Exclusivity agreement template

What is an Exclusivity Agreement?

An exclusivity agreement is a legal agreement that restricts a seller or company from negotiating or entering into deals with other parties during a set period, known as the exclusivity period. This helps progress on negotiations and due diligence for significant transactions, giving buyers and investors confidence to proceed without the risk of a competing buyer or investor.

At PaperRock Documents, we offer templates tailored to investment transactions, share sales, and business purchases:

• Comprehensive Agreement: A detailed template for complex deals.
• Short-Form Agreement: A concise, letter-style document for simpler arrangements.

How does an Exclusivity Agreement work?

Exclusivity agreements work by establishing a legally binding commitment from the seller or company not to engage in discussions or transactions with other potential buyers or investors for a specific timeframe. These obligations are framed as restrictions, rather than promises to negotiate in good faith, due to the potential unenforceability of good faith obligations under English law.

The agreement will outline specific terms such as the length of the exclusivity period and what actions are prohibited, ensuring clarity for both parties.

Benefits of Exclusivity Agreements

Exclusivity Agreements offer several advantages:

• Protection for buyers and investors: providing time and space needed to conduct due diligence and draft and negotiate legal documents without the risk of competing offers.
• Certainty during negotiations: ensures meaningful commitment from the seller, reducing the risk of wasted resources.

What is Due Diligence?

Due diligence refers to the process under which a buyer or investor undertakes a thorough review of a company’s financial, legal, and operational information and history. It allows buyers and investors to identify risks, verify the accuracy of information, and ensure the transaction aligns with their goals before legally committing to a binding deal.

Common clauses in an Exclusivity Agreement

Key clauses typically included in an Exclusivity Agreement are:

• Exclusivity obligations: undertakings from the seller or company not to engage in discussions or enter into transactions with others.
• Indemnity clauses: provisions requiring the seller or company to pay the buyer or investor for losses or costs incurred due to breaches of the exclusivity undertakings.  For example, if the seller negotiates with another party during the exclusivity period, the indemnity clause allows the buyer to recover its wasted professional fees, such as those spent on due diligence or preparing contracts. Indemnity clauses often set a cap on liability to protect the breaching party, ensuring the clause is fair and proportionate.

Other important clauses include:

• Termination of existing third party negotiations: undertakings from the seller or company to terminate any existing third party negotiations which might be ongoing at the outset of the Exclusivity Period.
• Exclusivity Period extension: provision for the Exclusivity Period to be extended, usually by agreement.

Legal considerations under English law

Exclusivity Agreements must align with English contract law principles, which affect their enforceability:

• Good faith limitations: commitments to negotiate in good faith are generally unenforceable in the UK, so obligations are typically framed as restrictions on the seller or company.
• Remedies for breach: Damages recoverable under English law for breach of contract claims are subject to rules concerning foreseeability and remoteness of loss.  To avoid the non-breaching party to an Exclusivity Agreement being unable to recover losses under these rules, Exclusivity Agreements often contain indemnity clauses which are not subject to the same rules.

When Are Exclusivity Agreements used?

Exclusivity Agreements are commonly used in:

• buying a company, business, or commercial property.
• investing in a business.

They are particularly helpful at the start of large or complex transactions to create a secure negotiation environment.