What is an Evergreen Contract?
An Evergreen Clause is a contract provision that calls for the contract to roll over (or continue) after the maturity or expiry of the agreement. The contract is renewed over time until either party cancels or terminates the contract.
How Does an Evergreen Contract Work?
An evergreen contract is an agreement that rolls over periodically until it is terminated by either party. When two or more parties sign an agreement they determine the maturity or end date of the contract. The maturity date varies from contract to contract, and it depends upon the nature of business. For instance, export businesses may require short term contracts whereas manufacturing enterprises sign contracts that often last longer. Regardless of the length of the contract, all parties are bound to fulfill their obligations as long as contract is enforceable. If the contract incorporates an evergreen provision, it is renewed automatically until it is terminated by either party on or prior to the expiry date. Any type of business contract may have an evergreen provision, including lease agreements, employee stock option plans, insurance policies, subscriptions; dividend reinvestment plans (DRIPs) and other related contracts.
Examples of Evergreen Contracts Explained
a) an employer may incorporate an evergreen provision in an employee stock option plans which automatically adds shares to the plan periodically. The ESOP is offered to retain efficient employees of the company and the evergreen option is renewed every year until management decides to terminate it. b) Dividend reinvestment plan (DRIP) is a plan that uses dividend payments to acquire additional shares in the firm. If the company and investor have signed an agreement and they have incorporated an evergreen provision, the dividend payment will be used to buy more shares of the company until either or both terminates the contract. c) A lease can also be structured with evergreen provision where the original terms of lease agreement are renewed automatically for the next (or for a subsequent) term.
