Most Favoured Nation (MFN) clauses are a common and commercially important feature of agreements between licensees (such as digital music, video, or tech platforms) and licensors (such as record labels, or publishers). However, in practice auditing MFN clauses is rarely straightforward common limitations on detailed disclosure of audit findings mean that licensors must fully understand audit methodology and common pitfalls before entering these agreements.
In principle, MFNs help to ensure parity between the licensor and certain competitors: if a licensee grants more favourable terms to one counterparty, those benefits must be extended to others protected by an MFN clause.
However, in practice auditing MFN compliance in the DSP environment is rarely straightforward. Common limitations on detailed disclosure of audit findings mean that licensors must fully understand audit methodology and common pitfalls before entering these agreements.
Agreements vary significantly in structure, and commercial terms may have either direct or indirect financial impacts depending on the scope and drafting of the clauses under review.
For auditors and licensors alike, the starting point is understanding what type of MFN clause is present.
MFN clauses in DSP agreements broadly fall along a spectrum between provision-level and whole-deal assessments.
Some apply only to specific contractual provisions, on a provision-by-provision basis. These may include terms such as revenue share percentages, marketing expenditure or minimum revenue guarantees, to name but a few. Under this structure, parity is required only in respect of the defined terms subject to an MFN.
Others operate as whole deal MFNs, requiring the DSP to ensure that the overall package of terms offered is at least as favourable as those granted to comparable counterparties.
This distinction has significant implications for the audit process. A key provision MFN can typically be assessed through targeted comparison of specific contractual terms. A whole deal MFN requires a broader evaluation of the economic value of entire agreements.
Where the MFN applies only to particular provisions, the audit exercise is comparatively contained.
The first step is identifying precisely which terms are covered, and how the MFN clause applies. With respects to the latter, the audit approach will vary depending on whether one has to assess the favourability of a key provision as a whole or can note any unfavourable variances.
The complexity of assessing the favourability of a key term will vary depending on the provision under consideration, and crucially how narrow or broad a defined key provision is. A key provision relating to, say, deductions, which may comprise of several different types of deductions, which may separately be less or more favourable than the licensor’s equivalent terms, will require a more complex sensitivity analysis than a comparatively narrowly defined key provision.
Though less common, an MFN clause whereby all terms within a key provision can be assessed discretely are comparatively simple to analyse and conclude on.
Whole deal MFNs introduce considerably more complexity.
Rather than comparing individual contractual provisions, auditors must evaluate the overall economic value of different agreements, which may be structured in very different ways.
Advances, minimum guarantees, royalty structures, marketing expenditure, positioning and differences with respects to periods and territories may all influence the overall value of a deal. The relevance of such factors will depend on the wording and the scope of the MFN clause itself. Agreements that appear materially different on their face may nevertheless produce similar economic outcomes, while superficially similar deals may differ significantly once the full economic package is considered.
As a result, auditing whole deal MFNs often requires a degree of economic normalisation. This may involve modelling effective royalty rates, assessing the value of guarantees, or considering how different contractual components interact to determine the overall economic outcome.
MFN audits in the DSP space are frequently constrained by the reality that comparator agreements are highly confidential, and auditors must be exceptionally aware of their confidentiality obligations to the licensee. This may also affect the granularity with which auditors can disclose information that supports findings in reporting to the licensor. In light of this, there is an even greater need for licensors to trust in the auditor’s experience, methodology and contextual understanding.
MFN clauses remain an important contractual safeguard in DSP agreements, but their practical enforcement depends heavily on how the clause is structured.
Key provision MFNs generally lend themselves to targeted comparison of specific contractual terms. Whole deal MFNs require a broader assessment of the overall economic value of agreements.
In both cases, the practical limitations around disclosure and deal complexity mean that experienced auditors play a critical role. Auditors are essential for identifying appropriate comparators, interpreting contractual scope, and assessing whether MFN protections have been properly applied to safeguard your revenues.
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