Understanding an anti-embarrassment clause

An anti-embarrassment clause is known as an on-sale clause. It’s a clause that allows sellers to recalculate the price of shares and increase that price if the buyer sells the same shares at a higher price. However, this clause is only valid for a certain period after the completion of a specific transaction. The anti-embarrassment clause is often used in share purchase agreements.

What is an anti-embarrassment clause?

The anti-embarrassment clause is also called the overage clause when it applies to the sale of other property, such as land. This clause often deals with the seller of shares or land. It enables the seller to increase the price when the value of assets increases in the future.

In the case of land, the seller can ask for an increased price, if the value of land has increased because of a certain event, such as getting permission to put the land into use, for a purpose that was non-existent at the time of sale or getting approval for construction. The anti-embarrassment clause doesn’t only apply to the increase in the property’s value because of typical market forces, but also to specific events that increase the property’s value.

With shares, the clause safeguards the seller from an event where the buyer sells the shares of a target business at a higher price than what was expected at the time of sale. The value of shares can increase because of many reasons, such as improved confidence in the market, better performance by the company, and inflation in share prices.

The anti-embarrassment clause is only valid for a short period after the sale has been completed. This time is agreed upon between the seller and buyer at the time of purchase.

The clause prevents the seller from being ‘embarrassed’ by the buyer getting a higher price for the shares immediately after the sale has occurred. As a result, the clause allows the seller to request a recalculation of price to make sure that they get the shares at the right price.

Rarely is an anti-embarrassment clause negotiated in the sale of a mid-market company, as it’s unlikely that a business could be subsequently sold to another buyer in a short time.

How can a seller structure the anti-embarrassment clause?

The typical structure of the anti-embarrassment clause specifies that an additional payment will be paid if a trigger event occurs during a specific time.

The seller can define the additional consideration of the trigger event (or events), and the period of time that the clause applies to.

The additional consideration is often a percentage of the difference between the price at which the buyer buys the shares and the price at which they resell the shares. The additional consideration may be changed regarding the time between two transactions, and/or the number of shares the buyer resells.

The trigger event is typically the disposal of more than a specific percentage of the shares within the specified period of time. The disposal could be in one or more transactions.

The time is normally measured in months, or years based on the circumstances. The time may be qualified in various ways. For instance, it may be longer if another event occurs.

When structuring the anti-embarrassment clause, it’s essential to include anti-avoidance measures. It’s easy to get around the clause through option agreements that move further transactions beyond the period when the clause is active. The anti-avoidance measures should not conflict with the legal obligations of the director of the buyer. If anti-avoidance measures do conflict with the directors, then those measures may not be binding.

Often, anti-avoidance measures include requirements for the buyer:

  • To communicate information promptly when a trigger event happens. Such information may include price specifics about the transaction and information about the proposed resale price.
  • To avoid acting in a way that avoids the payment or reduces it.
  • To avoid entering any sale agreements that aim to conclude the resale transaction after the expiry of the anti-embarrassment clause that may reduce payments to the original seller.

As with all agreements, there must be measures in place to resolve disputes outside of litigation. Mediation is the most preferred method over other forms of alternative dispute resolution (ADR). However, it would be beneficial to have an expert, such as a qualified accountant or solicitor, to help you resolve the dispute if it arises.

Final thoughts

The anti-embarrassment clause requires buyers of land, other properties, or shares to give sellers additional payment if they resell the assets or properties at a higher price within a specific time period. In purchase agreements or share sales, the anti-embarrassment clause prevents the seller from being ‘embarrassed’ by the buyer by having sold the shares below their true market value.

With land sale agreements, the clause is known as overage. The anti-embarrassment clause is used where the value of an asset is uncertain at the time of sale, or where the seller believes the buyer may get a better price because of additional work or different circumstances.

For further reading, check out our other articles like Business angels: advantages and disadvantages and Bringing your company into disrepute.

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