Exclusivity Agreement: What You Should Know

In a corporate context, it is common practice in many areas to negotiate exclusivity agreements in order to prevent a contracting party from simultaneously negotiating with multiple potential partners. Such an agreement may, for example, be concluded in the context of a corporate merger or a company takeover (Mergers & Acquisitions). However, it is also a common practice in commerce, particularly within distribution agreements.

We have summarized the key aspects of exclusivity agreements for you:

• What does an Exclusivity Agreement regulate?
• Key elements of an Exclusivity Agreement
• Key considerations regarding the exclusivity clause
• Which agreements between competitors are prohibited?
• Are exclusivity agreements permitted in distribution agreements?
• What is meant by vertical restraints on competition?
• Can an exclusivity clause be included in a Letter of Intent?
• Individual legal advice regarding exclusivity agreements

What does an Exclusivity Agreement regulate?

The purpose of an exclusivity agreement is to bind the contracting parties involved (usually the buyer and the seller) during contract negotiations and execution. This prevents the seller from conducting negotiations with multiple prospective buyers, thereby avoiding the misuse of information gained during negotiations and the risk of playing potential buyers against each other.

Key elements of an Exclusivity Agreement?

An exclusivity agreement usually contains the following points:

• Names of the contracting parties
• Subject of the intended transaction
• Scope of the exclusivity
• Duration of the agreement
• Penalty for non-compliance
• Confidentiality provisions
• Applicable law and jurisdiction

The exclusivity agreement defines the aspects of contract negotiations that may not be negotiated with other parties (natural or legal persons), and which are subject to confidentiality. The duration of the agreement usually starts with the signing of a Letter of Intent and ideally ends with the execution of the main contract. The duration of an exclusivity agreement depends on the complexity of the contract and can be extended if necessary. 

Key considerations regarding the exclusivity clause

From the buyer’s perspective, it is important to assess whether the seller is genuinely considering the transaction; in this context, a Letter of Intent (LoI) is recommended. Additionally, the buyer should take into account potential costs associated with a thorough examination of the company (“Due Diligence”), which typically involves engaging external parties such as lawyers and auditors. From the seller’s perspective, there must be a willingness to enter into a legal transaction with the potential buyer. This requires a certain level of trust, as the seller will need to share internal, sometimes sensitive information and provide insight into potential trade secrets. In general, attention should also be paid to the duration of the exclusivity agreement: as a rule, it should not exceed one year.

Which agreements between competitors are prohibited?

Extreme caution is required when it comes to exclusivity agreements between market participants, as antitrust law must be observed. Not only are price-fixing arrangements prohibited, but also any other agreements that could restrict competition under antitrust legislation. Such agreements may include, for example, quota arrangements or the (geographical) division of markets.

Are exclusivity agreements permitted in distribution agreements?

Besides purchase negotiations, it is also common practice in commerce to include exclusivity agreements. In this context, the supplier grants the distribution partner the exclusive right to market and sell certain products during the term of the contract. Exclusivity agreements in distribution contracts can be limited to specific areas. This naturally restricts the supplier’s negotiating power, but on the other hand, it secures a certain volume of sales and provides planning certainty. Nevertheless, the supplier should carefully weigh up their options before signing an exclusivity agreement and take into account potential future changes in the framework conditions or possible demands from the distribution partner (e.g., price reductions). Conversely, the distribution partner must accept possible quality issues or supply shortages due to their dependence on the supplier.

What is meant by vertical restraints on competition?

Vertical restraints on competition are agreements between two or more companies operating at different levels of production or distribution (e.g., retailer and manufacturer) that have the effect of restricting competition. It should be noted that vertical agreements are not illegal per se: franchise agreements, for example, are typical (permissible) vertical agreements.

The European Union allows vertical agreements under certain conditions and regulates these exceptions in Regulation 330/2010. So-called “de minimis agreements” (those that do not significantly restrict competition), as well as agreements between companies that are not in competition with each other and whose respective market share in the relevant market is less than 15%, are permitted. EU law also exempts agreements that enhance economic efficiency or help reduce the costs of the participating companies, thereby promoting investment.

Whether and when a vertical agreement is unlawful must be assessed on a case-by-case basis. On one hand, the positive effects and efficiency gains should be considered; on the other hand, potential restrictions of competition may occur at the expense of consumers.

Can an exclusivity clause be included in a Letter of Intent?

Exclusivity agreements are often preceded by a so-called Letter of Intent (LoI). This indicates that the contracting parties have already engaged in preliminary negotiations and have clarified key aspects of their cooperation. At this stage, the prospective buyer, in particular, has usually already invested significant time and effort and wants to ensure that these efforts are not in vain. An exclusivity clause can already be agreed upon as part of the Letter of Intent and usually expires upon the signing of the main contract.

Individual legal advice on Exclusivity Agreements

For individual legal advice regarding exclusivity agreements, please feel free to contact our law firm directly. Do you have another concern in the field of corporate law? Learn more about our corporate law advisory services.