What is an Ancillary Agreement?
Ancillary agreements are supplementary agreements that supplement a separate and existing primary agreement between the parties, whether that primary agreement is a contract, lease, note or other legal document. In short, an ancillary agreement is a supporting agreement that rests on, flows from, and is ancillary to , the primary agreement. A context for their definition is generally provided in the "Whereas" clauses to the ancillary agreement which provides that it is intended to amend a prior agreement or is to be executed at or around the same time as a related primary agreement. Examples of typical ancillary agreements include: (a) a collateral security agreement that creates rights in personal property to support a prior primary security agreement; (b) a guaranty to reinforce an existing primary obligation; (c) an intercreditor agreement among secured creditors; and (d) a subordination agreement tied into a primary financing or development agreement.
Different Types of Ancillary Agreements
Ancillary agreements between parties can cover a multitude of options, and the wording will often depend on the nature of the employer and how close the parties are. For example, confidentiality and non-circumvention are common in many industries, but other agreements might be much more specialized, such as a caddy and golfer.
Confidentiality
Confidentiality agreements are often used in areas where clients will be using or sharing a lot of private information, especially when it has to do with personal privacy. For a professional services company, including lawyers and accountants, this may include not revealing employee or client information to third parties who may be competitors. In medicine it may involve the need to keep patient information confidential under laws such as HIPAA.
Non-Circumvention
This agreement is often required when parties have access to trade secrets or other proprietary information and may circumvent the other party unnecessarily. For example, a trader and broker may share responsibility for a client.
Non-Competition
Non-competition agreements are a subset of non-compete agreements, but are only enforceable to the extent of restricting a person from competing in given districts. It excludes competition in the area of their employment. So if there was a cotton mill in Georgia that closed, an employee would be able to go work in a cotton mill that opened up in a different state.
The Significance of Ancillary Agreements in Business Transactions
Ancillary agreements are an important part of the negotiation and documentation of standard business transactions. Often the parties simultaneously enter into several agreements, each governing a different aspect of their relationship. Such agreements might include a "master" agreement, an escrow agreement, a software licensing agreement, a sales agency agreement, a distribution agreement, and several others. Such agreements conceivably could be consolidated into a single agreement. However, depending on the nature of the transaction, such agreements should not be consolidated into a single agreement. A single agreement may lessen the effectiveness of some of the documents in their effort to address a particular issue or clarify a specific term. In addition, individual ancillary agreements can be easier to amend over time as necessary.
Each ancillary agreement likewise may be executed in a special form, such as a letter agreement or a memorandum. For example, if a long-form agreement does not contain certain important terms, and if those terms are sufficiently detailed, the long-form agreement may be incorporated by reference into a letter agreement addressing only the important terms. A memorandum may be used to describe and evidence an important term contained in a long-form agreement, but does not need to address every term of that long-form agreement. Both letter agreements and memoranda may reduce the likelihood of inadvertently making a material mistake when entering into a long-term contract with numerous variations of seemingly similar terms.
If one of the parties to a transaction is a nonprofit or a government entity, it also may be necessary to comply with additional laws, rules, and regulations that apply to such entities. Such entities ordinarily should have their counsel draft and review any necessary ancillary agreements.
How to Draft Effective Ancillary Agreements
Ancillary agreements often involve unique business considerations that should be clearly reflected in the final deal terms.
Because ancillary agreements often accompany the purchase or sale of a business, it is important to ensure that they are consistent (and reconciled with) the deal terms. For example, some sellers may expect that a buyer to continue a particular service (such as pay rolling employees), while others may restrict a buyer from doing so. If that is the case, the deal terms must expressly address which expectation overrides. Whether the agreement is an assumption of a lease or the sale of business assets, there is likely to be overlap and cross-reference with the principal transaction. To the extent that certain provisions differ from the principal transaction, or to the extent an ancillary agreement includes provisions that are not a part of the principal transaction, parties should consider the following:
• Assignment: In many cases, both parties will prefer to be able to assign the agreement to a third party in the future.
• Defaults & Remedies: Defaults should be clearly defined, and contain specific remedies or penalties. Otherwise, aggrieved parties have no remedy or must rely on the standard measure of damages.
• Confidentiality: Most agreements require confidentiality over the terms of a deal, and can also protect confidential information that passes throughout the relationship. Parties should also consider whether certain aspects of the agreement itself can be publicly disclosed (such as providing for listing the agreement in connection with an S-1, or other public filing).
• Non-Competition: Non-competition clauses should be carefully tailored to the specific parties and circumstances, and should not be overreaching. Generally, non-competition provisions are enforceable if they are no greater than necessary to protect legitimate business interests, such as protecting confidential information, confidential relationships with customers and suppliers, or investment in training.
• Non-Solicitation: Non-solicitation provisions are generally more enforceable than non-competition provisions. In addition to the customary restriction on solicitation of employees, non-solicitation provisions are often effective at prohibiting solicitation of customers, suppliers, or other business relationships. Non-solicitation provisions can also be drafted to refer to "proprietary lists" of current or potential customers or suppliers, so that a departing officer or employee cannot use those lists in a competitive manner after leaving.
• Representations: Ancillary agreements may include many of the representations and warranties included in the principal transaction, but they can also address details not otherwise set out in the principal agreement. For example, representations may address financial records, inventory (including accounting for consignment stock), equipment maintenance requirements, and compliance with bonding and surety requirements.
• Term: Ancillary agreements should be for a set term or duration, and often contain terms that allow for one or both parties to extend that term on notice. In some instances, no notice may be required to extend the term.
Legal Aspects and Common Mistakes in Ancillary Agreements
When dealing with ancillary agreements, the specific industry will often dictate the legal considerations that must be addressed. For instance, where an ancillary agreement falls within the purview of a regulated industry, parties must be sensitive to the limitations or requirements imposed by such regulations. One example would be the operation of a pharmacy where the sale of certain drugs is limited based on the category of license held by the pharmacy. In that case, an ancillary agreement would have to be carefully construed so as not to violate the restrictions set forth in the pharmacy regulations.
While ancillary agreements may seem unimportant at first glance, they do have legal significance and can prove to be enforceable in some jurisdictions if not carefully drafted . As such, a party receiving an ancillary agreement must ensure that the fulsome requirements of the agreement are met. Common pitfalls encountered with ancillary agreements are: A common pitfall has also been in the consideration. For the most part, this is not an issue where there is sufficient consideration present. It becomes an issue in those cases where the consideration is nominal or there is no actual consideration. Generally, the agreement must be supported by some sort of consideration, which may be defined as "something of value that induces a person to enter into a contract." Mere recitals of consideration in the transaction section of the agreement are not enough.
Practical Examples of Ancillary Agreements in Action
Ancillary agreements are widely used across industries to manage risk and secure operational needs. For example, in the biotech industry, research institutions often enter into Material Transfer Agreements (MTAs) when sharing biological materials (like cell lines or other materials used in testing) with companies developing new products. Such agreements lay out the terms under which the material can be used and protect the parties from potential patent infringement claims. In the pharmaceutical space, companies frequently enter into Agreements in Principle (AIPs) with government entities wherein the government agrees to purchase a specific quantity of drugs for a certain time frame. These agreements cover the timeline, pricing, and related terms for bulk sales. AIPs are very important in industries where government procurements result in demands for significant volumes of product, such as vaccines. AmerisourceBergen recently agreed to enter into several MSA Termination Agreements in order to resolve potential claims on outstanding transactions. The termination agreements took the form of a joint stipulation to dismiss with prejudice in a California federal court litigation. Most of the agreements merely signaled a termination to the MSA relationship, but some agreements also spelled out specific deal parameters during the interim period until full execution of the termination agreements. Some agreements required the parties to continue to transact business to fulfill advance orders, with the option to request partial deliveries of the MSA participants, for example. Other agreements included provisions where AmerisourceBergen was to coordinate with a competitor of a terminated supplier to allow for a gradual transition to the competitor for contract customers and to continue servicing contract customers during the transition period.
Conclusion: The Strategic Value of Ancillary Agreements
Understanding and employing ancillary agreements is essential in any business deal. Too often, however, they fall by the wayside, as parties hastily finalize their main contracts without consideration for agreements and documents that can drive substantial long-term benefits. With the right adviser , this strategic oversight can be avoided. An experienced attorney will see opportunities to maximize your business through the effective use of ancillary agreements, ensuring all pieces of your larger deal contribute to sustainable growth.