Assignments and
Changes of Control

DEFINITIONS

An assignment provision triggers a notice, consent, termination, or other right when a party wants to transfer (i.e., assign) a contract to another party. Assignment provisions are typically relevant to asset transactions.

A change of control provision triggers a notice, consent, termination, or other right when a party to a contract experiences a change in ownership or, in some instances, management. CoC provisions are relevant to both asset and equity transactions.

CoC PROVISIONS FURTHER DEFINED

A change of control provision is usually triggered by one or more of the following:

• MERGERS

The party merges into another party.

• EQUITY TRANSACTIONS

The party is a target company and a certain percentage of its equity changes hands. Usually, CoC provisions are only triggered when more than 50% of a target’s equity is purchased. However, different provisions may set different thresholds—whether higher or lower.

For example, a target is owned by two equityholders. Investor A holds 75% of the target’s equity, and Investor B holds 25%. A CoC provision in the target’s partnership agreement requires Investor B’s consent to a change in ownership where Investor A ceases to own a majority of the company. 

Investor A wants to bring in a third investor and, following the investment, the third investor will own 51% of the company, with Investor B continuing to hold 25% and Investor A’s ownership decreasing to 24%. Investor B’s consent will be required. However, if Investor A retains 51% of the company and the third investor only receives 24% of the company, Investor B’s consent will not be required.

• ASSET TRANSACTIONS

The party is a target company selling its assets to a buyer. The threshold for triggering a CoC provision in an asset transaction usually requires the target to sell “all or substantially all” of its assets. In rare situations, however, a different threshold may be applicable.

For example, Investor A wants a target company to sell a subsidiary. A change of control provision requires Investor B’s consent over any dispositions of “all or substantially all” of the target’s assets. If the subsidiary houses all of the target’s operations and holds its assets, then Investor B’s consent will be required. However, if the subsidiary is immaterial, then Investor B’s consent will not be required.

• OTHER CHANGES

The party undergoes reorganizations, or management or other changes. If a management change is relevant, it will typically be tied to changes in the composition of the board or who has a right to appoint the board’s members.

IF TRIGGERED

If an assignment or CoC provision is triggered, the effect will vary depending on what the provision relates to. In mergers and acquisitions, effects principally relate to equity agreements, debt instruments, and commercial contracts.

EQUITY AGREEMENTS

Equity agreements include any contract relating to equity, such as stockholders’ agreements, limited liability company agreements, and partnership agreements.

• TRANSFER RESTRICTIONS

Assignment provisions in equity agreements generally relate to transfer restrictions, which govern the ability (or inability) of any equityholder to transfer equity to another party. Transfer restrictions usually apply to proposed transfers to related parties of an equityholder (e.g., affiliates or family members) as well as third parties (e.g., potential buyers). Transfer restrictions also apply to involuntary transfers (e.g., bankruptcy, divorce, or death). Most equity in the private market is subject to complex restrictions on transfer, with limited exceptions that may or may not be relevant to a contemplated transfer.

• CoC PROVISIONS

Change of control provisions in equity agreements relate to certain rights some equityholders might be able to exercise over others (e.g., drag rights to force a sale), as well as other rights meant to protect minority holders (e.g., tag-alongs) or provide downside protection or liquidity (e.g., put rights where a CoC has not occurred by a certain date). CoC provisions may also automatically accelerate unvested equity (e.g., under profits interest plans) or give rise to certain buyout rights (e.g., rights of refusal or first offer).

Like transfer restrictions, CoC provisions in equity documents are nuanced and must be thoroughly examined prior to any contemplated transaction, no matter the percentage of equity or amount of assets involved.

DEBT INSTRUMENTS

Debt instruments include any agreement relating to indebtedness, such as debt facilities, loan agreements, promissory notes, convertible debt instruments, and seller notes. Assignment and CoC provisions in debt instruments must be carefully reviewed in advance of any transaction, including an internal reorganization or business line divestiture.

• TRANSFER RESTRICTIONS AND ASSIGNMENTS

Assignment provisions in debt instruments function largely the same as in equity transactions: to bar a debtor from transferring debt obligations to another party. Conversely, these provisions may expressly permit the lender to transfer debt securities, though the scope of that right is frequently a negotiated point.

• CoC PROVISIONS

Change of control provisions in debt instruments may take the form of standalone clauses or they may be styled as an event of default. In mergers and acquisitions, they are most relevant to corporate buyouts and strategic exits. Related provisions, like restrictive covenants, may prevent dispositions of equity or assets while debt remains outstanding.

In a transaction that triggers a CoC provision, the underlying debt will usually accelerate and become automatically due and payable. In this scenario, a key consideration is whether any prepayment penalties will apply in addition to the mandatory repayment of the loan’s balance.

COMMERCIAL CONTRACTS

Commercial contracts include agreements with third parties like landlords, customers, suppliers, and vendors.

• SILENCE

If a commercial contract does not contain an assignment or CoC provision, a transaction may proceed as planned with no further action.

However, there are exceptions to this general rule that must be carefully considered, in particular where intellectual property or highly regulated areas (such as government contracting) are concerned.

• IF TRIGGERED

Depending on the provision’s terms, there are several possible results of either an assignment or CoC clause being triggered, including: (i) outright bar; (ii) optional termination of the contract by the counterparty; (iii) automatic termination of the contract; (iv) mandatory or optional renegotiation of the contract; or (v) mandatory notice of the proposed assignment or CoC to the counterparty.

If any of these provisions are bypassed, the contract will be breached.

• CONSENT AND WAIVER

When an assignment or CoC provision requires counterparty consent, the clause may specify whether such consent can be unreasonably withheld, conditioned, or delayed. Even if a provision strictly prohibits a transfer, a party can always approach the counterparty to negotiate a formal consent or waiver for the transaction.

KEY PITFALL: CONFUSING FORM FOR SUBSTANCE

The title or form of an assignment or CoC provision does not matter; its actual substance does.

Many clauses are styled strictly as assignment provisions, but functionally restrict changes of control as well. Conversely, some provisions may call themselves CoC provisions, but only restrict asset assignments. Qualified counsel must analyze the exact mechanics of each provision to determine how it interacts with a contemplated transaction.

For example, a target company’s agreement with a key customer includes an outright ban on any “assignment of the agreement, including any change of the company’s ownership.” 

Though poorly drafted, this clause explicitly mixes both assignment and CoC concepts.

If a seller attempts to sell all of either the equity or assets of the target to a buyer, this provision will be triggered. In either case, the seller and buyer may decide to approach the customer and ask for a waiver so the closing of the transaction does not breach the key customer’s contract.