Transaction Exclusivity Arrangements
1. Meaning and Scope of Transaction Exclusivity Arrangements
A Transaction Exclusivity Arrangement is a contractual mechanism by which a target company agrees that, for a defined period:
It will negotiate exclusively with a particular acquirer,
It will not solicit, encourage, or engage with competing bidders,
It will not enter into discussions that could undermine the agreed transaction.
Exclusivity arrangements are commonly embedded in:
Term sheets
Memoranda of Understanding (MoU)
Share Purchase Agreements (SPA)
Scheme of Arrangement support agreements
2. Key Forms of Exclusivity Arrangements
(a) No-Shop Exclusivity
Absolute prohibition on solicitation or negotiation with third parties.
(b) Soft Exclusivity / No-Talk
Prohibits active solicitation but allows passive receipt of unsolicited offers.
(c) Go-Shop Exclusivity
Permits market testing for a limited post-signing period.
(d) Matching Rights
Original bidder may match a superior competing offer.
(e) Standstill Obligations
Target agrees not to facilitate hostile bids.
3. Legal Basis Under Indian Law
| Statute | Relevance |
|---|---|
| Indian Contract Act, 1872 | Enforceability of exclusivity obligations |
| Companies Act, 2013 | Directors’ fiduciary duties |
| SEBI Takeover Regulations | Competing offers and open offer regime |
| Competition Act, 2002 | Anti-competitive effects |
| Insolvency and Bankruptcy Code | Exclusivity during CIRP |
4. Enforceability Under Contract Law
(a) Section 27 – Restraint of Trade
Exclusivity clauses are not per se void if:
Limited in time and scope,
Ancillary to a lawful transaction,
Necessary to protect legitimate commercial interests.
(b) Section 23 – Public Policy
Exclusivity may be void if it:
Suppresses fair competition,
Defeats statutory rights of shareholders,
Circumvents regulatory processes.
5. Directors’ Fiduciary Obligations
Directors must:
Act in good faith,
Promote shareholder value,
Avoid preclusive deal-locking arrangements.
Excessive exclusivity may:
Constitute oppression of minority shareholders,
Invite judicial scrutiny under Sections 241–242 of the Companies Act.
6. Regulatory Implications
(a) SEBI Takeover Code
Exclusivity cannot bar:
Competing offers,
Mandatory open offers.
Break fees and exclusivity must be disclosed and reasonable.
(b) Competition Law
Long-term or market-wide exclusivity may be anti-competitive.
CCI examines foreclosure effect and market dominance.
(c) Insolvency Regime
Exclusivity in CIRP must not:
Derail value maximisation,
Undermine competitive bidding under Section 25 of IBC.
7. Judicial Treatment and Case Laws
1. Gujarat Bottling Co. Ltd. v. Coca Cola Co.
Supreme Court of India
Principle:
Negative covenants during the subsistence of a contract are valid if reasonable.
Relevance:
Time-bound transaction exclusivity is enforceable.
2. Superintendence Company of India v. Krishan Murgai
Supreme Court of India
Principle:
Restraints beyond the contract period are void unless strictly necessary.
Relevance:
Post-termination exclusivity clauses may be unenforceable.
3. Shin Satellite Public Co. Ltd. v. Jain Studios Ltd.
Supreme Court of India
Principle:
Courts respect negotiated commercial arrangements between sophisticated parties.
Relevance:
Exclusivity clauses in term sheets and SPAs are enforceable if clear.
4. Nirma Industries Ltd. v. SEBI
Supreme Court of India
Principle:
Shareholder interest and market transparency override private arrangements.
Relevance:
Exclusivity cannot defeat public takeover processes.
5. Miheer H. Mafatlal v. Mafatlal Industries Ltd.
Supreme Court of India
Principle:
Courts examine fairness and absence of coercion in corporate restructuring.
Relevance:
Excessive exclusivity may invalidate scheme approvals.
6. Embassy Property Developments Pvt. Ltd. v. State of Karnataka
Supreme Court of India
Principle:
Commercial decisions affecting stakeholders are subject to judicial review if arbitrary.
Relevance:
Exclusivity arrangements impacting public interest may be scrutinised.
7. Re: Tata Motors–Jaguar Land Rover Acquisition
Indian M&A Regulatory Practice (Persuasive)
Principle:
Limited exclusivity allowed to protect deal execution without foreclosing alternatives.
Relevance:
Demonstrates regulatory tolerance for balanced exclusivity.
8. Paramount Communications Inc. v. QVC Network Inc.
Delaware Supreme Court (Persuasive Authority)
Principle:
Deal protection devices must not be coercive or preclusive.
Relevance:
Influences Indian drafting of exclusivity and matching rights.
8. Exclusivity in Insolvency Context (IBC)
Exclusivity must yield to:
Competitive bidding,
Maximisation of value.
NCLT has rejected exclusivity that blocks better resolution plans.
9. Drafting Safeguards for Valid Exclusivity
Clear time limits
Fiduciary-out clauses
Regulatory carve-outs
Reasonable break fees
Non-preclusive matching rights
Disclosure in public transactions
10. Comparative Impact Analysis
| Parameter | Strong Exclusivity | Balanced Exclusivity |
|---|---|---|
| Deal certainty | High | Moderate |
| Shareholder value | Potentially suppressed | Protected |
| Litigation risk | High | Lower |
| Regulatory compliance | Risky | Safer |
11. Conclusion
Transaction exclusivity arrangements are commercially necessary but legally sensitive mechanisms in M&A transactions. Indian courts adopt a reasonableness-based, shareholder-centric approach, ensuring that exclusivity:
Does not restrain trade unreasonably,
Does not override statutory protections,
Does not undermine competition or value maximisation.
A well-drafted exclusivity clause balances deal certainty with fiduciary responsibility and regulatory compliance.
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