#MeToo: Use a “Morals Clause” in Contracts to Deter and Quash Perpetrators of Misconduct

February 28, 2018 By in Contracts Tags: , , , , Leave a comment

Conde Nast TagID: null/Photo via Conde Nast

Morals clauses (or morality clauses) have long been part of celebrity, musician, athlete and other talent contracts.  With widespread revelations of sexual harassment and other misconduct in the wake of the #MeToo movement, the use of morals causes is expanding beyond traditional talent contracts to executive employment, consulting, distribution, and other contractual arrangements.

A morals clause gives one party the right to terminate the contract if the other party does not meet a certain behavioral standard. The standard is typically illegal, offensive or immoral conduct, resulting in a negative impact on the other party.

Morals clauses originated in Hollywood in 1921 in an effort by movie studios to curb the private misconduct of actors.  One year later, a morals clause appeared in Babe Ruth’s contract with the Yankees:

[Ruth] shall at all times. . .refrain and abstain entirely from the use of intoxicating liquors and. . .shall not during the training and playing season in each year stay up later than 1 o’clock A.M. on any day without the permission and consent of the Club’s manager. . .[I]f at any time. . .the player shall indulge in intoxicating liquors or be guilty of any action or misbehavior which may render him unfit to perform the services to be performed by him hereunder, the Club may cancel and terminate this contract.

More recently, morals clauses have been used to suspend or terminate deals with Tiger Woods (extramarital affairs), Michael Vick (dog fighting), Kobe Bryant (sexual assault), and Kate Moss (cocaine).

The allegations and acts of sexual and other misconduct that gave rise to the #MeToo movement have caused Hollywood studios and distributors to review and revise their contracts to include morals clauses, like this one:

Company may, at its option, terminate or suspend this Agreement immediately upon written notice to [Party B], if during the Term: (a) [Party B] commits any criminal act or other act involving moral turpitude, drugs, or felonious activities; (b) [Party B] commits any act or becomes involved in any situation or occurrence which brings [him/her] into public disrepute, contempt, scandal, or ridicule, or which shocks or offends the community or any group or class thereof, or which reflects unfavorably upon Company or reduces the commercial value of Company’s association with [Party B]; (c) information becomes public about how [Party B] has so conducted [himself/herself] as in (a) or (b) in the past; (d) [Party B] becomes involved or associated with an event or circumstance caused by [Party B]’s immediate family members or others closely associated with [Party B] (other than Company) which reflects unfavorably upon Company or reduces the commercial value of Company’s association with [Party B]; or (e) [Party B] takes any action or makes or authorizes statements deemed by Company to be in derogation of Company or its products.

Note that in the above example, the hiring company has the option to “terminate or suspend” instead of simply terminate.  This allows the company to take a wait-and-see approach if allegations of misconduct prove to be false or other favorable facts come to light.  (In the employment context, the employer’s right to “terminate or suspend” under the morals clause is in addition to the employer’s right to terminate for violation of the company’s code of conduct or anti-harassment policy.)

Some companies are going a step further, and implementing morals clauses not only in traditional talent agreements, but also in executive employment, consulting, and other agreements.

Given the substantial negative implications of misconduct on its victims, as well as on company morale, culture, and reputation, it makes good sense to think creatively about expanding the use of morals clauses to a range of business contracts.  Moreover, the immense power of the media to magnify the impact of a single event of misconduct requires companies to take (and to obtain the contractual right to take) swift remedial action upon any occurrence of misconduct in accordance with their policies.

A well-drafted morals clause can serve as a deterrent to potential misconduct and provide a heavy penalty for actual misconduct (e.g., contract termination).  It should also send a clear message to potential perpetrators of misconduct that such behavior will not be tolerated under any circumstances.

(Note: for talent, executives and others, there are often good arguments for seeking “reverse morals clauses“, but that is a post for another day.)

 

Two Client Case Studies: How to Raise Capital Using the New SAFE for LLCs

January 6, 2018 By in Financing, LLCs, SAFEs, Startups Leave a comment

case studies labelI created the Simple Agreement for Future Equity (SAFE) for LLCs for my LLC clients that needed a simple financing instrument to raise capital swiftly without much legal expense, while retaining pass-through tax treatment for their businesses. The SAFE for LLCs is an alternative to the Y Combinator SAFE, which is designed specifically for C-Corporations.

With the passage of the Tax Cuts and Jobs Act of 2017, the LLC remains an excellent structure for many business entities, the individual owners of which are now eligible to deduct 20% of their LLC-derived “qualified business income” on their US federal tax returns (subject to certain exceptions and limitations).

Since the LLC is largely a creature of agreement, its flexibility allows the SAFE for LLCs to be tailored to a wide variety of financing transactions. Here are two case studies showing the way my clients have used the SAFE for LLCs:

(A) Search Fund Financing:

  • Background: A former business executive at a multinational corporation and his business partners joined to form a search fund to acquire and roll-up various retail business assets under an LLC holding company. The assets were to be consolidated, re-vamped and re-branded under a single name, thereby adding substantial value.
  • Challenge: The client needed to quickly raise $500,000 to finance the asset search, due diligence and initial asset purchases. From their contacts in the industry, the client team had access to capital from private accredited investors, but needed a contractual mechanism to receive and deploy the funds.
  • Solution: I created a variant of the SAFE for LLCs called a “Seed Financing Investment Agreement (SFIA)” that allowed the client to raise the capital and spend it over 6-month search period (extendable for another 6 months) to identify and place assets for acquisition under contract. Upon the closing of a “next equity financing” (i.e., financing of at least $3,000,000) or a “liquidity event” (i.e., sale of equity or assets of the LLC), each SFIA automatically converts to the SFIA investor’s pro rata portion (based on his/her investment amount) of 25% of the the equity units owned by or issued to the LLC founders in the LLC as of the closing. This structure, in which the founders actually shared a portion of their equity with the investors, coupled with the founders’ experience and acumen, clearly aligned the investors’ and founders’ interests, and the target $500,000 was raised in short order. After the issuance of all SFIAs, the LLC succesfully closed the “next equity financing” for the acquisition and roll-up of the target assets and the SFIAs converted to founder-equivalent equity.

(B) The Film Financing:

  • Background: A film production company needed to raise capital for a new documentary film involving a time sensitive and controversial matter. The funds would be used to identify a screenwriter, develop a script, and engage in related film development activities.
  • Challenge: The client, a special purpose LLC wholly-owned by the film production company, wished to raise approximately $300,000 to finance the initial development of the project.
  • Solution: I created a variant of the SAFE for LLCs called a “Film Development Investment Agreement (FDIA)” that allowed the client to raise sufficient capital to finance the project within 30-60 days. The FDIA automatically converts to a special class of equity units upon the closing by the LLC of a “next equity financing” for the consummation of the project. The equity units to be issued to FDIA investors are the same as the equity units to be issued to investors in the “next equity financing”, except that they offer a 3% enhancement in preferred return relative to the preferred return payable on the standard equity units issued in the next financing. If a “liquidity event” occurs before the “next equity financing”, each FDIA investor had the priority right (over the LLC owners) to receive his/her original investment amount plus 30% of such amount, reduced on a pro rata basis among investors based on the LLCs available cash. The LLC is presently using the FDIA funds to develop the film.

These two case studies are merely examples of the many ways in which LLCs can swiftly and efficiently raise capital using the SAFE for LLCs. If your business is an LLC or a limited partnership and needs to raise seed capital, the SAFE for LLCs may be a viable option for you. Please contact me for details.

Introducing the New Simple Agreement for Future Equity (SAFE) for LLCs

October 4, 2017 By in Financing, SAFEs 2 Comments

My new Simple Agreement for Future Equity (SAFE) for LLCs is the first SAFE specifically designed for limited liability companies classified under U.S. federal tax law as partnerships or disregarded entities.

The new SAFE for LLCs, annotated with helpful drafting notes, is available here.

Due to the complexities associated with the taxation of pass-through entities under U.S. law, you should consult with and rely upon the advice of your own tax and legal advisors regarding the tax treatment associated with using this SAFE.

 

Beware of “Hotel California” Contracts

September 15, 2017 By in Contracts Leave a comment

hotel-californiaBeware of what I call “Hotel California” contracts.  These are contracts that may be easy to enter into but difficult to leave (i.e., terminate).

Before you sign a new contract, train yourself to think like a spy entering a hotel lobby, “Where are my exits if things go awry?”

For more on this, please read my article: “Your Right to Terminate: Quite Possibly the Most Important Right in Your Business Contract.”  Relationships change, and some day you may need a clean exit.

‘Relax’ said the night man, ‘We are programmed to receive. You can check out any time you like, But you can never leave!’   – Eagles

Free, Publicly-Available Startup Company Forms and Document Generators

August 28, 2017 By in Corporations, Financing, LLCs, SAFEs, Startups Leave a comment

The angel investor network Blue Water Angels has compiled a nice summary of free, publicly-available, startup forms and document generators, including direct links to those forms and generators, all available here.

Remember: even if you start with a good form, always engage your favorite corporate lawyer to review your documents before signing off.

The devil is in the details.

How to Create a Simple Cash Bonus Plan to Incentivize and Attract Employees

June 20, 2017 By in Contracts, Incentive Plans Leave a comment

showmethemoney-Jerry-Maguire-1Your employees, like wide receiver Rod Tidwell (Cuba Gooding Jr.) in the classic movie Jerry McGuire, are valuable commodities.  They will stay with you if offered proper incentives, especially if you “show them the money.”

One of the best ways to do this is to create a simple cash bonus plan.  A cash bonus plan offers employees a financial reward for achievement of corporate, business unit and/or individual goals. The goals can be short-term (e.g., annual or quarterly) or long-term (e.g., three to five years), or both.

The best cash bonus plans are easy for employees to understand and easy for companies to operate. The plan is memorialized in a short written document that is specifically tailored to the company. The company retains the right to amend the plan at any time.

A cash bonus plan can be particularly useful for LLCs and S-corporations that wish to share the economic benefits of ownership with employees without the burdens of issuing Schedule K-1s (with negative tax consequences to employees) or having additional owners with voting and other rights. Cash bonus payments are taxed as ordinary income to employees and subject to standard payroll withholdings and deductions.

A well-crafted plan is a wonderful tool to incentivize and attract high-performing employees.

Here is a summary of the main issues you should cover to create a simple cash bonus plan:

  1. Purpose. The purpose of the plan should be stated clearly so that employees understand its goals, such as “to attract and retain superior employees by providing a competitive bonus program that rewards outstanding performance.”
  2. Eligibility. To be eligible, an employee must typically work at least a minimum number of hours (e.g., 40) as a full-time employee. Employees who have been terminated or who have resigned prior to the bonus payment date are usually ineligible, as are temporary workers. Companies may implement special eligibility requirements as they deem appropriate.
  3. Funding Metrics. The bonus pool can be a percentage of company net income, adjusted net income, earnings before interest, taxes, depreciation and amortization (EBITDA), or any other pool of money that the company identifies. The pool is generally capped as a percentage of the chosen metric.
  4. Performance Goals. Performance goals should clearly describe the metrics that the employee is required to achieve to earn a bonus, and how award determinations are made. Goals should align corporate, business unit and individual performance targets with company interests and encourage teamwork, while retaining incentives for individual performance. Many plans define the maximum target bonus available to each plan participant at the beginning of the performance period if all goals are achieved. Goals may be separated into organizational and individual categories, such as corporate goals to increase earnings and individual goals for productivity, customer satisfaction and client procurement/retention. Goal categories may be weighed (e.g., 50% EBITDA, 50% individual) to encourage one factor over another or equal weight in each category, depending on company objectives. However, the simplest, most easily understsood plans tend to be the most successful.
  5. Bonus Payments. Bonus payments are customarily made within 30-60 days after the end of the performance period (e.g., quarter or year). Bonus payments may be prorated for employees who take approved leave, including maternity or parental leave, and according to date of hire.
  6. Calculation Method. The bonus payable to each employee may be calculated as a percentage or multiple of annual base salary or as a percentage of the bonus pool. Bonuses are often capped at a certain amount.
  7. Non-Assignment. Bonuses should be non-assignable to prevent incentives from being mis-directed. IRS private letter rulings require S-corporations to prohibit assignment of bonus rights to prevent classification of the bonus as a second class of stock.
  8. Withholding. All bonus payments should be subject to applicable deductions and withholdings for federal, state and local taxes, and any other required deductions.

If you are interested in creating a simple cash bonus plan for your company, please contact me at john@jmdorsey.com.

Photo credit: ‘Show me the money!’: Tom Cruise as Jerry Maguire

The Top 8 Issues in Sponsorship Sales/Strategy Consulting Agreements

May 16, 2017 By in Contracts, Sponsorship Leave a comment

Maximizing sponsorship revenue for an event or brand often requires greater resources than those available within a rights-holder’s internal organization.  Fortunately, there are several reputable consulting companies that provide sponsorship sales and strategy consulting to bridge the gap. The consultants, which range from big players such as IEG/ESP Properties and Legends to boutiques like Caravel Marketing, provide a range of sponsorship-related services, including valuation, packaging, content creation, branding, analytics, activation strategies, customer engagement and sales representation.

I have helped clients negotiate successful arrangements with sponsorship consultants and I have also represented consultants in deals with sponsorship properties.  This article discusses the most heavily negotiated terms based on my experience:

  1. Scope of Services.  The scope of services will vary depending on the needs of the rights-holder.  A recurring event with a substantial operations team may require only sponsorship sales consulting to help boost revenue, while a well-established organization seeking to develop a comprehensive sponsorship platform for the first time may need a full strategy, valuation and execution package in addition to sponsorship sales consulting.  The key here is to be clear about each party’s expectations of the other. Consultants should make sure they have, among other things, full access to their client’s sponsorship assets and activation opportunities, and assured responsiveness to requests for approvals and information.  Rights-holders should make sure the agreement answers their main questions regarding services to be provided, such as:
    • What are the consultant’s specific duties and deliverables?
    • What strategy services will be provided (e.g., ideas, content creation, packaging, presentation development, valuation, digital, analytics, customer/fan engagement, etc.?)
    • Will regular reports about meetings, presentations, pitches, introductions, prospects contacted, etc. be provided?  How often and in what level of detail?
    • Will the consultant permit a representative of the rights-holder to attend sponsor/prospect meetings?
    • Will the consultant help negotiate sponsorship agreements?
    • Is the consultant expected to be available for meetings to travel for the benefit of the rights- holder?
  2. Exclusive vs. Non-exclusive.
    • Exclusive Relationships. Sponsorship consultants will almost invariably seek an exclusive relationship with the rights holder to fully incentivize the consultant to secure deals and freely market and sell the rights across its relationship portfolio without competitor interference.  Exclusivity can also be beneficial to the rights-holder because it mitigates against the risk of duplicative sales efforts by multiple consultants, which would demonstrate organizational mismanagement by the rights-holder and possibly diminish sponsorship revenue.
    • Non-exclusive Relationships.  Notwithstanding the above-mentioned benefits of exclusivity to both parties, non-exclusive deals are possible.  I have successfully crafted non-exclusive sponsorship sales consulting arrangements for larger clients with care to avoid overlapping marketing efforts. Non-exclusive arrangements should (i) clearly identify the prospects to be solicited in a mutually agreed joint prospect list and (ii) require ongoing open communication and reporting regarding any changes to that list.
  3. Compensation.
    • Sales Consulting. Market rate compensation for sponsorship sales consultants is typically (i) a monthly retainer plus (ii) a commission based on a percentage of gross sponsorship revenue received (including both cash and in-kind value).  Commissions on in-kind value are typically paid only to the extent such value relieves budgeted line items of the sponsorship property.  (Note that the value attributed to in-kind benefits can be heavily negotiated, ranging from fair market value to wholesale value to some other value, often depending on whether the property must put forth additional effort or resources to use the in-kind contributions.)  I have seen sponsorship sales commissions ranging from 10%-20%, with customary commissions being from 10%-15% when a retainer is paid.  Sometimes commissions are laddered, such as a commission of 15% on the first $X of sponsorship revenue and 10% on amounts above $X.  In certain cases, the rights-holder may negotiate recoupment of a portion of the monthly retainer (I have seen up to 50% recoupment) by deduction from the commissions payable.
    • Strategy Consulting. Compensation for strategy work is often project-based or charged on an hourly basis.  If strategy consulting is combined with sales consulting, then the fees will be a combination of the above.
    • Expense Reimbursement.  The consultant will require reimbursement for its travel and other out-of-pocket expenses, including graphic printing costs or other special project costs.  Usually the rights-holder has a pre-approval right over all reimbursable expenses or reimbursables in excess of an agreed cap.
  4. Commission Carve-Outs.  The rights-holder may reasonably seek to exclude from commissions sponsorship dollars received from companies or brands (i) with which the rights-holder has a bona fide pre-existing sponsorship relationship and (ii) it finds objectionable on moral, business or other grounds.  In addition, to prevent conflicts of interest, the rights-holder may wish to prohibit the consultant from receiving commissions on sponsorships from any organization in which the consultant owns an interest or would receive remuneration (e.g., a kickback) without full disclosure to and prior written consent of the rights-holder.  The consultant should freely disclose any possible “double-dipping” opportunities from affiliate relationships from the beginning, and any permitted affiliate deals should be stated in the contract to avoid later disputes.
  5. Commissions on Renewals (“Tail”). Sales consultants will usually seek commissions on sponsorship renewals after the term expires if they arose from relationships the consultant originated during the term. The rationale for this is that, without the consultant’s origination efforts, there would be no renewal.  It is reasonable to allow these “tail” commissions for a limited time period after the term, although in certain instances I have seen the rights-holder negotiate up to a 50% reduced commission on sponsorship renewals (e.g., if the origination commission is 10%, the renewal commission is 5%).  The obligatory term for payment of renewal commissions is negotiable and varies depending on the type of rights at issue.  I have seen renewal commissions payable for terms ranging from 6 months to 3 years after expiration of the original agreement term.  If the consultant is terminated for breaching the contract, the tail commissions should terminate.
  6. Services to Competitors.  Especially in sponsorship sales arrangements, the rights-holder may wish to prevent the consultant from providing similar services to direct competitors if the services are likely to conflict with the services provided to the rights-holder or otherwise put the rights-holder at a competitive disadvantage.  For example, if a music festival retains a consultant to sell sponsorships for a June 2018 event, the festival may require the consultant not to provide services to any other music festival within a within 300 square miles of the event during the 90-day period immediately before or after the event. This is often a fair request if the clause is narrowly tailored, but for large consultants with substantial worldwide customer portfolios it may be unrealistic.
  7. Work Product.  If the consultant is creating specific deliverables for a sponsorship property, then the property should typically own the intellectual property rights in those deliverables since it is paying value for them.  The consultant should, however, be permitted to retain ownership of any underlying or pre-existing IP used to create the deliverables and should grant the rights-holder an irrevocable, worldwide, royalty-free license to use that underlying IP to the extent it is incorporated into the deliverables.
  8. Term.  The agreement term is customarily a period of time necessary to complete the project or obtain sponsorships for the event or brand.  Each party is usually permitted to terminate the agreement (i) at any time for uncured material breach by the other party and (ii) for convenience upon advance written notice.  Often the consultant will negotiate a minimum fixed term of the agreement and/or a minimum fee payable by the rights-holder even if the agreement is terminated early, as long as the consultant is not in breach. This is generally a reasonable request because it justifies the consultant’s investment of time and energy into the project, which can be substantial during the initial ramp-up period.  I have seen agreements giving the rights-holder a termination right if $X in sponsorship revenue is not generated by Y date, but those are unusual.

I hope this article is helpful for both consultants and sponsorship properties.  If you have any experiences in the sponsorship consulting market you would like to share, please write them in the comments below or send me an email at john@jmdorsey.com.

 

Sponsorship Agreements: Rights of First Negotiation (ROFNs) and Rights of Last Refusal (ROLR)

May 12, 2017 By in Contracts, Sponsorship Leave a comment

In a previous article, I discussed Rights of First Offer (ROFOs) and Why You Need Them in your sponsorship agreement if you are a sponsor.  But if you are not the sponsor and instead you are the event or other sponsorship rights-holder, the ROFO will limit competitive bidding for your valuable sponsorship rights and may therefore decrease your sponsorship revenue.

For this reason, if a sponsor seeks to include a ROFO in a sponsorship agreement, the event or other rights-holder should usually either (i) reject the ROFO or (ii) change it to a Right of First Negotiation (ROFN) or Right of Negotiation (RON).  The ROFN is the common middle road approach used in sponsorship agreements.

Below I discuss both the ROFN and the RON, as well as the Right of Last Refusal (ROLR), which is sometimes used in conjunction with the ROFN/RON.

  • Right of First Negotiation (ROFN).  The ROFN requires the grantor to first and exclusively negotiate with the sponsor for a thing (e.g., renewal of the sponsorship or new rights) for a defined time period before negotiating for the thing with any third party. The ROFN is only triggered if the grantor makes the thing available.  For example, if there is no event or no new sponsorship rights are made available during the ROFN period, then the ROFN does not come into effect and expires. The only obligation the ROFN typically imposes on the parties is to negotiate in good faith.  If the sponsor and the grantor fail to reach an agreement for the thing within the defined period, then the grantor is free to negotiate and enter into an agreement for the thing with any third party, assuming the sponsor does not have a Right of Last Refusal (ROLR) (described below).  Here is a sample sponsor-friendly ROFN clause that is derived from a deal I worked on:

“If the Company or any of its affiliates organizes an Event at any time in any part of the world during the 2-year period following the 2017 Event (the “Future Event“), Sponsor shall have the exclusive right of first negotiation to purchase the same rights granted under this Agreement for the Future Event. On the date that the Company makes the final decision to hold the Future Event, the Company shall give written notice to Sponsor that it will hold the Future Event. Beginning on the date that Sponsor receives such notice and ending sixty (60) days thereafter, the parties shall negotiate in good faith to enter into a definitive agreement for the Future Event.  If the negotiations do not result in an agreement during the negotiation period for Sponsor to sponsor the Future Event, the Company may enter into negotiations with third parties with respect to the purchase of such sponsorship rights, or any other rights, and may proceed, in its sole discretion and without further obligation to Sponsor, with the sale of such sponsorship rights, or any other rights, to any third party.”

  •  Right of Negotiation (RON).  The RON is the same as the ROFN except the RON is not exclusive and does not give the sponsor a first priority in negotiation. Since the RON is nearly the functional equivalent of negotiating for the thing on the open market, it has little economic value and is not customarily used.
  • Right of Last Refusal (ROLR).  The ROLR is sometimes implemented in connection with a ROFN or RON.  If the sponsor and the grantor do not reach a deal for the thing during the ROFN/RON period and the grantor subsequently receives an offer from a third party for the thing, the ROLR gives the sponsor the right to match the third party offer during a defined time period.  A potential drawback of the ROLR for the grantor is that may discourage third parties from negotiating with the grantor for the thing since they know they may be outbid.  On the other hand, if there is significant interest among third parties and the ROLR holder, the grantor may be able to use the third party bids as a stalking horse to increase the price payable by the ROLR holder.  That said, ROLRs are not customarily found in sponsorship agreements, and in most cases the sponsorship recipients should avoid them because (i) they are more likely reduce third party interest in sponsorship assets than to increase the price of those assets and, (ii) perhaps more important, they complicate sponsorship negotiations for management.

Portions of this article were inspired by the article, Rights of First Negotiation, Offer and Refusal by PracticalLaw, a tool I use in my law practice.

Sponsorship Agreements: ROFOs and Why You Need Them

May 10, 2017 By in Contracts, Sponsorship Leave a comment

Imagine that last year you sponsored a wonderful event with a return on investment that exceeded expectations. The sponsorship agreement has now expired by its terms, and you have learned that the event is seeking alternative sponsors for your former rights, as well as partners for new properties, including digital and internet-of-things partners (See, e.g., SAP digital tools).
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You would have loved to have the first seat at the table in negotiating a renewal and for the new opportunities, but you must now negotiate new terms with the event in full competition with other sponsors.

If you had a ROFO, or Right of First Offer, you could have improved your lot. The ROFO gives the sponsor the opportunity to “stay in the game” when the agreement terminates or when new sponsorship opportunities are made available.

The ROFO is important because the sponsorship agreement, particularly in the eyes of the sponsor, has two significant limitations:

  1. It will expire after a defined term, such as conclusion of the event or a period of years; and
  2. It will not cover all potential sponsorship opportunities, such as new properties or rights that are not fully established or contemplated when the deal is first papered.

The ROFO requires the grantor (in this case, the event) to offer to the sponsor the right to purchase a thing before making or soliciting an offer for that thing from any third party. The thing, in the context of a sponsorship agreement, is customarily a renewal of the sponsorship or new/additional rights that were not previously available.

If the sponsor rejects the grantor’s offer, the grantor is free to negotiate a deal for the thing with third parties. But the ROFO prohibits the grantor from making a third-party deal unless the terms are at least as favorable (or materially more favorable) to the grantor as the terms offered to the sponsor.

For example, if ACME Rental Car enters into an agreement to become the exclusive official rental car sponsor of the 2018 Indianapolis 500 for $5 million cash plus additional benefits, ACME could include a provision in the agreement giving ACME a ROFO for the same rights for the 2019 event (and possibly for subsequently available sponsorship properties, categories, or territories).

The ROFO would provide that the Indy 500 could not offer any third party the right to be the official rental car sponsor (or similar category sponsor) of the 2019 event without first making an offer to ACME. If ACME refused the offer, only then could the Indy 500 seek third party rental car sponsors. However, the Indy 500 could not enter into an agreement with a third-party sponsor unless the deal was at least as favorable (or materially more favorable) to the Indy 500 as the offer made to ACME.

For instance, assume that under the ROFO the Indy 500 offers ACME a 2019 sponsorship package for $6 million cash plus additional benefits. ACME rejects the offer. The Indy 500 could enter into the same deal ACME rejected with Jalopy Car Rental Car, but it could not do a deal with Jalopy for $5.5 million unless it first made that offer to ACME and ACME rejected it.

Now, if you are not the sponsor but instead you are the event or other sponsorship recipient, the ROFO is not necessarily favorable to you because it limits the market of potential sponsors, which can reduce your fees. What to do? The event or other recipient can either (i) decline to include the ROFO in the sponsorship agreement or (ii) change it to a Right of Negotiation (RON) or a Right of First Negotiation (ROFN), both of which I discuss here.