Evergreen Contract Definition
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.
A Little More on Evergreen Contract Provisions
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.
References for Evergreen Contract
Academic Research on Evergreen Contracts
- ● Deep relationships: the case of the vanishing salesperson, Wilson, D. T. (2000). Journal of Personal Selling & Sales Management, 20(1), 53-61. The role and responsibilities of the salesperson continually evolve as firms react to competitive pressures. This paper suggests that in some instances the salesperson will vanish as the contact person for firms engaged in deep relationships. Deep relationships involve the selling firm placing staff on the buying firm’s floor space to coordinate acquisition of the product that the buyer needs. This paper goes on to describe the forces behind the changes and examples of deep relationships.
- ● Evergreen leasing of aquaculture sites, Townsend, R. E., & Young, M. D. (2005). Marine Resource Economics, 20(2), 203-210. This paper analyses the concept of evergreen lease on siting aquaculture in relations to government policies.
- ● Contracting on time, Guriev, S., & Kvasov, D. (2005). American Economic Review, 95(5), 1369-1385. The paper shows how time considerations, especially those concerning contract duration, affect incomplete contract theory. The objective is to show that efficient investment can be induced either through a sequence of constantly renegotiated fixed-term contracts; or through a renegotiation-proof “evergreen” contract—a perpetual contract that allows unilateral termination with advance notice. To achieve this, the authors provide a detailed analysis of properties of optimal contracts.
- ● Contract usage in the california winegrape economy, Goodhue, R., Heien, D., & Lee, H. (2000). ARE Update, 3. This article analyzes the relationship between product quality and contracting choices using the results of a survey of California winegrape growers.
- ● Concurrent sourcing, governance mechanisms, and performance outcomes in industrial value chains, Heide, J. B., Kumar, A., & Wathne, K. H. (2014). Strategic Management Journal, 35(8), 1164-1185. This paper focuses on a buyer’s use of particular safeguards or governance mechanisms vis‐à‐vis an external supplier and, how the effects of these mechanisms on various performance outcomes are influenced by the joint presence of an internal manufacturing branch. For clarity, data from transaction governance in the context of concurrent sourcing is used.
- ● Have” evergreen” provider contracts lost their bloom?, Mosher-Beluris, T., & Rich, J. P. (2003). Managed care quarterly, 11(4), 5-7.
- ● About the Laws, Wolff, E. (1986). This paper highlights the importance of waste recycling by businesses in the San Diego area. The main objective is to show how proper waste disposal and recycling helps a business to stay in line with the law.
- ● The Building Contract for Evergreen Plantation, 1832, Wilson, S. (1990). Louisiana History: The Journal of the Louisiana Historical Association, 31(4), 399-406.
- ● Contracts, quality, and industrialization in agriculture: Hypotheses and empirical analysis of the California winegrape industry, Goodhue, R. E., Heien, D. M., Lee, H., & Sumner, D. A. (2000). Unpublished paper, University of California, Davis. This paper address the issue of the realtionahisp between product quality and contract provisions in a quality-driven system.
- ● The boundaries of the firm revisited, Holmstrom, B., & Roberts, J. (1998). Journal of Economic perspectives, 12(4), 73-94. This paper analyses different theories which offer explanations of the boundaries of firm based on ideas of ex post bargaining and holdup. We show that these theories are not satisfactory for a large amount of practices. Thus, this paper proposes the need to enhance these theories to better explain the boundaries of firms.
- ● Duration and Term Structure of Trade Agreements, Guriev, S., & Klimenko, M. (2015). The Economic Journal, 125(589), 1818-1849. This paper aims to show that time structure of trade agreements is related to the characteristics of trade-facilitating investments using a dynamic incomplete contracting model.