What is a "market out clause"?
A "market out clause" is a provision sometimes included in underwriting agreements for securities offerings, such as initial public offerings (IPOs) or secondary offerings. This clause provides the underwriter with the option to cancel or postpone the offering if certain specified market conditions or events occur. It allows the underwriter to withdraw from its commitment to purchase and distribute the securities under certain circumstances.
How a Market Out Clause Works:
Inclusion in Underwriting Agreement:
The market out clause is included as a provision in the underwriting agreement between the issuer of the securities and the underwriting syndicate.
Specified Conditions:
The clause typically outlines specific conditions or events that, if they occur before the securities are issued, give the underwriter the right to terminate or delay the offering. Common conditions may include adverse changes in market conditions, disruptions in the financial markets, or other events that could impact the success of the offering.
Notice and Consultation:
If the underwriter intends to exercise the market out clause, it usually provides notice to the issuer promptly. The underwriter may also be required to consult with the issuer before making a final decision.
Termination or Postponement:
Depending on the terms of the market out clause, the underwriter may have the option to either terminate the offering or postpone it to a later date. The decision is often influenced by the nature and duration of the adverse market conditions.
Sample Market Out Clause:
"Market Out Clause: The underwriters shall have the right, at their sole discretion, to terminate this underwriting agreement and not purchase the securities if, prior to the closing date, there shall have occurred any material adverse change in the financial markets, any outbreak of hostilities or escalation thereof, any act of terrorism, or any other event or circumstance that, in the underwriters' judgment, makes it impractical or inadvisable to proceed with the offering on the terms and in the manner contemplated by the offering documents."
In this example:
The market-out clause gives the underwriters the discretion to terminate the underwriting agreement if certain specified events occur.
The specified events include material adverse changes in the financial markets, outbreaks of hostilities, acts of terrorism, or other circumstances that, in the underwriters' judgment, make the offering impractical or inadvisable.
Market out clauses provide flexibility to underwriters and help manage risks associated with unforeseen events or adverse market conditions that could impact the success of a securities offering. It's important for both parties to clearly understand and negotiate the terms of the market out clause in the underwriting agreement. .
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