does assignment include change of control

Don’t Confuse Change of Control and Assignment Terms

David Tollen
September 11, 2020

An assignment clause governs whether and when a party can transfer the contract to someone else. Often, it covers what happens in a change of control: whether a party can assign the contract to its buyer if it gets merged into a company or completely bought out. But that doesn’t make it a change of control clause. Change of control terms don’t address assignment. They say whether a party can terminate if the other party goes through a merger or other change of control. And they sometimes address other change of control consequences.

Don’t confuse the two. In a contract about software or other IT, you should think through the issues raised by each. (Also, don’t confuse assignment of contracts with assignment of IP .)

Here’s an assignment clause:

Assignment. Neither party may assign this Agreement or any of its rights or obligations hereunder without the other’s express written consent, except that either party may assign this Agreement to the surviving party in a merger of that party into another entity or in an acquisition of all or substantially all its assets. No assignment becomes effective unless and until the assignee agrees in writing to be bound by all the assigning party’s obligations in this Agreement. Except to the extent forbidden in this Section __, this Agreement will be binding upon and inure to the benefit of the parties’ respective successors and assigns.

As you can see, that clause says no assignment is allowed, with one exception:

Assignment to Surviving Entity in M&A: Under the clause above, a party can assign the contract to its buyer — the “surviving entity” — if it gets merged into another company or otherwise bought — in other words, if it ceases to exist through an M&A deal (or becomes an irrelevant shell company).

Consider the following additional issues for assignment clauses:

Assignment to Affiliates: Can a party assign the contract to its sister companies, parents, and/or subs — a.k.a. its “Affiliates”?
Assignment to Divested Entities: If a party spins off its key department or other business unit involved in the contract, can it assign the contract to that spun-off company — a.k.a. the “divested entity”? That’s particularly important in technology outsourcing deals and similar contracts. They often leave a customer department highly dependent on the provider’s services. If the customer can’t assign the contract to the divested entity, the spin-off won’t work; the new/divested company won’t be viable.
Assignment to Competitors: If a party does get any assignment rights, can it assign to the other party’s competitors ? (If so, you’ve got to define “Competitor,” since the word alone can refer to almost any company.)
All Assignments or None: The contract should usually say something about assignments. Otherwise, the law might allow all assignments. (Check your jurisdiction.) If so, your contracting partner could assign your agreement to someone totally unacceptable. (Most likely, though, your contracting partner would remain liable.) If none of the assignments suggested above fits, forbid all assignments.

Change of Control

Here’s a change of control clause:

Change of Control. If a party undergoes a Change of Control, the other party may terminate this Agreement on 30 days’ written notice. (“Change of Control” means a transaction or series of transactions by which more than 50% of the outstanding shares of the target company or beneficial ownership thereof are acquired within a 1-year period, other than by a person or entity that owned or had beneficial ownership of more than 50% of such outstanding shares before the close of such transactions(s).)

Contract terminated, due to change of control.

Termination on Change of Control: A party can terminate if controlling ownership of the other party changes hands.

Change of control and assignment terms actually address opposite ownership changes. If an assignment clause addresses change of control, it says what happens if a party goes through an M&A deal and no longer exists (or becomes a shell company). A change of control clause, on the other hand, matters when the party subject to M&A does still exist . That party just has new owners (shareholders, etc.).

Consider the following additional issues for change of control clauses:

Smaller Change of Ownership: The clause above defines “Change of Control” as any 50%-plus ownership shift. Does that set the bar too high? Should a 25% change authorize termination by the other party, or even less? In public companies and some private ones, new bosses can take control by acquiring far less than half the stock.
No Right to Terminate: Should a change of control give any right to terminate, and if so, why? (Keep in mind, all that’s changed is the party’s owners — possibly irrelevant shareholders.)
Divested Entity Rights: What if, again, a party spins off the department or business until involved in the deal? If that party can’t assign the contract to the divested entity, per the above, can it at least “sublicense” its rights to products or service, if it’s the customer? Or can it subcontract its performance obligations to the divested entity, if it’s the provider? Or maybe the contract should require that the other party sign an identical contract with the divested entity, at least for a short term.

Some of this text comes from the 3rd edition of The Tech Contracts Handbook , available to order (and review) from Amazon here , or purchase directly from its publisher, the American Bar Association, here.

Want to do tech contracts better, faster, and with more confidence? Check out our training offerings here: https://www.techcontracts.com/training/ . Tech Contracts Academy has options to fit every need and schedule: Comprehensive Tech Contracts M aster Classes™ (four on-line classes, two hours each), topical webinars (typically about an hour), customized in-house training (for just your team). David Tollen is the founder of Tech Contracts Academy and our primary trainer. An attorney and also the founder of Sycamore Legal, P.C. , a boutique IT, IP, and privacy law firm in the San Francisco Bay Area, he also serves as an expert witness in litigation about software licenses, cloud computing agreements, and other IT contracts.

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On May 14, 2024, our founder David Tollen spoke about AI issues in contracting at the Forge Technology Sourcing conference in Boston. Both sessions were

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Why and How to Add a Change of Control Clause to Contracts

Contracts are inherently risky, and a number of things can go wrong that may result in a costly contract dispute . Of course, there may be a change in circumstances that is not even addressed in a contract, and thus contesting any such unwanted change is not even a possibility, or perhaps there is only a remote chance of success in the courtroom. One rather significant change that is quite likely to occur and yet not often addressed in contracts is a change in the structure or ownership of one of the parties to the contract. 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 the existing contract. This is obviously a mistake as a change in ownership may cause changes, both intentional or inadvertent, to the established arrangement. For example, a newly formed entity may change vendors or subcontract with new parties, situations in which the nature, quality, or timing of contractual obligations is altered.

But, this potential scenario is easily avoided by simply including a provision in a contract that explicitly details how the contract must be treated in the event of a change in control. For example, a company may wish to render the contract void if the other party to the deal undergoes a change in ownership. This may be an extreme choice, but there has to be predetermined options clearly written into the agreement. Here is how to include a change of control clause in business contracts:

Identify Problematic Changes

The first step is to identify the types of changes that your company may consider problematic to a contract as it stands. For some companies, a change in ownership may not be a big deal. However, in some instances, the contract may be very specific or address a unique product or service, and thus it may be difficult to replicate the terms with a new entity. Of course, some companies simply may not want to deal with the hassle of getting to know new leaders if one of its contracting partners is acquired or take the risk that the new management will not be a good fit. Ultimately, when a company enters into a contract with another firm, it must determine the circumstances under which it would not want to continue the contract as originally negotiated and drafted.

Differentiate Between an Assignment and Change of Control

A lot of contracts forbid an assignment, which prevents one or both parties from assigning its rights and obligations under the contract to a new party. This may seem like it covers a change of control, but it does not as an assignment is a specific action taken. A change in control clause must specifically address how the contract is to be handled if or when the other party to the agreement undergoes a specific type of change to its structure and/or ownership. A robust contract will include distinct yet detailed clauses with respect to both assignments and changes of control.

Negotiate Requirements

It is always possible that the change of control issue will not even come to fruition. Thus, rather than get bogged down in trying to avoid this situation, it may be possible to negotiate some requirements in the event that it does in fact occur. For example, your company may seek to include some kind of permission process during which the other side seeks consent to make the change and maintain the contract or provide some form of payment as compensation for the change. Obviously, 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.

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Difference Between Assignment, Novation and a Change of Control Clause

By Stephanie Mee Lawyer

Updated on October 14, 2022 Reading time: 5 minutes

This article meets our strict editorial principles. Our lawyers, experienced writers and legally trained editorial team put every effort into ensuring the information published on our website is accurate. We encourage you to seek independent legal advice. Learn more .

What is the Right of Assignment?

What is novation.

What is a “Change of Control”?

How Do They Differ?

Key takeaways, frequently asked questions.

Contractual rights, obligations and performance are all essential factors of any contract landscape. Identifying the parties and their responsibilities are the key building blocks of any commercial arrangement. As a result, the rights of assignment, novation and what to do in the case of a change of control all influence the architecture of your contract.

As a business owner entering commercial contracts, knowing what these terms mean is vital. This article will explore the differences between e ach clause and their impact on your contract.

The right of assignment arises as a boilerplate clause in most contracts. This means that it is generally included as standard wording and is not usually subject to much rewording.

Typically, the right of assignment will look like the following:

A Party must not assign or deal with the whole or any part of its rights or obligations under this Agreement without the prior written consent of the other Party (such consent is not to be unreasonably withheld).

The effect is that you can assign certain rights under the contract to someone else with written consent. For example, the right to be paid a debt owed could be assigned to a third party, perhaps if that third party was wronged (such as in the case where the third party’s intellectual property rights were infringed).

However, assignment is limited in that only rights can be assigned, not responsibilities . For example, you cannot assign another party the actual obligation to perform the contract.

On the other hand, the right to novation allows for the transfer of responsibility or liability. That is, if you no longer wish to or are no longer able to perform the contract, you could novate it to a third party.

Imagine that you are being replaced by a third party, cut out of the contract and a third party put in your place with access to your rights and burdens. Even though novation only needs to deal with the burdens of a contract, it will typically handle the whole arrangement.

As a result, novation does not occur only between two parties. A ll three parties subject to this change must be involved and sign off on the change. Typically, y ou will use a deed , and all three parties to the change must sign and acknowledge that one party is stepping out, allowing another to step in.

What is a “Change of Control”?

A ‘change of control’ is another clause that affects who is a party to a contract and who has responsibilities for its rights and obligations. It is common to find this kind of clause in your contracts as a boilerplate or a general mention .

A change of control refers to the make-up of a contracting party. It looks at the ownership structure of the other business contracting with you and states that if there is a significant change in the legal ownership and control of that party, you can legally exit the contract.

It may look something like this:

We shall have the right to terminate, without prejudice to our other rights and remedies, with 30 days written notice to you if there is a Change of Control.

Your business might find this clause beneficial if you are seeking to:

preserve and recognise an existing close business relationship with the other party;
avoid the outcome where a competitor or potential competitor comes into ownership of the other party;
avoid specific risks that may be posed by certain companies or groups.

Notably, not just any change to a counterparty constitutes a change of control. In contracts, a change of control will often be defined with reference to the Corporations Act . In this legislation, a change of control has occurred when another entity has the capacity to determine the outcomes of decisions for the counterparty, particularly financial and operating decisions. Other contracts will specify that there has to be a change of 50% of the counterparty’s board or ownership.

Both assignment and novation deal with how rights and obligations under a contract are transferred. A change of control addresses changes to the parties themselves, even as they remain linked to the rights and obligations.

In broad terms:

assignment deals with transferring a benefit or right to another party;
novation deals with transferring a burden (and often everything else in the contract) to another party; and
change of control deals with who the counterparty is and whether you feel comfortable continuing your commercial relationship with them, even if their ownership or leadership changes.

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A contract is built on several key building blocks, including who the parties are and t heir responsib ilities . The rights of assignment, novation and a change of control aim to address changes to these key building blocks. They a im to give boundaries to who can be a party to the contract and t heir obligations.

For more information about your commercial contract, our experienced contract lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page .

Before you assign or novate, you will want to consider whether the new party can properly benefit from whatever you assign to them, or perform the obligations you intend to novate. You may also want to consider the work that has already been completed and who will be liable for that prior work. Likewise, think about how you will manage other agreements attached to the contract.

Generally, this is interpreted broadly and given a common-sense meaning. It will very much depend on the particular arrangement, the nature of the contract and the benefit being assigned. A consideration of what is reasonable may also look to defaults in obligations or solvency issues of the assignee.

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Do Change of Control Transactions Constitute an Assignment by Operation of Law?

Commercial l andlords often rely on anti-assignment provisions to restrict the ability of tenants to assign their interest in a lease to a third party . Such provisions will often explicitly restrict assignments by “ operation of law, ” which are generally considered involuntary assignments mandated via a court order. Commercial landlords may assume that a change of control transaction violates a basic anti – assignment cla use, but clear drafting is necessary for Landlords to protect their interests . Landlords wishing to restrict change of control of a tenant entity , should have clear anti-assignment provision s in their leases that expressly restrict such transaction s and characterize such “changes of control” as assignments .

A change of control is a significant change in the equity, ownership, or management of a business entity. This can occur through a merger, consolidation or acquisition.

The general rule is that change of control of a corporate entity is not an assignment by operation of law , and therefore does not violate a basic anti- assignment provision. Courts have reasoned that a landlord entering into a lease with a corporate tenant should be aware that a corporation, or limited liability company, is an entity which exists separate and apart from its ownership, and that a change in ownership of the corporate entity does not change the tenant entity under the lease.

Courts in many states including Florida, New York and Delaware have held that a change of control is not an assignment by operation of law. I n Sears Termite & Pest Control, Inc. v. Arnold , a Florida court held , “ [t] he fact that there is a change in the ownership of corporate stock does not affect the corporation’s existence or its contract rights, or liabilities. ” Further, i n Meso Scale Diagnostics LLC v. Roche Diagnostics GMBH , a Delaware court ruled, “ [ g ] enerally mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger.”

Importantly, the rule is different if the tenant entity does not survive the transaction. In MTA Canada Royalty Corp. v. Compania Minera Pangea , a Delaware Superior Court held that a merger in which the contracting entity does not survive may be held to be an assignment by operation of law.

If a l andlord inten d s for a change of control of a tenant to violate the anti-assignment clause in its lease, the landlord should ensure that its lease expressly state s that a change of control constitutes an assignment .

This article is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read here. Please review the full disclaimer for more information. Relying on the information provided in this article or communicating with Lowndes through our website does not create an attorney/client relationship.

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Do Change of Control Transactions Constitute an Assignment by Operation of Law?

Commercial landlords often rely on anti-assignment provisions to restrict the ability of tenants to assign their interest in a lease to a third party. Such provisions often restrict assignments by “operation of law,” which are generally considered involuntary assignments mandated via a court order. Commercial landlords may assume that a change of control transaction violates a basic anti–assignment clause. Landlords wishing to restrict change of control of a tenant entity, however, should have clear anti-assignment provisions in their leases that expressly restrict such transactions and characterize such “changes of control” as assignments.

A change of control is a significant change in the equity, ownership, or management of a business entity. This can occur through a merger, consolidation or acquisition.

The general rule is that change of control of a corporate entity is not an assignment by operation of law, and therefore does not violate a basic anti-assignment provision. Courts have reasoned that a landlord entering into a lease with a corporate tenant should be aware that a corporation, or limited liability company, is an entity which exists separate and apart from its ownership, and that a change in ownership of the corporate entity does not change the tenant entity under the lease.

Courts in many states including Florida, New York and Delaware have held that a change of control is not an assignment by operation of law. In Sears Termite & Pest Control, Inc. v. Arnold , a Florida court held, “[t]he fact that there is a change in the ownership of corporate stock does not affect the corporation’s existence or its contract rights, or liabilities.” Further, in Meso Scale Diagnostics LLC v. Roche Diagnostics GMBH , a Delaware court ruled, “[g]enerally mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger.”

If a landlord intends for a change of control of a tenant to violate the anti-assignment clause in its lease, the landlord should ensure that its lease expressly states that a change of control constitutes an assignment.

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What is change of control and how does it operate?

Written by: Kira Systems

December 10, 2015

4 minute read

For many lawyers, as soon as you set foot in a law firm, one of your very first tasks may well be a due diligence project. If you want to impress your boss with successful due diligence projects or just keep your head above the water, this guide will save your life. (Okay, so maybe that’s an exaggeration, but as a junior associate, it might feel that way!)

Change of control provisions are composed of two elements:

The definition of what constitutes a change of control
The operation of the provision when an event occurs that meets any requirements reflected in the definition

Seems simple enough, right?

Is It a Change of Control?

Unfortunately, there is no standard definition of a change in control. As a result, each agreement must be carefully reviewed to determine whether a proposed M&A transaction actually constitutes a change of control under the agreement. That’s why you are slaving away reading hundreds of agreements on a Friday night. However, there are some common transactions in which a change of control may be triggered.

1. Transfer of Percentage of Company Stock

A change of control typically includes the transfer of a certain percentage of the target company’s issued and outstanding shares from the target company to the acquirer. Usually, the required percentage exceeds 50%, but it may be lower or higher.

2. Sale of “All or Substantially All” Assets

A change of control may also include a sale of all or substantially all of a target company’s assets in its definition. A general rule of thumb is that a sale transaction is at a substantial risk of being deemed a change of control under this definition when the asset sales exceed 50% of the target company’s total assets.

The definition of a change of control usually includes any “merger” of the target company with another company, regardless of whether the target company survives the merger of not.

4. Other Events

The definition of a change of control may include other events such as reorganizations, consolidations or other transaction structures of various forms in which one of the following occurs:

More than 50% of the board members change
Change in shareholders who have the right to elect more than 50% of the board
Standards and events drawn from special tax code provisions or securities regulations

5. Affiliate Transactions

In some cases, a transaction where the acquirer of the stock, assets or rights is an “affiliate” of the target company, may be an exclusion from the change of control definition stated in the above four instances. The exclusion is granted by counterparties to allow target companies with complex ownership structures, to move companies, assets or rights in and around those structures without triggering change of control provisions.

How Do Change of Control Provisions Operate?

To add to the complexity of understanding and reviewing this provision, change of control provisions operate by providing target companies and their acquirers with the following problematic rights upon the announcement or consummation of a proposed transaction: termination rights, consents, and payments.

1. Termination Rights

Termination rights refer to some cases where change of control provisions provide counterparties with the right to unilaterally terminate their agreements in the event of a change of control transaction. If the contract is material to the buyer, this can threaten the transaction. In this case, to terminate the agreement outright, the counterparty must undertake an affirmative action.

2. Consents

The agreement might also require the target company to obtain consent from a counterparty. Delays in this process may delay the closing of the transaction and failure to obtain consent will make the contract void post-acquisition, effectively making it a termination. No affirmative action is required by the counterparty for the agreement to be terminated or in material breach when the change of control provision is triggered if the counterparty has not provided its consent.

3_._ Payments

Payments to counterparties may be required upon the announcement or consummation of the agreement. If they are material, they can impact the transaction value. Payment rights also operate in a myriad of ways. Some payment rights may be triggered immediately upon a change of control while some may become due and payable only upon the occurrence of additional events after a change of control.

As you embark on your journey of due diligence contract review, you may find that change of control is defined and operates in ways beyond the factors discussed in this article. But at least now, you know what change of control is and how it operates. For a more in-depth discussion of reviewing change of control and assignment provisions in due diligence, take a look at our free guide .

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Anti-Assignment Provisions and Assignments by ‘Operation of Law’: What Do I Have to Do? What Should I Do?

Introduction.

One of the key roles of legal due diligence in mergers and acquisitions (M&A) is to assist in the efficient and successful completion of any proposed M&A transaction. Due diligence is not merely a procedural formality but can serve as a proactive shield against unforeseen challenges and risks. One essential aspect of the legal due diligence process is reviewing third-party contracts to which the target entity is party, in order to better understand the scope of its commercial relationships and to anticipate any issues that may arise via the underlying contractual relationships as a result of completing the proposed M&A transaction.

A frequent reality in many M&A transactions is the requirement to obtain consents from third parties upon the “change of control” of the target entity and/or the transfer or assignment of a third-party contract to which the target is party. Notwithstanding the wording of such contracts, in many instances, the business team from the purchaser will often ask the question: “When is consent actually required?” While anti-assignment and change of control provisions are fairly ubiquitous in commercial contracts, the same cannot be said for when the requirement to obtain consent is actually triggered. The specifics of the proposed transaction’s structure will often dictate the purchaser’s next steps when deciding whether the sometimes-cumbersome process of obtaining consents with one or multiple third parties is actually needed.

This article examines what anti-assignment provisions are and how to approach them, depending on the situation at hand, including in the context of transactions where a change of control event may be triggered. This article also discusses how to interpret whether consent is required when faced with an anti-assignment provision which states that an assignment, including an assignment by operation of law , which requires consent from the non-assigning party.

Understanding Anti-Assignment Provisions

Generally, an anti-assignment provision prohibits the transfer or assignment of some or all of the assigning party’s rights and obligations under the contract in question to another person without the non-assigning party’s prior written consent. By way of example, a standard anti-assignment provision in a contract may read as follows:

Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written consent of Company XYZ.

In this case, Company ABC requires Company XYZ’s prior written consent to assign the contract. Seems simple enough. However, not all anti-assignment provisions are cut from the same cloth. For example, some anti-assignment provisions expand on the prohibition against general contractual assignment by including a prohibition against assignment by operation of law or otherwise . As is discussed in greater detail below, the nuanced meaning of this phrase can capture transactions that typically would not trigger a general anti-assignment provision and can also trigger the requirement to get consent from the non-assigning party for practical business reasons.

To explore this further, it is helpful to consider anti-assignment provisions in the two main structures of M&A transactions: (i) asset purchases and (ii) share purchases.

Context of M&A Transactions: Asset Purchases and Share Purchases

There are key differences between what triggers an anti-assignment provision in an asset purchase transaction versus a share purchase transaction.

i) Asset Purchases

An anti-assignment provision in a contract that forms part of the “purchased assets” in an asset deal will normally be triggered in an asset purchase transaction pursuant to which the purchaser acquires some or all of the assets of the target entity, including some or all of its contracts. Because the target entity is no longer the contracting party once the transaction ultimately closes (since it is assigning its rights and obligations under the contract to the purchaser), consent from the non-assigning party will be required to avoid any potential liability, recourse or termination of said contract as a result of the completion of the transaction.

ii) Share Purchases

Provisions which prohibit the assignment or transfer of a contract without the prior approval of the non-assigning party will not normally, under Canadian law, be captured in a share purchase transaction pursuant to which the purchaser acquires a portion or all of the shares of the target entity. In other words, no new entity is becoming party to that same contract. General anti-assignment provisions are not typically triggered by a share purchase because the contracts are not assigned or transferred to another entity and instead there is usually a “change of control” of the target entity. In such cases, the target entity remains the contracting party under the contract and the consent analysis will be premised on whether the contract requires consent of the third party for a “direct” or “indirect” change of control of the target entity and not the assignment of the contract.

Importantly, some anti-assignment provisions include prohibitions against change of control without prior written consent. For example, the provision might state the following:

Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written approval of Company XYZ. For the purposes of this agreement, any change of control of Company ABC resulting from an amalgamation, corporate reorganization, arrangement, business sale or asset shall be deemed an assignment or transfer.

In that case, a change of control as a result of a share purchase will be deemed an assignment or transfer, and prior written consent will be required.

A step in many share purchase transactions where the target is a Canadian corporation that often occurs on or soon after closing is the amalgamation of the purchasing entity and the target entity. So, what about anti-assignment provisions containing by operation of law language – do amalgamations trigger an assignment by operation of law? The short answer: It depends on the jurisdiction in which the anti-assignment provision is being scrutinized (typically, the governing law of the contract in question).

Assignments by Operation of Law

In Canada, the assignment of a contract as part of an asset sale, or the change of control of a party to a contract pursuant to a share sale – situations not normally effected via legal statute or court-ordered proceeding in M&A transactions – will not in and of itself effect an assignment of that contract by operation of law . [1]

Still, one must consider the implications of amalgamations, especially in the context of a proposed transaction when interpreting whether consent is required when an anti-assignment provision contains by operation of law language. Under Canadian law, where nuances often blur the lines within the jurisprudence, an amalgamation will not normally effect the assignment of a contract by operation of law . The same does not necessarily hold true for a Canadian amalgamation scrutinized under U.S. legal doctrines or interpreted by U.S. courts. [2]

Difference Between Mergers and Amalgamations

As noted above, after the closing of a share purchase transaction, the purchasing entity will often amalgamate with the target entity ( click here to read more about amalgamations generally). When two companies “merge” in the U.S., we understand that one corporation survives the merger and one ceases to exist which is why, under U.S. law, a merger can result in an assignment by operation of law . While the “merger” concept is commonly used in the U.S., Canadian corporations combine through a process called “amalgamation,” a situation where two corporations amalgamate and combine with neither corporation ceasing to exist. For all of our Canadian lawyer readers, you will remember the Supreme Court of Canada’s description of an amalgamation as “a river formed by the confluence of two streams, or the creation of a single rope through the intertwining of strands.” [3] Generally, each entity survives and shares the pre-existing rights and liabilities of the other, including contractual relationships, as one corporation. [4]

MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V.

As a practical note and for the reasons below, particularly in cross-border M&A transactions, it would be wise to consider seeking consent where a contract prohibits assignment by operation of law without the prior consent of the other contracting party when your proposed transaction contemplates an amalgamation.

In MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V. (a Superior Court of Delaware decision), the court interpreted a Canadian (British Columbia) amalgamation as an assignment by operation of law , irrespective of the fact that the amalgamation was effected via Canadian governing legislation. In essence, the Delaware court applied U.S. merger jurisprudence to a contract involving a Canadian amalgamation because the contract in question was governed by Delaware law. This is despite the fact that, generally, an amalgamation effected under Canadian common law jurisdictions would not constitute an assignment by operation of law if considered by a Canadian court. As previously mentioned, under Canadian law, unlike in Delaware, neither of the amalgamating entities cease to exist and, technically, there is no “surviving” entity as there would be with a U.S.-style merger. That being said, we bring this to your attention to show that it is possible that a U.S. court (if the applicable third-party contract is governed by U.S. law or other foreign laws) or other U.S. counterparties could interpret a Canadian amalgamation to effect an assignment by operation of law . In this case, as prior consent was not obtained as required by the anti-assignment provision of the contract in question, the Delaware court held that the parties to that agreement were bound by the anti-assignment provision’s express prohibition against all assignments without the other side’s consent. [5]

To avoid the same circumstances that resulted from the decision in MTA Canada Royalty Corp. , seeking consent where an anti-assignment provision includes a prohibition against assignment by operation of law without prior consent can be a practical and strategic option when considering transactions involving amalgamations. It is generally further recommended to do so in order to avoid any confusion for all contracting parties post-closing.

Practical Considerations

The consequences of violating anti-assignment provisions can vary. In some cases, the party attempting to complete the assignment is simply required to continue its obligations under the contract but, in others, assignment without prior consent constitutes default under the contract resulting in significant liability for the defaulting party, including potential termination of the contract. This is especially noteworthy for contracts with third parties that are essential to the target entity’s revenue and general business functions, as the purchaser would run the risk of losing key contractual relationships that contributed to the success of the target business. As such, identifying assignment provisions and considering whether they are triggered by a change of control and require consent is an important element when reviewing the contracts of a target entity and completing legal due diligence as part of an M&A transaction.

There can be a strategic and/or legal imperative to seek consent in many situations when confronted with contractual clauses that prohibit an assignment, either by operation of law or through other means, absent the explicit approval of the non-assigning party. However, the structure of the proposed transaction will often dictate whether consent is even required in the first place. Without considering this nuanced area of M&A transactions, purchasers not only potentially expose themselves to liability but also risk losing key contractual relationships that significantly drive the value of the transaction.

The Capital Markets Group at Aird & Berlis will continue to monitor developments in cross-border and domestic Canadian M&A transactions, including developments related to anti-assignment provisions and commercial contracts generally. Please contact a member of the group if you have questions or require assistance with any matter related to anti-assignment provisions and commercial contracts generally, or any of your cross-border or domestic M&A needs.

[1] An assignment by operation of law can be interpreted as an involuntary assignment required by legal statute or certain court-ordered proceedings. For instance, an assignment of a contract by operation of law may occur in, among other situations: (i) testamentary dispositions; (ii) court-ordered asset transfers in bankruptcy proceedings; or (iii) court-ordered asset transfers in divorce proceedings.

[2] MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V ., C. A. No. N19C-11-228 AML, 2020 WL 5554161 (Del. Super. Sept. 16, 2020) [ MTA Canada Royalty Corp. ].

[3] R. v. Black & Decker Manufacturing Co. , [1975] 1 S.C.R. 411.

[4] Certain Canadian jurisdictions, such as the Business Corporations Act (British Columbia), explicitly state that an amalgamation does not constitute an assignment by operation of law (subsection 282(2)).

[5] MTA Canada Royalty Corp .

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Change of Control Provision: Everything You Need to Know

A change of control provision is an agreement where a party has certain rights, such as payment, consent, or termination. 3 min read updated on February 01, 2023

Updated October 8,2020:

A change of control provision is an agreement where a party has certain rights, such as payment, consent, or termination. This is often related to a change in management or ownership of the opposite party. However, there isn't a standard definition when it comes to a change in control. Due to this, every agreement needs to be reviewed carefully to see if a proposed transaction is enough to warrant a change in control. There is a provision in every employment agreement that gives employees specific protections in case there is a change in ownership of the company.

Change of Control Clause

Protections often include the continuation of benefits, salary agreements, and other compensation that is arranged after there has been a change in the controlling interest. This impacts the relationship the employee has with the company, but not all changes of control provisions will be triggered by a similar action.

How Do Change of Control Provisions Operate?

There are common transactions where a change of control can be triggered, which include the following:

Transfer of company stock percentage . This often involves a specific percentage being issued and any outstanding shares being transferred from the main company to the new acquirer. This often goes over 50 percent but can be higher or lower.
Sale of a majority of, or all, assets. This change of control can also include the sale of all, or most, of the target company's assets. Generally, a sale transaction becomes at risk of going under a change of control when the asset sales are at least 50 percent of the company's total assets.
Mergers. Change of control happens when a company merges with another company. It doesn't matter if the target company ends up surviving the merger or not.
Other events. This can include events such as consolidations, reorganizations, or other transactions where more than half of the board members change. Also, if there is a change in shareholders who are allowed to elect more than half of the board, or events and standards are drawn from certain security regulations or tax code provisions.
Affiliate transactions. Sometimes a transaction occurs where the new acquirer of the rights, stock, or assets is an affiliate of the company, and they might be excluded from the change of control scenarios above. This exclusion is given by counterparties so that target companies who have complex ownership structures can move their assets or rights.

Mergers & Acquisitions

When entering into a commercial agreement , parties tend to focus on the main business terms. However, they do not pay much attention to change of control provisions and anti-assignment. The provisions are often at the end of the agreement and are not taken seriously. This is dangerous, as it will complicate any future acquisitions when the party tries to sell the business in the future. It will also cause the contractual party to require concessions to be extorted in exchange for its consent.

In turn, this can cause a large increase when it comes to the cost of the acquisition. It may also reduce the stockholder's consideration. A key part of the role of a corporate lawyer in an acquisition is to look at any agreements that exist. They will also look at the structure of the acquisition to maximize any assets of the enterprises when they are combined. Sometimes complicated corporate acquisition structures are used to resolve these problems. However, parties can decrease the possibility that the provisions will be a problem by addressing the issues in a commercial agreement.

Usually, a contract can be assigned freely unless it has an anti-assignment provision in it. There may be one exception to this when the contract involves personal services, such as getting a painter to paint a portrait.

If you need help with a change of control provision, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Understanding Change-in-Control Agreements

Understanding Change-in-Control Agreements:

Understanding Change in Control agreements, also labeled œgolden parachute agreements, arose out of the hostile takeovers that began in the 1970’s through the early nineties. In the midst of friendly takeovers in recent years, executives now demand protections for their continued employment, equity, deferred compensation and retirement benefits, in the event of a change in control of the company. A crystal ball is obviously not effective in predicting the future, so executives demand change in control agreements in order to provide some measure of predictability for the future, in exchange for the increased risk. Companies routinely enter into these agreements to avert the executive(s) departure during change in control events and provide continuity in management.

œNaturally, threats to both the economic and noneconomic incentives to remain arise. On the economic side, the executive faces the loss of his salary, retirement benefits, vacation pay, and other advantages. From the noneconomic perspective, the executive’s job security is threatened, as well as career advancement commensurate with seniority and skills, marketability, professional respect, and satisfaction of working at a prestigious company. . . Golden parachutes help offset these problems. The golden parachute shifts the risk of displacement from the executive to the corporation. The plan’s payment is intended to compensate the executive for most of the economic loss and some of the noneconomic loss associated with forced departure. The executive, therefore, remains at ease. He or she continues to acquire firm-specific knowledge, and the management team remains efficient and profitable. International Insurance Co., v Johns, 874 F.2d 1447, 1464-65 (11th Cir.1989)(internal citations omitted).

There exist various opinions about the effect of these agreements on executive objectivity. Change in control agreements generally motivate the executive to act in the best interests of the shareholders, by removing the distraction of post change in control uncertainties faced by the executive with regard to his compensation. See Fenoglio v. Augat, Inc. 254 F3d 368 (1st Cir.2001). If the executive is confident his change in control agreement will produce a substantial golden parachute payment, and a grossed up payment to account for excise taxes, his personal interests will be aligned more closely with the shareholders.

CHANGE IN CONTROL CLAUSE:

Understanding Change in Control Agreements may differ from company to company. Whether the agreement is used to defend against an unreasonable tender offer (œpoison pill) or used to instill general confidence in its key management employees, each company will draft language that best serves the reasonable short and long-term interests of the shareholders. The analytical legal theories (œthe business judgment rule and œthe reasonable relationship test) used to determine the enforceability of these agreements is outside the scope of this article.

As in all contractual transactions, the actual written provisions govern. The following is an example of a change in control definition:

œChange of Control means

(a) any œperson (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the œExchange Act)), other than a trustee or other fiduciary holding securities of the Company under an employee benefit plan of the Company, becomes the œbeneficial owner (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of (A) the outstanding shares of common stock of the Company or (B) the combined voting power of the Company’s then-outstanding securities;

(b) the Company is party to a merger or consolidation, or series of related transactions, which results in the voting securities of the Company outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving or another entity) at least fifty (50%) percent of the combined voting power of the voting securities of the Company or such surviving or other entity outstanding immediately after such merger or consolidation;

(c) the sale or disposition of all or substantially all of the Company’s assets (or consummation of any transaction, or series of related transactions, having similar effect);

(d) there occurs a change in the composition of the Board of Directors of the Company within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors;

(e) the dissolution or liquidation of the Company; or

(f) any transaction or series of related transactions that has the substantial effect of any one or more of the foregoing.

When reviewing similar provisions, the executive and his/her counsel must carefully consider each word and how it is used in the agreement. Slight changes in language can have an enormous and sometimes costly impact to the executive. Remember, the terms define the œintent of the parties. If a specific term is not in the agreement, it will not be enforced. Similarly, if the controversial term is somehow negotiated into the agreement, the executive or the company will be hard press to remove the term once a dispute arises.

THE TERMINATION CLAUSE:

Golden parachute payments are triggered in one of three ways, and each is precipitated by specifically identified change in control events. There is the œsingle trigger, where the executive voluntarily resigns at his/her leisure and demands payment. The single trigger favors the executive because of the automatic nature of the change in control definition, i.e. he or she is financially protected. The executive has less concern for the future of the company after a change in control, and depending on the contractual language the executive can become reemployed the very next day.

The œdouble trigger is more common and favors the company. This trigger requires a termination without cause or with good reason by executive, and a defined period of payment of generally one year. Unlike the single trigger, the executive cannot voluntarily resign. His participation in the existing company and future company is mandated by the agreement. However, the executive still receives a great deal of protection while the change in control takes place. The company will clearly desire to retain the executive’s loyalty and commitment, and will reward the executive well after the change in control is completed. Such an outcome is attractive in order to maintain continuity and retention of key management personnel.

In Buckhorn, Inc. v. Ropak Corp, the court held that a double trigger change in control payment was valid because œthe Court believes that this provision reasonably advances the shareholders’ interest in retaining key management personnel in their present positions during a critical transition period, without unduly entrenching management or over-burdening Ropak. 656 F.Supp. 209, at *232 to*233. However, the court invalidated the single trigger change in control provision adopted by the Board of Directors as not a reasonable response to a takeover threat.

The following language is an example of a double trigger change in control provision:

(b) If the Executive’s employment with the Company shall be terminated for any reason other than as specified in Section 3(a), the Executive shall be entitled to the following: (i) the Employer shall pay the Executive all Accrued Compensation and a Pro Rata Bonus;

(ii) the Employer shall pay the Executive as severance pay and in lieu of any further compensation for periods subsequent to the Termination Date, in a single payment an amount in cash equal to two and a half (2 1/2) times the sum of (A) the Base Amount and (B) the Bonus Amount; provided, however, if an employment agreement is in existence between the Company and the Executive on the Termination Date, any amount due the Executive under this Section 3(b)(ii) shall be reduced by the amount of Base Amount and Bonus Amount paid as severance pay to Executive pursuant to such employment agreement in lieu of compensation for periods subsequent to the Termination Date.

(iii) for thirty (30) months following the Termination Date, (the œContinuation Period), the Employer shall at its expense continue on behalf of the Executive and his dependents and beneficiaries the medical, dental, life, disability and hospitalization benefits provided (A) to the Executive at any time during the 90-day period prior to the Change in Control or at any time thereafter (and if different benefits were paid during such period, such of those benefits as are elected by the Executive) or (B) to other similarly situated executives who continue in the employ of the Company during the Continuation Period. The coverage and benefits (including deductibles and costs) provided in this Section 3(b)(iii) during the Continuation Period shall be no less favorable to the Executive and his dependents and beneficiaries than the most favorable of such coverages and benefits during any of the periods referred to in clauses (A) and (B) above. The Employer’s obligation hereunder with respect to the foregoing benefits shall be compromised to the extent that the Executive obtains any such benefits pursuant to a subsequent employer’s benefit plans, in which case the Employer may reduce the coverage of any benefits it is required to provide the Executive hereunder as long as the aggregate coverages and benefits of the combined benefits plans is no less favorable to the Executive than the coverages and benefits required to be provided hereunder. This subsection (iii) shall not be interpreted so as to limit any benefits to which the Executive, his dependents or beneficiaries may be otherwise entitled under any of the Company’s employee benefit plans, programs or practices following the Executive’s termination of employment, including without limitation, retiree medical and life insurance benefits;

(iv) all theretofore unvested share options, restricted options, restricted share and other awards issued to the Executive pursuant to the Company’s Share Option and Share Award Plan, and all unvested benefits under any split dollar life insurance policies insuring the Executive’s life, shall immediately become 100% vested; and

(v) a payment from the Employer equal to the unvested amount contained in the Executive’s accounts in the Company’s 401(k) plan (or any other qualified plan of the Company or an affiliate) which he or she will forfeit as a result of his or her termination.

Finally, the œmodified trigger, also company friendly, requires a termination without cause or good reason. However, the executive’s resignation occurs only during the œopen window period (typically 30 days) after six to twelve months have elapsed since the change in control. During this transition period, the company benefits from continued performance. Similar to the single and double trigger, the executive still obtains financial security through the modified trigger provision.

The following language is an example of a modified trigger change in control provision: œTermination Upon Change of Control means: (a) any termination of the employment of Executive by the Company without Cause during the period commencing on or after the date that the Company first publicly announces a definitive agreement that would result in a Change of Control (even though still subject to approval by the Company’s stockholders and other conditions and contingencies) and ending on the date which is twelve (12) months following a Change of Control; or (b) any resignation by Executive based on a Diminution of Responsibilities where (i) such Diminution of Responsibilities occurs during the period commencing on or after the date that the Company first publicly announces a definitive agreement that would result in a Change of Control (even though still subject to approval by the Company’s stockholders and other conditions and contingencies) and ending on the date which is twelve (12) months following the Change of Control, and (ii) such resignation occurs within one-hundred and twenty (120) days following such Diminution of Responsibilities.

The term œTermination Upon Change of Control shall not include any other termination, including a termination of the employment of Executive (1) by the Company for Cause; (2) by the Company as a result of the Disability of Executive; (3) as a result of the death of Executive; or (4) as a result of the voluntary termination of employment by Executive for reasons other than a Diminution of Responsibilities.

THE COMPENSATION CLAUSE:

Once the change in control and trigger provisions have been met, the golden parachute payment must be determined. In 1984, Congress passed the Deficit Reduction Act as a tax penalty in reaction to a period of intense corporate takeover activity, where entrenched management teams used golden parachutes to remain in control. Senate Comm. on Finance, 98th Congress, Deficit Reduction Act of 1984, Explanation of Provisions Approved by the Committee on March 21, 1984. The Act created two new Internal Revenue Code Sections 280G, disallowing deductions for excess parachute payments, and Section 4999, which applied a 20% excise tax on the executive for excess parachute payments. The specific provisions of the two sections can be summarized in the following manner: A ˜parachute payment’ is any payment to a ˜disqualified individual’ in the nature of compensation, if such payment is contingent on a change in control of the corporation and the aggregate present value of all such payments equals or exceeds three times the individual’s ˜base amount.’ The base amount is the individual’s average compensation includible in gross income for the five taxable years preceding the taxable year in which the change in control occurs. An œexcess parachute payment’ is any parachute payment in excess of the portion of the base amount allocated to such payment. A ˜disqualified individual’ is any individual who is an employee or independent contractor of a corporation and who is an officer, shareholder, or highly compensated individual.

The Golden Parachute Provisions: Time for Repeal? Virginia Tax Review at *129, Fall 2001, Bruce A. Wolk. Calculating the excess parachute payment and base amount can be difficult. Each calculation is dependent on the makeup of the payments, the value of other benefits and the executives combined income tax rate. Such calculations are outside the scope of this article. However, œit is important to emphasize that once the three-times base amount threshold is equaled or exceeded, it is not the excess over this threshold that is penalized, but the excess over the base amount. Id. at *131.

ERISA IMPLICATIONS:

In the event of breach of contract in the parachute agreement, a federal statute provides additional protection beyond ordinary contract law, as specified in the choice of law provision of the agreement. These agreements are generally governed by the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et.seq. ERISA treats change in control agreements as employee welfare benefit plans:

Any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund or program was established or is maintained for the purpose of providing for its participants or their beneficiaries . . . any benefit described in section 186(c) of this title. . . 29 U.S.C. § 1002(1) (1988 Supp.).

In a breach of contract case, a court will decide the dispute based on the evidence of what the parties intended prior to ratifying the agreement. In the ERISA context, the executive can further allege legal arguments based on the fiduciary relationship; one where the company owed a fiduciary obligation to pay benefits in the event of a change in control. This modifies the original arms-length transaction to one of a beneficiary and trustee relationship. Where the trustee must protect the best interests of the beneficiary, the executive.

In order to usurp the ERISA fiduciary schema, the executive must first establish that the change in control agreement is a welfare benefit plan. A œplan under ERISA is established if from surrounding circumstances a reasonable person can ascertain the [1] intended benefits, [2] a class of beneficiaries, [3] a source of financing, and [4] procedures for receiving benefits. Purser v. ENRON Corp., 1988 WL 220238 at *3 (W.D.Pa.1988).

The œintended benefits equates to the golden parachute payment the executive will or should receive. In examining the change in control agreement, the company may limit it to one executive, or apply to œkey management personnel. If the agreement does not supply a source of funding, under ERISA golden parachutes would be paid out of general corporate assets. Fort Halifax Packing Co., Inc. v. Coyne, 96 L.Ed.2d 1, 15 (S.Ct.1987). The method of computing benefits is set forth in the specifically identified change in control provisions.

Although an examination of the fiduciary relationship is outside the scope of this article, the executive must understand there is possibly more to the enforceability of the change in control agreement than previously suspected. The ERISA component can have an enormous impact on how parachute payment will be adjudicated.

If you would like more information about understanding change in control agreements, please contact our Employment Law Attorneys at Carey & Associates, P.C. at [email protected] .

Understanding Change in Control Agreements “ Resource:

Definition of Change in Control

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Practical Law

Change of Control Clause

Practical law glossary item 0-382-3325 (approx. 3 pages).

United States

Adviser Changes of Control: An Elusive Definition

In some form or another, nearly every registered investment adviser will at some point be involved in a merger, acquisition, sale, or restructuring. Whether it’s a simple equity ownership stake by a new financier, the addition of a new partner, a union of two practices, the death of a major shareholder or the full-blown execution of a succession plan, RIAs will inevitably need to navigate SEC “change of control” rules and guidance.

Such rules and guidance are rooted in the requirement that investment advisory contracts may not be assigned without client consent. I discussed the interplay of positive and negative consent a few years back in this article , but left open the question of what actually constitutes an “assignment” that would necessitate client consent. Said another way, what types of mergers, acquisitions, sales, or restructurings are considered an assignment of an advisory contract and therefore require client consent?

For starters, the SEC attempts to define “assignment” in the very first definition of the Investment Advisers Act, Section 202(a)(1): “Assignment includes any direct or indirect transfer or hypothecation of an investment advisory contract by the assignor or of a controlling block of the assignor’s outstanding voting securities by a security holder of the assignor […]”.

There are a few more sentences specific to partnerships, but we’ll address that later. The general concept of the “assignment” definition is that there are essentially two situations in which an assignment is deemed to have occurred: (1) when advisory contracts are transferred to another RIA or pledged as collateral, or (2) The equity ownership structure of an RIA changes such that a “controlling block” of the RIA’s outstanding voting securities changes hands.

Both situations would trigger the need for client consent.

With respect to #2, the logical next question is: what constitutes a “controlling block?” What percentage of voting equity interest needs to change hands for the SEC to care? Unfortunately the SEC does not define “controlling block”, but we can cobble together an understanding from a few different guideposts.

The first is Section 202(a)(12) of the Advisers Act, which defines “control” as “the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company”. This is only moderately helpful since “controlling influence” is still left undefined, but at least we can discern that such control should be in relation to management of the RIA or its policies. And just because somebody employed by an RIA has a fancy title doesn’t mean he or she automatically has control over the RIA.

The second is the instructions to Form ADV Part 1, the glossary to which presumes that RIA equity owners with the right to vote 25% or more of the securities of that RIA “control” that RIA. Under this framework, the following persons would be deemed to control an RIA:

A corporate stockholder that owns 25% of its voting stock
A LLC member that owns 25% of its voting membership units, has contributed 25% of the capital, or has a right to receive 25% of the capital upon dissolution
A partner that has contributed 25% of the partnership’s capital, or has the right to receive 25% of the capital upon dissolution

The third is actually the section that defines “control” in the Investment Company Act (applicable to mutual funds), not the Advisers Act. In Section 2(a)(9), the SEC establishes a rebuttable presumption that “any person who owns beneficially, either directly or through one or more controlled companies, more than 25% of the voting securities of a company shall be presumed to control such company”. Though technically not applicable to RIA change of control scenarios, many have looked to this percentage as a helpful guidepost regardless.

The fourth is SEC Rule 202(a)(1)-1, which states that “a transaction which does not result in a change of actual control or management of an investment adviser is not an assignment for purposes of section 205(a)(2) of the [Investment Advisers] Act”. This mainly applies to reorganizations, and the SEC cites a scenario in which an RIA changes its state of incorporation as one example of a transaction that would not constitute a change of control.

The fifth and final guidepost is several no-action letters that, though fact-specific to the complex transactions described therein, generally stand for the proposition that the SEC is ultimately concerned with the “trafficking” in investment advisory contracts to the detriment of investors. So long as there is no actual change in control or management of an RIA, the trafficking concern is moot.

Side bar about RIAs organized as partnerships: minority partners that are admitted to the partnership, die, or otherwise withdraw from the partnership do not trigger an advisory contract assignment. That said, any change in the membership of the partnership triggers a client notification obligation within a reasonable time.

This is all a tortuous way of saying that determining whether or not an advisory contract assignment or change in control has occurred may not be as straightforward as it seems. Complete lift-outs or cash-for-stock transactions are likely a no-brainer, but private equity infusions, partial buyouts and certain mergers likely require a more nuanced analysis.

The 25% voting security threshold is by analogy only, and higher or lower thresholds may very well be justified given the right facts.

When in doubt, simply send clients a negative consent to borderline control changes (assuming your advisory contracts permit negative consent) and let them decide whether or not to continue the advisory relationship.

This article originally appeared on October 28, 2016 in ThinkAdvisor .

What are the different clauses in an NDA?

Non-disclosure agreements, as we talked about in a previous blog post , are important tools for any company that shares confidential information with third parties.

Within a non-disclosure agreement (NDA), there can be different clauses about rights, relief and more. This post is meant to summarize some of the more “legalese” provisions that might appear in an NDA and why they matter.

Can a party assign their rights to a third party?

An assignment clause provides rules for whether a party is allowed to assign their rights or obligations under the NDA to a third party. There are situations where assignment could be helpful or harmful, depending on who is assigning.

If a receiving party sells its assets to a third party, for example, and assigning its rights under an NDA to the buyer, the buyer may be a company that the disclosing party would not have wanted to share that confidential information. This situation could also arise in a change of control of the receiving party, so it is best practice to be careful whenever there is an assignment or change of control clause within an NDA.

Does choice of law matter?

Yes! There should be a clause within the NDA that chooses the laws of which state (or /province or country if outside the U.S.) will govern the agreement. This clause should probably also choose a proper venue or it may provide that the dispute resolution method will be arbitration instead of litigation. It is important to choose a reasonable jurisdiction to enforce the NDA, as well as one that is not too inconvenient or costly.

What is injunctive relief?

What happens when a receiving party discloses confidential information in violation of an NDA? In this case, the disclosing party can seek an injunction. An injunction is a court order for a party to do (or stop doing) something.

The party seeking the injunction must show that they have suffered or will suffer irreparable harm from the unauthorized use of their confidential information. “Irreparable harm” means the type of harm that cannot be cured through monetary compensation.

The cost of litigating an injunction can be significant, so some NDAs include a provision stipulating that the unauthorized disclosure of confidential information will cause irreparable harm. This does not necessarily mean that the judge will automatically grant an injunction, but it could make proving irreparable harm easier or improve the availability of emergency, short-term action by the court.

Who pays for the legal fees?

Similar to an injunction, the cost of seeking enforcement of an NDA can also be substantial. Therefore, it may be a good idea for the disclosing party to include a fee payment provision. Generally, this type of provision allows the prevailing party to recover its legal fees from the other party.

Without such a provision, a successful party may still suffer financial harm when paying the costs of their own legal fees, and in the face of the huge expense of enforcement, a party might be hesitant to enforce their rights at all.

Whether fees can be recovered in contract cases is a matter of state law, so choice of law is important!

What happens when a party is legally compelled to disclose information?

NDAs should have a provision that specifies what happens if the receiving party is compelled to disclose confidential information by law. For example, if the receiving party receives an order from a court or other governmental agency, or as part of the discovery process. Typically, these provisions require the receiving party to notify the disclosing party that such an order has been issued. Additionally, the receiving party should also be required to cooperate (within reason) with the disclosing party in acquiring a protective order.

A protective order allows the parties to keep confidential information protected from disclosure beyond the ordered disclosure to the court. This clause is important, especially with litigation, because either party can add documents to their court filings. These documents could then become generally accessible by the public, which would defeat the purpose of the NDA!

Strong non-disclosure agreements are essential tools for businesses to protect their commercially valuable information as well as the personal information of clients and employees. However, the strength of the agreement can hinge on the way key provisions are written.

Finding the best fit for each situation may take time, but the protection afforded by a well-drafted NDA is worth the time.

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Sources : places where infectious agents (germs) live (e.g., sinks, surfaces, human skin). Sources are also called reservoirs.
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COMMENTS

Don't Confuse Change of Control and Assignment Terms
Change of control and assignment terms actually address opposite ownership changes. If an assignment clause addresses change of control, it says what happens if a party goes through an M&A deal and no longer exists (or becomes a shell company). A change of control clause, on the other hand, matters when the party subject to M&A does still exist.
Change of Control?
Summary. Parties normally seek to include provisions in an agreement that allow for either termination or an adjustment of their rights, such as payment, upon a change of structure or ownership of the other party. This is known as a "change of control" clause. This can often be due to a concern that the other party may be acquired by a ...
Why and How to Add a Change of Control Clause to Contracts
Differentiate Between an Assignment and Change of Control. A lot of contracts forbid an assignment, which prevents one or both parties from assigning its rights and obligations under the contract to a new party. This may seem like it covers a change of control, but it does not as an assignment is a specific action taken. A change in control ...
Assignment, Novation and Change of Control Clause
A 'change of control' is another clause that affects who is a party to a contract and who has responsibilities for its rights and obligations. It is common to find this kind of clause in your contracts as a boilerplate or a general mention. A change of control refers to the make-up of a contracting party. It looks at the ownership structure ...
Spotting issues with assignment clauses in M&A Due Diligence
Exclusion for Change of Control Transactions. In negotiating an anti-assignment clause, a company would typically seek the exclusion of assignments undertaken in connection with change of control transactions, including mergers and sales of all or substantially all of the assets of the company.
Do Change of Control Transactions Constitute an Assignment by ...
A change of control is a significant change in the equity, ownership, or management of a business entity. This can occur through a merger, consolidation or acquisition. The general rule is that change of control of a corporate entity is not an assignment by operation of law, and therefore does not violate a basic anti-assignment provision.
Do Change of Control Transactions Constitute an Assignment by Operation
The general rule is that change of control of a corporate entity is not an assignment by operation of law, and therefore does not violate a basic anti-assignment provision. Courts have reasoned ...
What is change of control and how does it operate?
A change of control may also include a sale of all or substantially all of a target company's assets in its definition. ... For a more in-depth discussion of reviewing change of control and assignment provisions in due diligence, take a look at our free guide. 370 King Street West Box 67, Suite 500 Toronto, Ontario M5V 1J9 Canada. 1 888 710 3454.
Anti-Assignment Provisions and Assignments by 'Operation of Law': What
Importantly, some anti-assignment provisions include prohibitions against change of control without prior written consent. For example, the provision might state the following: Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written approval of Company XYZ.
Does a change of control constitute assignment?
650+ full-time experienced lawyer editors globally create and maintain timely, reliable and accurate resources across all major practice areas. 83% of customers are highly satisfied with Practical Law and would recommend to a colleague. 81% of customers agree that Practical Law saves them time. Under UK/English Law does a change of control, or ...
A Guide to Understanding Anti-Assignment Clauses
Silent Provision and Change of Control Provision. In the event that an agreement does not contain an anti-assignment provision, a contract is generally assignable without the consent of the non ...
Differences between the change of control clauses and assignment
A change of control clause constitutes of two main elements: The definition of change in control; The operation of the clause after the occurrence of an event that meets the requirement under the definition. There exists no standard definition of change of control but it does include the following transactions: A transfer of shares of the company;
Mergers and Restrictions on Assignments by "Operation of Law"
Nonetheless, " [w]hen an anti-assignment clause includes language referencing an assignment 'by operation of law,' Delaware courts generally agree that the clause applies to mergers in which the contracting company is not the surviving entity.". [3] Here the anti-assignment clause in the original acquisition agreement did purport to ...
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It is common for creditor agreements to include a change of control clause to protect the lender in case the company comes under new ownership. Such clauses may stipulate that the lender can demand to be repaid in full upon triggering of the clause by a change in company ownership. Unsure as to the creditworthiness of the new owner (s), a bank ...
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A transaction where the acquirer of the stock, assets or rights is an "affiliate" of the target company may be an exclusion from the change-of-control definition. Change of control 2.0. The ...
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that while a change in control may in certain circumstances violate an anti-assignment provision, a change in con - trol of an upper-tier holding company would not: "The License Agreement provided that a change in controlling ownership of a party to the contract would be considered an assignment, not that a change in controlling ownership
Change of Control Provision: Everything You Need to Know
A change of control provision is an agreement where a party has certain rights, such as payment, consent, or termination. This is often related to a change in management or ownership of the opposite party. However, there isn't a standard definition when it comes to a change in control. Due to this, every agreement needs to be reviewed carefully ...
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Change of Control Explained. Equity sales may trigger change of control provisions in the same manner that asset sales do anti-assignment provisions. These are necessary when one party needs a greater amount of control over who business is accomplished with and how deeply the relationship goes. These types of requirements are standard in ...
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and drafting assignment provisions. It also considers issues relating to the transferability of IP licenses in the context of bankruptcy and secured transactions, and change-of-control provisions. TRANSFERABILITY OF CONTRACTS DEFAULT RULES: CONTRACTS GENERALLY Under basic contract law, a contract that is silent on assignment is
Change of Control Clause
Change of Control Clause. Also known as change of control. A provision in an agreement giving a party certain rights (such as consent, payment or termination) in connection with a change in ownership or management of the other party to the agreement. Not all change of control provisions are triggered by the same action. For example, a change of ...
Adviser Changes of Control: An Elusive Definition
The fourth is SEC Rule 202(a)(1)-1, which states that "a transaction which does not result in a change of actual control or management of an investment adviser is not an assignment for purposes of section 205(a)(2) of the [Investment Advisers] Act". This mainly applies to reorganizations, and the SEC cites a scenario in which an RIA changes ...
What are the different clauses in an NDA?
An assignment clause provides rules for whether a party is allowed to assign their rights or obligations under the NDA to a third party. There are situations where assignment could be helpful or harmful, depending on who is assigning. If a receiving party sells its assets to a third party, for example, and assigning its rights under an NDA to ...
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Infection Control Basics
Infection prevention, control and response resources for outbreak investigations, the infection control assessment and response (ICAR) tool and more. Infection control specifically for surfaces and water management programs in healthcare settings. Preventing multi-drug resistant organisms (MDROs). Sources. Infection control prevents or stops ...

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What are the different clauses in an NDA?

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1 thought on “What are the different clauses in an NDA?”

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