Change of Control Contract Terms: Accounting for Ownership Changes of a Counterparty, Avoiding Unintended Consequences

Companies are bought, sold, and merged all of the time, but contracts are often silent as to the impact that such a change should or will have on an existing contract.

Many contracts contain an anti-assignment clause, which prohibits the parties from assigning their rights or obligations under the contract to another party. In addition, contracts should, but often do not, have a "change of control" clause, allowing the parties to have recourse (even termination) if the counterparty to the agreement changes its ownership or structure.

Change of control provisions are not one size fits all. They vary from agreement to agreement based on the needs of the parties and they help to ensure that an agreement does not devolve into a disadvantageous relationship between parties. Because of the significant impact a change of control provision can have on both parties, it is important that these provisions be strategically negotiated and that appropriate diligence is taken to understand any existing provisions before they are triggered.

When drafting change of control provisions, counsel should define the kind of change that their client fears the most. For instance, is it the transfer by a counterparty of a certain percentage of ownership or interest, the sale of all or substantially all of the assets of the counterparty, or a change in the make-up of the governing board? Change of control terms should also define the recourse available to the parties in the event a triggering event occurs, such as termination of the contract, a permission process during which the other side seeks consent to make the change and maintain the contract, or the provision of some form of payment as compensation for the change. Retaining the right to terminate the contract affords the most protection, but whether this is needed really depends on the type of agreement at stake.

Listen as our authoritative panel discusses the importance of change of control clauses in commercial contracts and provides tips, best practices, and sample clauses to consider for various types of agreements.