Royalty Agreements When the Unexpected Occurs

From the perspective of the royalty investor the ugly unexpected is the case where a royalty issuing company is unable to generate its projected revenues.

The cause for this disappointment can be either an unanticipated or temporary problem faced by one or more of the customer’s customers or something more fundamental and permanent, such as a patent denial or competitive weakness of the royalty issuing company’s primary product.

If these problems result in the royalty issuer not meeting an agreed minimum level of royalty payments, then one solution could be for the terms of the royalty agreement to be amended to extend the royalty payment period due to the shortfall in royalty payments.

It is also possible that if cumulative royalty payments for a defined period do not reach expected minimum levels that royalty rates could be adjusted upward. The royalty rate could be increased until the amount anticipated by the investor has been achieved.

Royalty terms are totally flexible and the needs of both issuers and investors can be accommodated. Royalty payment period extension and royalty rate adjustment are the most simple tools to employ. Depositing additional assets as a surety may also be required during periods of disappointing revenues.

Royalty investors have no rights over corporate decision making and are not prospective business owners. They are purchasers of a percentage of the royalty issuer’s revenues which are anticipated to generate a minimum level of investment return.

Royalty investors are also likely to have had much of or all of their original investment returned after several years and are therefore likely to be favorably inclined and sympathetic towards the royalty issuing company. The original royalty agreement can provide for a modification of terms by the parties when needed.


Arthur Lipper, Chairman
British Far East Holdings Ltd.
+1 858 793 7100

©Copyright 2020 British Far East Holdings Ltd. All rights reserved.



Blog Management: Viktor Filiba

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