Exclusivity Agreements at paper rock docs

Why use Exclusivity Agreements?

An exclusivity agreement is a preliminary agreement entered into at the commencement of negotiations for a transaction, usually the sale or a company, business or commercial property or a proposed investment in a company.

The purpose of an exclusivity agreement is to allow the buyer or investor a period of time (the exclusivity period) during which the seller or investee company agrees not to negotiate or enter into an agreement with a third party relating to the same subject matter as the proposed transaction. This allows the buyer or investor to incur costs in carrying out its due diligence and in preparing and negotiating the sale documents in the knowledge that the seller or company is not engaged in similar discussions with another rival bidder.

Whether the seller or investee company will agree to enter into an exclusivity agreement is a matter for commercial negotiation, often determined by whichever party is in a better negotiating position.

How long should the exclusivity period last?

An exclusivity period usually lasts for at least 4 weeks and possibly up to 2-3 months. A longer period than that would be unusual. A shorter period than 2 weeks may be agreed in situations where either the buyer has been selected as a preferred bidder following an auction or other kind of competitive process or in the event that the target company is in financial difficulty.

What is the remedy for breach of an exclusivity agreement?

The likely remedy for breach of an exclusivity agreement is an action in damages to recover the costs incurred in due diligence and contract preparation and negotiations.

The agreement may provide for the party which is granting the exclusivity to indemnify the other party for its wasted costs, potentially up to a specified maximum amount.