • Commercial lawyers play a vital role in drafting and structuring the anti-embarrassment clause.
  • Anti-avoidance measures should be considered to ensure that the clause is not circumvented.
  • The dominant purpose of the clause must be established in the event of dispute resolution or litigation.
  • The anti-embarrassment clause ensures that the seller receives a fair price, even if they believe they can obtain a better price after the completion of the transaction.

The Impact of the Anti-Embarrassment Clause on Business Deals

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The anti-embarrassment clause can have a significant impact on business deals, particularly in situations where a buyer sells the acquired assets within a specified period. This clause is often included in share purchase agreements, and it enables the seller to receive a higher price if the buyer resells the shares within a certain timeframe. The clause is also relevant in sale agreements and land sales, among other scenarios.

When drafting an anti-embarrassment clause, it is essential to structure it appropriately. The clause should include anti-avoidance measures, and the solicitor or LLP responsible for drafting the provision should consider the potential scenarios in which the clause may be triggered. The uplift payable to the seller upon resale and any additional considerations in purchase agreements should also be defined clearly.

The trigger event that activates the anti-embarrassment clause occurs when the proposed resale price is higher than the price at which the buyer initially buys the shares. If the resale transaction occurs after the expiry of the anti-embarrassment clause, the seller can seek an additional payment for the uplift in price within litigation. However, if the clause is still active, the seller cannot reduce payments to the original seller. It is also important to note that the dominant purpose of the anti-embarrassment clause is to prevent the seller from selling the business below its true market value.

ScenarioDuration
Shares sold within a short period of timeMeasured in months
Shares sold over a longer period of timeMay be qualified by the drafting of the anti-embarrassment clause
Option agreementsMay vary depending on the specific circumstances

It is important to note that the anti-embarrassment clause requires the buyer to act in good faith and fulfill their legal obligations. If a trigger event happens, and the buyer resells the shares below their true market value, the director of the buyer may be held personally liable for any damages incurred by the seller. Furthermore, if the buyer and seller act in good faith and collaborate to obtain a better price, the principle is that the relevant percentage of the difference between the price at which the buyer initially buys the shares and the price at which they resell them should be payable to the original seller.

In conclusion, the anti-embarrassment clause can have a profound impact on business deals, particularly in situations where the resale of acquired assets occurs within a certain period. The clause should be structured appropriately to prevent any conflicts with anti-avoidance measures or expiration issues. Ultimately, the clause enables buyers and sellers to collaborate in good faith to obtain a better price for the asset in question.

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Conclusion

In conclusion, the anti-embarrassment clause is not obligatory, but it allows sellers to receive a percentage of the difference between the price at which the buyer initially buys the shares and the price at which they resell them within a certain period of time. This period can be measured in months and may vary depending on the circumstances. It is important to ensure that anti-avoidance measures do not conflict with the clause and note that such measures may not be binding.

Trigger events, proposed resale prices, and the expiry of the clause can all impact the clause’s effectiveness, and it is essential to understand these implications. If the buyer sells the shares below their true value, the seller may seek a higher price within litigation, but it is best to avoid such circumstances and act within a certain period of time to protect the value of the asset.

Option agreements and additional work or different circumstances may qualify or lengthen the period in which the clause is active. Recent cases have highlighted the importance of acting in good faith, and it is crucial to collaborate with the buyer to fulfill legal obligations and achieve the best outcome for both parties.

Remember, the principle is that the relevant parties act in good faith, and the value of the asset is protected within a short period. The anti-embarrassment clause can be a valuable tool in the sale of businesses, but its effectiveness ultimately depends on the buyer and the seller’s collaborative efforts and willingness to act in good faith.

FAQ

What is the anti-embarrassment clause in UK agreements?

The anti-embarrassment clause is a provision included in UK agreements, particularly share purchase agreements. It serves to protect the seller by allowing them to receive a percentage of the difference between the price at which the buyer initially buys the shares and the price at which they resell them within a specified period.

How should I draft and structure an effective anti-embarrassment clause?

When drafting an anti-embarrassment clause, it is important to consult with commercial lawyers who specialize in this area. The clause should clearly state its dominant purpose, specify the trigger events that activate it, and outline the duration of its expiry. Structuring the clause should take into account the specific circumstances of the transaction, such as land sales or business deals.

What is the impact of the anti-embarrassment clause on business deals?

The anti-embarrassment clause can have a significant impact on business deals. For sellers, it can result in a higher price when the buyer sells the acquired assets within the specified period. The clause prevents sellers from reducing payments to the original seller and seeks to ensure that the seller receives a fair share of any additional profits made from the resale of the assets.

What happens if the buyer resells the assets after the expiry of the anti-embarrassment clause?

If the buyer resells the assets after the expiry of the anti-embarrassment clause, the seller may seek a higher price within litigation or dispute resolution processes. The resale transaction may be subject to negotiation and may involve determining the market value of the assets at the time of sale. It is important for both the buyer and the seller to act in good faith and within the legal obligations outlined in the agreement.

Are anti-avoidance measures relevant when including an anti-embarrassment clause?

Yes, anti-avoidance measures should be considered when including an anti-embarrassment clause. However, it is important to ensure that these measures do not conflict with the intentions and provisions of the clause itself. While such measures may not be legally binding, they can provide additional protection and prevent situations where the seller’s payments are reduced due to avoidance strategies.

How long does the anti-embarrassment clause remain active?

The duration of the anti-embarrassment clause can vary depending on the circumstances and the agreement. It may be measured in months or within a certain period of time. It is essential to clearly state the duration in the agreement to avoid any misunderstandings or disputes regarding the application of the clause.

Disclaimer: This document has been prepared for informational purposes only and should not be construed as legal or financial advice. You should always seek independent professional advice and not rely on the content of this document as every individual circumstance is unique. Additionally, this document is not intended to prejudge the legal, financial or tax position of any person.

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Whether you require specialised knowledge for your business or personal affairs, Gaffney Zoppi can support you.