Anti-embarrassment or anti-shaming clause in M&A transactions

In recent years, the inclusion of a so-called anti-shame or anti-embarrassment clause has become more and more common in company purchase and sale transactions. This allows the selling party to secure financial compensation in the event that the buyer resells the assets at a significantly higher price within a relatively short period of time.

The anti-embarrassment clause is often found in divestment contracts of private equity companies. The aim is literally to prevent the seller from being embarrassed by the agreed price. Because calculating the price in M&A can be very complicated and thus minimises the risks of both financial and reputational damage.

The example of Telefónica

When Telefónica sold its mobile tower division in Europe and Latin America to American Tower for €7.7 billion it included an anti-shaming clause in the contract. This ensured that it would receive financial compensation in the event that American Tower sold all or part of the assets, merged with another company, agreed to share the infrastructure with a third party…

Why include an anti-embarrassment clause in the sales contract?

Also known as a best-fortune clause, this is a mechanism that gives the seller peace of mind that the agreed price is not far below the market. Because sometimes it is natural to have doubts about this and even suspect that the buyer has already agreed to a subsequent resale at a much higher price.

The anti-embarrassment clause is in fact an agreement in the contract according to which the sale price will be adjusted upwards if the buyer resells the shares at a higher price. In addition to sparing the seller the embarrassment of having sold below the market price, this clause serves to make the seller a participant in the capital gain made by the buyer.

What an anti-shame clause should include

There are four key issues to specify in any anti-shaming or anti-embarrassment clause:

The period of time during which the seller is entitled to upward price adjustment. This is usually not too long and is limited to a period of between one and five years.
The percentage increase in price that will give rise to the right to upward adjustment. For example, if the shares are resold within the period provided for in the first bullet point at a price 15% higher than the purchase price.
The number of units whose resale will trigger the realignment. It may be expressed as a specific number or as a percentage of the total.
The price adjustment system to be applied. One possibility is that the original selling party is entitled as compensation to a percentage of the price increase obtained from the resale. This is usually around 50%. It is also necessary to foresee the way in which this would be effective.
Some mechanism to prevent possible breaches of the clause by the buyer. For example, specific penalties in the event of concealing the sale, simulating a lower price than the real one, or even agreeing a sale to be executed after the end of the period of application of the anti-embarrassment clause. Another possibility is to control or prevent the distribution of dividends or reserves during the agreed period.

If your company is going to negotiate the M&A transaction, Confianz can help you negotiate an anti-shaming clause to ensure you get the best price for the sale.

By Manuel Urrutia