Clear market: Overview, definition, and example
What is clear market?
Clear market refers to a contractual commitment in which a company agrees not to pursue or negotiate alternative financing or investment opportunities for a specified period while working with a particular lender, investor, or underwriter. This ensures exclusivity and prevents competing offers that could disrupt a financial transaction.
For example, if a company is raising capital through a private equity firm, it may enter into a clear market agreement stating that it will not seek funding from other investors during the negotiation period.
Why is clear market important?
A clear market provision is important because it provides certainty to lenders, investors, and financial institutions by preventing competing transactions that could affect the terms or pricing of a deal. It also helps businesses maintain credibility in financial negotiations by ensuring exclusivity and focus on a single transaction.
For businesses, agreeing to a clear market term may improve their ability to secure favorable financing or investment terms. However, it also limits their flexibility to seek alternative options, making it essential to carefully consider the duration and scope of the restriction.
Understanding clear market through an example
Imagine a company planning an initial public offering (IPO) signs an underwriting agreement with an investment bank. The agreement includes a clear market clause stating that the company cannot issue additional securities or seek alternative funding during the underwriting process. This ensures that the underwriter has a stable market for the IPO without unexpected competition from other fundraising efforts.
In another scenario, a business secures a loan from a private lender, agreeing to a clear market provision that prevents it from negotiating with other lenders for a set period. This ensures that the lender has an exclusive opportunity to complete the financing without the risk of losing the deal to a competitor.
An example of a clear market clause
Here’s how a clear market clause might appear in a financing agreement:
“The Borrower agrees that, for a period of [X] days following the execution of this Agreement, it shall not solicit, negotiate, or enter into any alternative financing arrangements that could compete with or adversely affect the transaction contemplated herein.”
Conclusion
A clear market provision ensures exclusivity in financial transactions, preventing a company from seeking competing financing or investment opportunities during a specified period. While it provides stability for lenders and investors, businesses should carefully consider the restrictions to ensure they align with their strategic goals and financial flexibility.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.