Thursday, June 21, 2012

Assignment versus Change of Control

What is the difference between Assignment and Change or Control provision? That was a question someone asked in another forum and I thought I would share and expand upon my response.

Contractually you are able to prevent assignment of the contract to another party. You do this because you were confident in that other party and were relying upon that other party for performance. You don’t want to be dealing with someone else unless you approve.

As Directors and Executives of companies have the fiduciary responsibility to do what is best for their shareholders, they would never agree that they cannot merge with or be acquired by another company as that would violate their fiduciary responsibility. Since you can’t restrict those activities from occurring, you use the change of control provision to protect your company when those change of control situations occur.

A change of control provision normally includes a right for the other party to terminate the agreement without liability within a specific period after the change of control. A good example of why you would want a change of control provision would be if a competitor acquires one of your suppliers and you no longer want to do business with the supplier as a result because of competitive concerns. The change of control provision should allow you to terminate the agreement without liability for the termination. It should be without liability, as the party who merges with another knows that this is a risk they have if they agree to a merger and a merger is a voluntary thing they can control. If there is an acquisition, as part of the due diligence the acquiring company knows that this is a risk where you could walk away without liability.

In negotiating a change of control provision you want the period you have to be long enough for you to develop and implement an alternative strategy if needed. Many times you may be happy with the merger of acquisition, as it will provide you with a bigger more financially stronger business partner. I'm sure there can be a number of variations where in addition to you having not having liability for termination you could also have them reimburse you for any un-liquidated portions of investments made. In those it would probably require that the change of control posed a real and significant threat to your business.

Where the inclusion of a change of control provision is extremely important is if you are dealing with a company that is venture capital funded where if the if the funder isn’t seeing the growth they want they may want to company to be merged or sold to another. I would also include it in any agreement where I had a long-term firm purchase requirement. I would do that as it would eliminate my having to meet that commitment if they merged with or were acquired by someone that would be a problem. I might also use it as a deterrent to the supplier wanting to merge or a company wanting to acquire them especially if your business volumes represented a significant portion of their business and your termination would significantly impact the worth of the company. Rather that surprising you they could always disclose their intent to you under confidentiality provisions to determine in advance whether it is a problem for you and if not get your advance agreement that you will not exercise the right to terminate for that specific change of control.

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