Earn out Accounts Controlled by the Buyer after Completion
Buyer control of post-closing accounts threatens earn-outs; sellers protect consideration using strict accounting hierarchies and standalone operational covenants.
Anti-Circumvention Clause
Meaning
Contractual provisions in cross border joint venture or investment agreements prevent parties from bypassing designated intermediaries to deal directly with introduced contacts or underlying business opportunities. The anti-circumvention clause protects the original sponsors or originators of proprietary deals from being excluded after sharing closely held relationships or strategic operational contacts. This specific mechanism governs the bilateral interactions between co-investors, transaction sponsors and target founders during the formative stages of a corporate transaction.
It establishes a clear legal boundary that prevents a prospective investor from using shared due diligence files to strike a separate parallel agreement that bypasses the introducing broker or partner. The obligation survives the termination of active discussions and remains in force for a defined period, typically two to three years following the end of the transaction lifecycle. By signing this clause, the receiving party agrees to channel all transaction-related communications, inquiries and negotiations through the designated intermediary.
This restriction ensures that the introducing party’s commercial interests, transaction fees and equity rights are fully preserved against direct, unauthorised dealings.
Contractual Protection
The primary function of these clauses lies in securing the finder’s fee or equity participation rights in corporate acquisitions and manufacturing partnerships. When a venture capitalist or sponsor introduces a co-investor to a potential target, the introducing party faces the distinct risk that the co-investor might cut them out of the transaction syndicate. This protective provision operates by prohibiting any parallel bilateral negotiations with the target company’s major shareholders or operational management without explicit written consent.
In signed shareholder agreements, this clause protects the minority sponsor who originated the platform deal from being squeezed out by larger financial backers who possess deeper capital reserves. The clause is categorized as a control mechanism because it restricts the investment choices and direct procurement options of the participating parties. It does not alter the company’s valuation directly, but it provides the necessary legal weight to enforce partnership loyalty and joint execution.
The protection remains in force during the active investment period and survives for a set multi-year runoff term.
Transactional Triggers
The clause becomes active when a party makes direct contact with an introduced party without the introducing partner’s presence or written authorisation. In the context of industrial partnerships or manufacturing joint ventures, this happens when a partner communicates with a raw material supplier or distributor introduced during due diligence. The restriction prevents the partner from signing separate supply agreements that exclude the introducing party.
If such a transaction occurs, the injured party can claim liquidated damages equivalent to the lost transaction fees or the equity share they would have received under the joint venture. The contract specifies that any profits generated from the circumventing deal must be held in trust for the introducing party. This remedial structure acts as a strong deterrent against bilateral side deals.
The clause also triggers when a party uses confidential specifications to establish a parallel, competing production facility with the introduced manufacturer.
Operational Limits
The operational scope of the restriction ends when the relationship between the parties has been publicly documented or when the introduced contact was already a verified pre-existing counterparty. To avoid disputes, the receiving party must provide written evidence of prior business dealings with the contact within a short window after the introduction. If the pre-existing relationship is verified, the restriction ceases to apply to that specific entity.
Furthermore, the clause does not prevent general market competition or parallel negotiations with unrelated third parties. It is limited to the specific target or contact introduced under the agreement. Once the designated survival period expires, the parties are free to engage directly without violating the contract.
This boundary balances the protection of deal originators with the market freedom of institutional investors. The clause remains a standard feature in non-disclosure and joint venture contracts.