The Bluebox Blog

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How Embarrassing!

June 21, 2023

Anti-embarrassment provisions are a seller-friendly mechanism delivering additional consideration to a seller.  It is often used where the value of the asset being sold is disputed or difficult to value (e.g. an emerging technology, unproven market, distress situation or where a seller might be reticent to sell, mismatch in price expectations due to market volatility or the desire to lock in gains before feared tax rate increases).

It is triggered usually by reference to a buyer’s “on-sale” of the original assets to another within a specified period.  If a buyer makes a quick or large “profit”, there is a greater justification for seller protection.  If the seller is also paid, less embarrassment might be felt by a seller having sold the original asset too cheaply where the buyer “flips” the asset.  It can help reassure a seller that this risk of looking foolish is mitigated to gain “peace of mind”.  The trigger, what happens as a result and the period in which the anti-embarrassment is active are often heavily negotiated.

In addition to assisting in protecting the seller from selling too cheaply and balancing the sale price appropriately, even if the anti-embarrassment is not triggered it can serve as an important deterrent to such an “on-sale”.  Remedies for breach could even extend beyond sharing the upside through to termination of the original sale and damages.  Drafted properly, it will assist in preventing the concealment of an “on-sale” which might otherwise be difficult to discover following the original sale.  It can be an important consideration in the actual selection of an appropriate buyer (e.g. in family or owner-managed businesses wanting to ensure a degree of succession or continued stakeholder involvement).

A buyer may seek to avoid it by arguing in the alternative for a price reduction or refund in certain circumstances.  Even if a buyer accepts it in principle, it will usually negotiate to clarify trigger event(s) for additional payment(s) (typically referable to the business originally being sold or part of it), minimise quantum (typically up to 1 to 3 years), time period and the disclosure of information required to police the anti-embarrassment provision (typically the minimum required and subject to confidentiality requirements).

Valuation methodology misaligned with the original deal can create friction.  Uncertainty of increased deal costs can lead to heated discussions, including as to the rationale for the transaction.  Complex drafting may make parties nervous to ensure they have determined all the scenarios which may be relevant or may alter behaviours or when actions are taken (e.g. a buyer delaying an “on-sale” until immediately after expiry of the anti-embarrassment period).  Whilst there is fertile ground for questioning motivations, complexity, delay and even disputes, anti-embarrassment remains a useful tool well worth considering.

 

Get in Touch:

For more information on anti-embarrassment provisions and how to maximise value and manage risk when buying or selling a business, please contact Thomas Colmer, Partner at Fieldfisher LLP at Thomas.Colmer@Fieldfisher.com.

 

For more information on how to prepare your business for sale, please contact Jonathan Rich at jonathan.rich@blueboxcfg.com. 

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