An anti-embarrassment clause also called an overage or on-sale clause, is often used in land or share sales to benefit the original seller.
Anti-embarrassment clauses come into play in various scenarios. For instance, if a seller faces financial constraints and must sell quickly at a discounted rate, including such a clause makes sure that the buyer compensates for the shortfall by sharing a percentage of any subsequent profit from a quick resale.
In another scenario, a seller might agree to sell land below market value to a buyer with planning permission. Here, an anti-embarrassment or overage clause is included. This ensures that when the buyer develops the land and sells it at a profit, the seller benefits from the increased land value.
In this article, we'll break down what an anti-embarrassment clause is, why it's so named, why it matters, and how it's used in share purchase agreements and property sales.
Table of Contents
- What is an anti-embarrassment clause?
- Anti-embarrassment clauses in land sales
- When is an anti-embarrassment clause used?
- How long is an anti-embarrassment clause valid for?
- How should an anti-embarrassment clause be structured?
- How enforceable is an anti-embarrassment clause?
- How to negotiate anti-embarrassment clauses
- How can Lawhive help?
What is an anti-embarrassment clause?
An anti-embarrassment clause allows sellers to increase the price of shares or property if the buyer resells the asset at a higher price within a certain period.
Anti-embarrassment clauses in share agreements
In share agreements, the anti-embarrassment clause got its name because it stops the seller from feeling bad about selling below value.
This clause protects the seller if the buyer sells the shares for more than expected soon after the sale, thanks to factors like increased market confidence, better company performance, and inflation.
Anti-embarrassment clauses in land sales
More commonly referred to as overage, anti-embarrassment clauses in land sales mean the seller can request a higher price if the value of the land increases due to market trends or certain events, like getting planning or construction permission.
When is an anti-embarrassment clause used?
An anti-embarrassment clause is typically used when the asset's value is uncertain at sale, like when the buyer and seller have different information or when there's no clear market value.
They're also used in management buyouts or pre-pack sales by administrators, where the business hasn't been widely advertised for sale. This might be for confidentiality reasons or because there wasn't enough time to market the sale properly.
In these situations, the clause aims to prevent a buyer from snapping up the asset with plans to quickly sell it for a profit.
How long is an anti-embarrassment clause valid for?
The duration of an anti-embarrassment clause isn't fixed. It's determined by mutual agreement between the buyer and seller and specified in the contract.
It's important to note that these clauses typically have a limited lifespan and are only applicable for a short period following the sale.
How should an anti-embarrassment clause be structured?
At a minimum, an anti-embarrassment clause should specify:
What events will trigger the extra payments?
How much the extra payments should be?
How long does the clause last?
Usually, the trigger event is when a certain percentage of shares are sold within a specific timeframe, either in one go or in multiple transactions. Further, the extra payment often depends on the difference between the buying and selling process of the shares, the time between transactions, or the number of shares sold.
But there are no hard or fast rules here and it depends on the negotiations between buyer and seller.
It may also be a good idea to include measures in the clause that prevent buyers from trying to avoid it. For example, buyers might try to sidestep trigger events by structuring the sale as a put-and-call option outside the restricted period.
How enforceable is an anti-embarrassment clause?
Anti-embarrassment clauses need precise wording to be enforceable. However, even with clear language, they aren't always upheld. Buyers might try to circumvent them, or the court may rule against you, despite your belief in the clause's coverage.
To avoid such situations and safeguard your interests, it's wise to consult an experienced commercial solicitor. They can assist in drafting or reviewing the anti-embarrassment clause, helping you anticipate and avoid potential pitfalls.
How to negotiate anti-embarrassment clauses
When negotiating anti-embarrassment clauses, it's important to:
Decide how long the clause willl last.
Agree on how much the price can go up.
Include rules to prevent issues, like penalties if the buyer tries to hide sales or reports lower prices. Make sure these rules cover actions during and after the agreed timeframe.
If you're unsure about an anti-embarrassment clause and what it means to buy or sell an asset, speak to a solicitor before taking action so you can make an informed decision based on the facts.
How can Lawhive help?
Anti-embarrassment clauses, whether concerning shares or property, can be confusing due to their various names and legal jargon.
At Lawhive, we're committed to making the law understandable and accessible to everyone.
Our network of experienced commercial lawyers can provide clear and affordable advice for transparent fixed fees.
To begin, request a free case evaluation from our Legal Assessment Team and receive a no-obligation quote for the services of a skilled lawyer.