“Most favored nation” clauses, or MFN clauses, are intended to protect contracting parties from unequal treatment. They entitle a party entering into a contract with another party to the same benefits as anyone else entering into a similar contract with the other party. MFN provisions can arise in a wide variety of contexts, including international trade agreements, business contracts, and lending agreements.

In the international trade context, MFN clauses ensure a level playing field for trading partners. It is a core principle of the World Trade Organization (WTO) that promotes non-discrimination in global trade. While the concept has roots in international trade, MFN provisions play an important role in a variety of business and commercial contracts.

A number of business and commercial contracts contain MFN provisions. For example, in a supply agreement, a buyer may request an MFN clause to prevent the supplier from giving other customers lower prices, better payment terms, or other more advantageous features.

Loan agreements may also contain MFN provisions. For example, if a company already has an existing credit agreement in place and subsequently decides to enter into an incremental credit facility to borrow additional debt, the incremental credit facility may be subject to an MFN provision. The MFN provision is usually drafted to apply to all incremental indebtedness incurred by the borrower. The purpose is to provide pricing protection to lenders, keeping the all-in yield and other material terms of the incremental indebtedness similar to the existing indebtedness.

Companies raising capital from investors may include an MFN clause in the investment documentation to ensure earlier investors that they are receiving at least as favorable terms as later investors. MFN clauses can be especially important in venture capital financing rounds, where early-stage investors will want assurances that they are not being disadvantaged or diluted relative to investors in subsequent financing rounds.

An example of an MFN clause in a purchase agreement for a private placement in public equity (PIPE) offering is set forth below:

“Notwithstanding anything to the contrary set forth herein, the Company acknowledges and agrees that, during the period beginning on the date of this Purchase Agreement and ending on the date of the Closing, the Company will not enter into any additional purchase agreements with other investors with terms and conditions that are more advantageous to the investor thereunder than the terms and conditions set forth in this Purchase Agreement in any material respects, unless such terms and conditions are also offered to the Investor.”

While MFN provisions often serve a beneficial purpose, they can draw antitrust scrutiny. Government regulators are especially likely to scrutinize large companies that use MFN clauses to drive out smaller competitors. Companies like Amazon have been targeted with lawsuits for using MFN provisions that force third-party merchants to sell products on Amazon at prices that are at least as low as the prices offered for the same product on the merchant’s own website or elsewhere. Amazon alleges that the MFN provisions prevent Amazon’s third-party merchants from undercutting Amazon’s prices when selling elsewhere. However, the plaintiffs claim that Amazon charges exceptionally high fees for listing products on Amazon’s marketplace, which forces third-party merchants to sell their products at higher prices on Amazon. In the absence of an MFN clause, the plaintiffs argue that they would be able to sell their products at lower prices on other websites that charge lower or no listing fees.