Due diligence may not be the glamorous work that you imagined performing as an M&A lawyer or banker. In due time, you may become the next Harvey Spectre, closing deals in spectacular fashion. However, until then, contract review and analysis will still be a major part of your job description.
As rigorous and tedious as it may be, due diligence is a key component of any transaction and must be completed with care. One of the most important parts of legal due diligence is the contract review, and in particular, the review of the target company’s contracts for problematic change of control and assignment clauses. Lucky for you, Kira has just released a free, comprehensive guide to reviewing these provisions.
Change of control and assignment provisions, individually or in aggregate, can impact the intended consummation date and post-acquisition value of the target company. One of the purposes of due diligence is to separate the target company’s material contracts into two distinct groups:
- Contracts that will require counterparty consent, notice or payments in order to remain in effect after consumation of a proposed transaction
- Contracts that will remain in effect without any further action with respect to their respective counterparties
What are the consequences of change of control and assignment provisions?
If triggered by a transaction involving the target company, a change of control provision may entitle the counterparty to terminate its contract outright (or seek damages), refuse consent to the transaction and thereby terminate its agreement with the firm if the deal goes through, or receive payment from the target company.
Meanwhile, an anti-assignment provision may entitle the counterparty to terminate its contract with the target company if the target company has to assign its rights and/or delegate its duties under a contract to another party and the consent of the counterparty is required to do so.
Why do these clauses exist in the first place?
Although they can prove to be a headache, these clauses exist to protect the counterparties in an agreement with the target company.
Companies like to know who they are doing business with. It is only natural to want to protect against fundamental changes to the nature of the target company’s business and/or major shifts in the ownership of the target company. Change of control and assignment provisions exist so that counterparties have an opportunity to decide whether or not they wish to continue their relationship with the target company if the changes meet the specified criteria. These provisions also provide them with a method of compensation for any additional risk in the new business or any added value they bring to the target company.
How do I spot all the different types of change of control and assignment provisions, and how do I know if they are problematic?
There are many variations of change of control provisions -- for example, they may cover transfers of “all or substantially all assets,” “mergers,” “transfers” (to “affiliates” or not), and variety of other events (e.g. reorganizations, consolidations). Assignment clauses also have almost as many variations as change of control provisions.
It is critical to identify these variations early on and to determine whether they will pose an issue under the contemplated transaction structure. A provision that is not triggered by an asset purchase might be triggered by a merger, and so on. A more in-depth discussion on this topic will follow in a future blog post.
To learn more about these clauses and effective strategies to deal with them, download Kira’s free guide on “Reviewing Change of Control and Assignment Provisions in Due Diligence”.