no assignment clause change of control

Don’t Confuse Change of Control and Assignment Terms

• techcontracts-david
• 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).)

• 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.

© 2020, 2022 by Tech Contracts Academy, LLC. All rights reserved.

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Spotting issues with assignment clauses in M&A Due Diligence

Written by: Kira Systems

January 19, 2016

6 minute read

Although not nearly as complex as change of control provisions , assignment provisions may still present a challenge in due diligence projects. We hope this blog post will help you navigate the ambiguities of assignment clauses with greater ease by explaining some of the common variations. (And, if you like it, please check out our full guide on Reviewing Change of Control and Assignment Provisions in Due Diligence. )

What is an Assignment Clause?

First, the basics:

Anti-assignment clauses are common because without them, generally, contracts are freely assignable. (The exceptions are (i) contracts that are subject to statutes or public policies prohibiting their assignment, such as intellectual property contracts, or (ii) contracts where an assignment without consent would cause material and adverse consequences to non-assigning counterparties, such as employment agreements and consulting agreements.) For all other contracts, parties may want an anti-assignment clause that allows them the opportunity to review and understand the impact of an assignment (or change of control) before deciding whether to continue or terminate the relationship.

In the mergers and acquisitions context, an assignment of a contract from a target company entity to the relevant acquirer entity is needed whenever a contract has to be placed in the name of an entity other than the existing target company entity after consummation of a transaction. This is why reviewing contracts for assignment clauses is so critical.

A simple anti-assignment provision provides that a party may not assign the agreement without the consent of the other party. Assignment provisions may also provide specific exclusions or inclusions to a counterparty’s right to consent to the assignment of a contract. Below are five common occurrences in which assignment provisions may provide exclusions or inclusions.

Common Exclusions and Inclusions

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. This allows a company to undertake a strategic transaction without worry. If an anti-assignment clause doesn’t exclude change of control transactions, a counterparty might materially affect a strategic transaction through delay and/or refusal of consent. Because there are many types of change of control transactions, there is no standard language for these. An example might be:

In the event of the sale or transfer by [Party B] of all or substantially all of its assets related to this Agreement to an Affiliate or to a third party, whether by sale, merger, or change of control, [Party B] would have the right to assign any or all rights and obligations contained herein and the Agreement to such Affiliate or third party without the consent of [Party A] and the Agreement shall be binding upon such acquirer and would remain in full force and effect, at least until the expiration of the then current Term.

Exclusion for Affiliate Transactions

A typical exclusion is one that allows a target company to assign a contract to an affiliate without needing the consent of the contract counterparty. This is much like an exclusion with respect to change of control, since in affiliate transfers or assignments, the ultimate actors and responsible parties under the contract remain essentially the same even though the nominal parties may change. For example:

Either party may assign its rights under this Agreement, including its right to receive payments hereunder, to a subsidiary, affiliate or any financial institution, but in such case the assigning party shall remain liable to the other party for the assigning party’s obligations hereunder. All or any portion of the rights and obligations of [Party A] under this Agreement may be transferred by [Party A] to any of its Affiliates without the consent of [Party B].

Assignment by Operation of Law

Assignments by operation of law typically occur in the context of transfers of rights and obligations in accordance with merger statutes and can be specifically included in or excluded from assignment provisions. An inclusion could be negotiated by the parties to broaden the anti-assignment clause and to ensure that an assignment occurring by operation of law requires counterparty approval:

[Party A] agrees that it will not assign, sublet or otherwise transfer its rights hereunder, either voluntarily or by operations of law, without the prior written consent of [Party B].

while an exclusion could be negotiated by a target company to make it clear that it has the right to assign the contract even though it might otherwise have that right as a matter of law:

This Guaranty shall be binding upon the successors and assigns of [Party A]; provided, that no transfer, assignment or delegation by [Party A], other than a transfer, assignment or delegation by operation of law, without the consent of [Party B], shall release [Party A] from its liabilities hereunder.

This helps settle any ambiguity regarding assignments and their effects under mergers statutes (particularly in forward triangular mergers and forward mergers since the target company ceases to exist upon consummation of the merger).

Direct or Indirect Assignment

More ambiguity can arise regarding which actions or transactions require a counterparty’s consent when assignment clauses prohibit both direct and indirect assignments without the consent of a counterparty. Transaction parties will typically choose to err on the side of over-inclusiveness in determining which contracts will require consent when dealing with material contracts. An example clause prohibiting direct or indirect assignment might be:

Except as provided hereunder or under the Merger Agreement, such Shareholder shall not, directly or indirectly, (i) transfer (which term shall include any sale, assignment, gift, pledge, hypothecation or other disposition), or consent to or permit any such transfer of, any or all of its Subject Shares, or any interest therein.

“Transfer” of Agreement vs. “Assignment” of Agreement

In some instances, assignment provisions prohibit “transfers” of agreements in addition to, or instead of, explicitly prohibiting “assignments”. Often, the word “transfer” is not defined in the agreement, in which case the governing law of the contract will determine the meaning of the term and whether prohibition on transfers are meant to prohibit a broader or narrower range of transactions than prohibitions on assignments. Note that the current jurisprudence on the meaning of an assignment is broader and deeper than it is on the meaning of a transfer. In the rarer case where “transfer” is defined, it might look like this:

As used in this Agreement, the term “transfer” includes the Franchisee’s voluntary, involuntary, direct or indirect assignment, sale, gift or other disposition of any interest in…

The examples listed above are only of five common occurrences in which an assignment provision may provide exclusions or inclusions. As you continue with due diligence review, you may find that assignment provisions offer greater variety beyond the factors discussed in this blog post. However, you now have a basic understand of the possible variations of assignment clauses. For a more in-depth discussion of reviewing change of control and assignment provisions in due diligence, please download our full guide on Reviewing Change of Control and Assignment Provisions in Due Diligence.

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Rethinking the “No Assignment” Provision

27 November 2023 20 November 2012 | Ken Adams

In this post , Brian Rogers explains how, as an experiment in crowdsourcing contract language, he has posted on Quora ( here ) his candidate for “the best anti-assignment provision in a contract ever.” He says that it’s “probably lifted” from Negotiating and Drafting Contract Boilerplate (Tina Stark ed. 2003) ( NDCB ). Here’s Brian’s provision:

Neither party may assign any of its rights under this agreement, either voluntarily or involuntarily, whether by merger, consolidation, dissolution, operation of law, or any other manner, except with the prior written consent of the other party. Neither party may delegate any performance under this agreement, except with the prior written consent of the other party. Any purported assignment of rights or delegation of performance in violation of this section is void.

It so happens that I’ve been idly contemplating shortcomings in standard no-assignment language. That’s something that I’ve tackled previously ( here ), and Brian’s post prodded me to revisit the topic.

I’ll start by offering the following comments on Brian’s provision:

• In the interest of consistency I prefer using “shall not” for language of prohibition, but that’s something I’m still exploring. Using “neither party may” works too.
• If you provide for the possibility of consent, it would be safest to assume that consent can’t be unreasonably withheld. If you have a problem with that, omit any mention of consent.
• Isn’t “voluntarily or involuntarily” needless elaboration, analogous to saying “I don’t eat fish, whether fresh-water or salt-water”?
• To avoid having to be all encompassing (“or in any other manner”), I’d use “including”.
• You might want to make it clear whether the prohibition applies to mergers regardless of whether the party is the surviving or disappearing entity (see this post ).
• The distinction between assigning rights and delegating obligations is pointless; in this context, “assign” and “delegate” constitute what I call “misapplied terms of art” (see this post ). Because the provision refers to what is being assigned and delegated, a generic alternative to both words would work just as well, and I opt for “transfer”. Regarding that choice, NDCB , at 56, says, “The problem, however, is that there are reams of cases that analyze ‘assign,’ but not ‘transfer.’ If ‘transfer’ were used alone, the precedential value of the existing cases might be compromised. Moreover, the cases already question the meaning of ‘transfer.'” This doesn’t worry me, as the context makes it clear what’s going on.
• It’s unclear what “rights” refers to. (I don’t use the word “rights” anywhere in MSCD .) I think it refers to discretion granted to a party under an agreement and any remedy that a party has under an agreement, and I’d rather make that explicit.
• By referring to delegation of performance rather than delegation of obligations, Brian’s provision seeks to reflect that a party might delegate not only a duty but also a condition. See NDCB at 26, 74. But I think it’s unrealistic to expect readers to deduce that nuance from a reference to delegation of performance; it would be better to make it explicit.
• The last sentence is language of policy. I suggest that because it relates to a contingent future event, most native English speakers would say “will be void” rather than “is void”.

So here’s my initial version (it’s certain to change) [ Updated 9 August 2016: Language tidied up]:

Except with the prior written consent of the other party, each party shall not transfer, including by merger (whether that party is the surviving or disappearing entity), consolidation, dissolution, or operation of law, (1) any discretion granted under this agreement, (2) any right to satisfy a condition under this agreement, (3) any remedy under this agreement, or (4) any obligation imposed under this agreement. Any purported transfer in violation of this section X will be void.

Because my version makes explicit what Brian’s version only alludes to, it’s longer, but not by much (85 words versus 72 words).

I’ve posted my version on Quora, under Brian’s. (Hey, Brian! In. Yo. Face!) But crowdsourcing is still no way to identify optimal contract language. In particular, I wouldn’t rely on contract language select by haphazard vote. Instead, what you have here is the usual process of Brian, me, and others hashing stuff out. I look forward to having readers point out the weaknesses in my version.

[ Updated 27 November 2023: Bear in mind that in some contexts—notably bankruptcy—no-transfer provisions are unenforceable by law. See my 2014 article on termination-on-bankruptcy provisions, here .]

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of  A Manual of Style for Contract Drafting , and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

17 thoughts on “Rethinking the “No Assignment” Provision”

I have several concerns here. First, I have never been happy with the “each party shall not” formulation. I don’t mind “may not,” or better yet, “no party may,” but if you really want to use “shall not,” then I recommend “a party shall not” as being less awkward and contrary to normal usage.

Second, I’m surprised that you would allow “by operation of law” to survive here. For the most part, this phrase is used to refer to the “automagic” continuation of the disappearing company’s contracts under the aegis of the surviving company in a merger, in which case the language is redundant when you’ve already discussed mergers. Moreover, if this language relates to some other operations of law, for example an order of a bankruptcy court, it’s rather hubristic to think a contract can trump the ruling authority. Better, if it’s such a big deal, to handle the consequences of such a mandated transfer by giving the affected party an explicit termination right (without the nasty consequences of breach).

Third, in my experience the issues surrounding “delegation” are not only that it’s a misapplied term of art, but that it mistakes the transfer of a contractual obligation for a subcontracting of its performance. In fact, reliance on delegation or transfer is misplaced if one is concerned about subcontracting (since it doesn’t really amount to a transfer of any contractual obligation, only having that obligation physically performed by someone else). A drafter should inquire carefully what the client is really concerned about here, and if it’s subcontracting, that should be explicitly mentioned.

Ah, thank you Vance. I thought My discomfort with ‘delegate’ was a translation issue from US to UK English. I,too, Think that is the wrong word to use.

“No purported transfer of one or more of the following arising from this agreement will be valid without prior written consent of the other party: (1) discretion, (2) right to satisfy a condition, (3) remedy under this agreement, and (4) obligation.”

Other than light trimming, the principal thing this version does is dump the duty not to transfer and go solely with the avoidance of purported transfers. Why prohibit killing the dead?

Because failure to comply with a prohibition gives rise to a remedy; voiding purported transfers doesn’t. I can imagine situations where that might be significant.

No one can fail to comply with a prohibition against transfer when purported transfers are void. Void transfers are non-transfers. Killing the dead isn’t wicked, it’s just impossible.

It’s wicked and depraved! Actually, what happens if Acme makes a purported assignment that results in costly and protracted litigation? Widgetco would like to be able to go after Acme. Wouldn’t that be easier if Widgetco could point to breach? Should the obligation refer to not attempting to transfer?

“Any purported transfer by Acme, without Widgetco’s advance written consent, of one or more of Acme’s rights or obligations under this agreement will be void and will constitute a breach of this agreement.”

This game is based so much on underlying US laws on the meaning of assignment, merger, etc, that it is impossible for a non-US lawyer to participate. We don’t generally have mergers where a party disappears into a puff of smoke. A sale of a business [nearly] always happens by a sale of shares or a sale of assets.

I think the concept of assigning rights under a contract is well established in case law and using different terminology is reinventing the wheel.

I think the “if you do it despite the prohibition, it will be void” concept is strange, but one that I have seen before in US contracts. I don’t think it works, under English law, in respect of prohibitions on assignments of IP. I am doubtful whether it works for assignments of rights under contracts.

For what it is worth, my English law version would be very different and would simply say:

Neither party may assign any rights, or transfer any obligations, under this agreement, without the prior written agreement of the parties.

I have used the word “agreement” rather than “consent” to try to avoid case law on whether a term should be implied that consent should not be unreasonably withheld. The terminology of assignment and transfer is based on a House of Lords case, Linden Gardens v Lenesta Sludge – see http://www.bailii.org/uk/cases/UKHL/1993/4.html

As usual, caselaw is of less interest to me than the scope for confusion. I suspect that if you ask many lawyers what is meant by assignment of rights under a contract, you’d get quite a variety of answers.

Okay, Ken I’ll take your word for it. English lawyers who keep Chitty on Contracts under their pillows won’t be so variegated

Mark: Regarding your statement, “I think the ‘if you do it despite the prohibition, it will be void’ concept is strange, but one that I have seen before in US contracts,” consider the probable source of such provisions:

Since U.S. contract law is the province of the states, we have the high court of each of the 50 states reviewing the handiwork of probably twice that number of state appellate courts, which in turn have reviewed the work of probably thousands of trial courts. In addition, we have almost 90 federal district courts trying to predict how the supreme courts of the various states would rule if they were hearing the contracts cases that have fallen into the laps of the federal courts due to accidents of jurisdiction, plus the dozen courts of appeals and the Supreme Court. Then there are specialty federal courts such as the bankruptcy and tax courts which provide an additional source of cases for the federal district and appellate courts to review. And did I mention the extensive administrative law system that probably dwarfs all of the above in scope and which I’m sure has plenty to say about contracts?

Somewhere, sometime in the distant past one of those courts had an unfortunate fact pattern and, wanting to avoid the effect of an anti-assignment provision, decided that although the purported assignment was a breach of the contract in which it was found, the assignment was still effective. Other courts picked up on the work-around, and commercial lawyers have all been covering that base ever since.

Thanks Brian, interesting insight. I would have posted on your site but For the reasons given above I didn’t have a useful contribution.

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The language as being quoted from Negotiating and Drafting Boilerplate is incomplete. Here is the full language, along with explanations of some of the text. Many of my points will be at odds with those of Ken and arise because of differences in drafting philosophy.

Assignment and Delegation.

(a) No Assignments. No party may assign any of its rights under this Agreement, except with the prior written consent of the other party. [That party shall not unreasonably withhold its consent.] All assignments of rights are prohibited under this subsection, whether they are voluntary or involuntary, by merger, consolidation, dissolution, operation of law, or any other manner. For purposes of this Section,

(i) a “change of control” is deemed an assignment of rights; and

(ii) “merger” refers to any merger in which a party participates, regardless of whether it is the surviving or disappearing corporation.

(b) No Delegations. No party may delegate any performance under this Agreement.

(c) Consequences of Purported Assignment or Delegation. Any purported assignment of rights or delegation of performance in violation of this Section is void.

1. The provision is divided into three separate subsections, each dealing with a different topic. A long provision violates the so-called “three-line rule.” Sentences longer than three lines are hard for the reader to take in. Also, by separating assignment from delegation, the drafter is reminded that each of these provisions may need to be elaborated based on facts. (Perhaps delegation is permitted subject to certain conditions.)

2. Generally, exceptions should not begin a sentence. The usual rule is to state the rule – so that the reader has context – and then state the exception. This is also helpful if the sentence contains multiple exceptions that the drafter might want to tabulate.

3. I prefer “No party may” to “Each party shall not.” The sentence’s purpose is to express a prohibition that applies to all – no one can do it. In this context, a negative subject is appropriate: no party/neither party. When using a negative subject “may” is correct. “Shall not” works perfectly well when the subject of the sentence is a single party. “Sam shall not borrow any money.”

4. As to whether consent can be unreasonably withheld is a matter of state law. Some states read into a provision that grants discretionary authority an implied promise of good faith and fair dealing, stated differently, they read in reasonableness. Others do not imply a reasonableness requirement. For example, in New York, landlords may be unreasonable in denying consent to assignment.

5. Courts seriously dislike anti-assignment provisions. They view them as interfering with the free flow of commerce. They insist that if a particular assignment is to be prohibited, it must be listed. For example, if a provision prohibits the assignment of rights, the issue arises as to whether the provision prohibits the assignment of rights by merger. In all states that I’ve checked, unless the assignment by merger is explicitly prohibited, it’s permitted. The courts are rather adamant. They’ll turn their decisions inside out to find the anti-assignment provision unenforceable. They don’t like them and if the provision isn’t explicit, the courts will say that if the parties had really wanted to prohibit assignments by merger, they knew how to use their words. “Voluntarily or involuntarily” is used consistent with these cases.

6. Drafters have tried multiple ways to create all-inclusive provisions, but the courts reject them as not having been specific. “or in any other manner” was blessed by one court, so it’s used in the provision. Another court rejected the phrase “or by any other transfer,” stating that it did not know what “transfer” meant and it therefore could not act as an omnibus savings provision.

7. An anti-assignment provision should also address whether a change of control is deemed an assignment. If Parent Company A sells all of its issued and outstanding shares in Subsidiary A to Buyer Company, Subsidiary A becomes a wholly-owned subsidiary of Buyer Company. Nothing has happened at the Subsidiary A level; there’s been no assignment. Courts hold that unless the change of control is expressly prohibited, it does not rise to the level of an assignment. This prohibition can generally be accomplished in one of two ways: either through a definition, as in the stated provision, or by including a change of control as a default.

8. Assignment and delegation are terms of art, not misapplied terms of art. The Restatement (Second) of Contracts carefully defines them, as do legions of cases. Unfortunately, some lawyers are unfamiliar with them because their contracts courses didn’t cover them. That doesn’t mean new words should be created.

9. Rights are the flip-side of an obligation. If I have an obligation to pay you $100, you have a right to my performance. The transfer of the right to performance is what the assignment is all about. It’s technical. Using terms in a technical way creates precision. If one has discretionary authority, that is a colloquial right but not a contract right. That’s the reason why “right” is not used to signal discretionary authority. Instead, the correct verb to signal discretionary authority is “may”. Incorrect: The publisher has the right to reject the book. Correct: The publisher may reject the book.

Rights can also refer to remedies, but that is consistent with the definition of rights. If a party has a right to have its deposit returned, the flipside obligation is the obligation to return it. If a party has a right to an injunction, the flipside obligation is the promise not to contest the right to the injunction.

10. “Will be void” v. “is void.” I can’t get too excited about this issue. I start from the premise that the contract should always read as if it presently applies and that, therefore, the present tense is correct.

11. Subsection (c) is another consequence of the courts’ dislike for anti-assignment provisions. Mere prohibition does not void the assignment. The courts draw a distinction between the “right” to assign and the “power” to assignment. A flat prohibition merely prohibits the assignment of the right to assignment. Violation of the prohibition is a breach, like any other contract breach. The assignment is enforceable, but gives rise to damages. Unfortunately, the nonassigning party often has trouble finding damages to claim. What difference does it make to whom it pays money? If the nonassigning party’s performance is somehow changed, then damages might be claimed. To make the purported assignment unenforceable, a provision must take away the “power” to assign. That is accomplished through language along the lines of subjection (c).

Tina: Thanks; some readers might find that extract helpful.

More generally, the only drafting philosophy I buy into is identifying the clearest contract language.

Do you see any issues with making the transfer voidable by the non-transferring party instead of void ab initio?

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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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Change of Control Clause Commercial Contract

A change of control clause commercial contract is needed when a buyer wants to buy a company. 4 min read updated on February 01, 2023

A change of control clause commercial contract is needed when a buyer wants to buy a company. Boilerplate clauses are usually found at the bottom of a contract. These clauses are often viewed as dry, basic, and legalistic, but they are extremely important. In fact, for large companies, the boilerplate clause in an IP contract is essential to the company's valuation. The two clauses in a boilerplate that are of the utmost value are the change of control and the assignment clauses.

When Will a Change of Control Clause Be Needed?

It is not uncommon for new technology companies to run out of money before they hit success. Because of this, these companies need to have the ability to react quickly to opportunities that allow them to partner with corporate companies. Such opportunities may include:

• Trade sales,
• Joint ventures,
• Stock market flotations,
• Acquisitions .

When these opportunities become available, the startup will need to prove its market value. The value of a startup is normally based on its products. The two main assets of the company will be its intellectual property and any contracts that impact the development of its intellectual property licenses.

When a corporate transaction takes place and the IP contract does not survive, then the value of the transaction for the acquirer is zero. This is often seen during acquisitions. When the IP contract is paramount to the value of a company, this could indicate that the company has little to no value. The acquirer will have a lawyer, and this professional will conduct due diligence to scrutinize the value of the contracts.

Why Are Assignment Clauses Important?

When there is an assignment clause in a contract, this indicates whether one of the parties has the right to delegate a part of the contract to a third party. In some instances, the contract will state that one party can transfer part of the contract to someone who wants to buy the business; this is always preferred by someone who is wanting to take part in an asset sale. When this part of the contract is missing, the ability to transfer the contract to a purchaser may not be possible.

Commercial contracts often include some type of assignment clause. It's also important to include a change of control clause in a commercial contract. This clause will determine whether or not a third party can terminate the contract in the event that there is a change of control regarding who owns the company, or if there is a change in who has control of the company.

Much of the time, deal lawyers will explain their services to clients as being mergers and acquisitions . However, when a deal takes place, it is usually structured as an asset sale.

When an equity sale takes place, this means the person buying the equity is taking over the equity from the owner. When it is a corporation, the purchaser is taking over the stock. When it is a limited liability company, the purchaser is taking over the membership interests of the company. When a new person takes control of a company, the company will become a wholly-owned subsidiary. The status of the company is not usually changed in the eyes of the public.

What Is an Asset Sale?

When an asset sale takes place, only certain assets are transferred to the buyer. If all assets are going to be transferred, this must be stated in the contract. Much of the time, equity in the company will still remain owned by its equity holders. In some instances, though, some of the liabilities of the company will be switched over to be controlled by the new owner.

It is not uncommon for contracts to include an anti-assignment provision or clause. It is always important for a buyer to read through an entire contract before signing it. A lot of the time, if there are provisions or clauses that the buyer does not agree with, the buyer and seller can come together to work on some type of negotiation.

What Happens When There Is No Change of Control Clause?

When a seller doesn't include a change of control clause, a buyer will usually refuse to sign the contract. The buyer wants to know how they can delegate control of the company and whether or not they can sell it at a future time. Without a change of control clause, the buyer will normally alert the seller that they need to renegotiate the terms of the contract.

If you need help with a change of control clause commercial contract, you can post your legal need (or post your job) 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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• Change of Control Provision

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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Assignment clause defined.

Assignment clauses are legally binding provisions in contracts that give a party the chance to engage in a transfer of ownership or assign their contractual obligations and rights to a different contracting party.

In other words, an assignment clause can reassign contracts to another party. They can commonly be seen in contracts related to business purchases.

Here’s an article about assignment clauses.

Assignment Clause Explained

Assignment contracts are helpful when you need to maintain an ongoing obligation regardless of ownership. Some agreements have limitations or prohibitions on assignments, while other parties can freely enter into them.

Here’s another article about assignment clauses.

Purpose of Assignment Clause

The purpose of assignment clauses is to establish the terms around transferring contractual obligations. The Uniform Commercial Code (UCC) permits the enforceability of assignment clauses.

Assignment Clause Examples

Examples of assignment clauses include:

• Example 1 . A business closing or a change of control occurs
• Example 2 . New services providers taking over existing customer contracts
• Example 3 . Unique real estate obligations transferring to a new property owner as a condition of sale
• Example 4 . Many mergers and acquisitions transactions, such as insurance companies taking over customer policies during a merger

Here’s an article about the different types of assignment clauses.

Assignment Clause Samples

Sample 1 – sales contract.

Assignment; Survival .  Neither party shall assign all or any portion of the Contract without the other party’s prior written consent, which consent shall not be unreasonably withheld; provided, however, that either party may, without such consent, assign this Agreement, in whole or in part, in connection with the transfer or sale of all or substantially all of the assets or business of such Party relating to the product(s) to which this Agreement relates. The Contract shall bind and inure to the benefit of the successors and permitted assigns of the respective parties. Any assignment or transfer not in accordance with this Contract shall be void. In order that the parties may fully exercise their rights and perform their obligations arising under the Contract, any provisions of the Contract that are required to ensure such exercise or performance (including any obligation accrued as of the termination date) shall survive the termination of the Contract.

Reference :

Security Exchange Commission - Edgar Database,  EX-10.29 3 dex1029.htm SALES CONTRACT , Viewed May 10, 2021, <  https://www.sec.gov/Archives/edgar/data/1492426/000119312510226984/dex1029.htm >.

Sample 2 – Purchase and Sale Agreement

Assignment . Purchaser shall not assign this Agreement or any interest therein to any Person, without the prior written consent of Seller, which consent may be withheld in Seller’s sole discretion. Notwithstanding the foregoing, upon prior written notice to Seller, Purchaser may designate any Affiliate as its nominee to receive title to the Property, or assign all of its right, title and interest in this Agreement to any Affiliate of Purchaser by providing written notice to Seller no later than five (5) Business Days prior to the Closing; provided, however, that (a) such Affiliate remains an Affiliate of Purchaser, (b) Purchaser shall not be released from any of its liabilities and obligations under this Agreement by reason of such designation or assignment, (c) such designation or assignment shall not be effective until Purchaser has provided Seller with a fully executed copy of such designation or assignment and assumption instrument, which shall (i) provide that Purchaser and such designee or assignee shall be jointly and severally liable for all liabilities and obligations of Purchaser under this Agreement, (ii) provide that Purchaser and its designee or assignee agree to pay any additional transfer tax as a result of such designation or assignment, (iii) include a representation and warranty in favor of Seller that all representations and warranties made by Purchaser in this Agreement are true and correct with respect to such designee or assignee as of the date of such designation or assignment, and will be true and correct as of the Closing, and (iv) otherwise be in form and substance satisfactory to Seller and (d) such Assignee is approved by Manager as an assignee of the Management Agreement under Article X of the Management Agreement. For purposes of this Section 16.4, “Affiliate” shall include any direct or indirect member or shareholder of the Person in question, in addition to any Person that would be deemed an Affiliate pursuant to the definition of “Affiliate” under Section 1.1 hereof and not by way of limitation of such definition.

Security Exchange Commission - Edgar Database,  EX-10.8 3 dex108.htm PURCHASE AND SALE AGREEMENT , Viewed May 10, 2021, < https://www.sec.gov/Archives/edgar/data/1490985/000119312510160407/dex108.htm >.

Sample 3 – Share Purchase Agreement

Assignment . Neither this Agreement nor any right or obligation hereunder may be assigned by any Party without the prior written consent of the other Parties, and any attempted assignment without the required consents shall be void.

Security Exchange Commission - Edgar Database,  EX-4.12 3 dex412.htm SHARE PURCHASE AGREEMENT , Viewed May 10, 2021, < https://www.sec.gov/Archives/edgar/data/1329394/000119312507148404/dex412.htm >.

Sample 4 – Asset Purchase Agreement

Assignment . This Agreement and any of the rights, interests, or obligations incurred hereunder, in part or as a whole, at any time after the Closing, are freely assignable by Buyer. This Agreement and any of the rights, interests, or obligations incurred hereunder, in part or as a whole, are assignable by Seller only upon the prior written consent of Buyer, which consent shall not be unreasonably withheld. This Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and permitted assigns.

Security Exchange Commission - Edgar Database,  EX-2.1 2 dex21.htm ASSET PURCHASE AGREEMENT , Viewed May 10, 2021, < https://www.sec.gov/Archives/edgar/data/1428669/000119312510013625/dex21.htm >.

Sample 5 – Asset Purchase Agreement

Assignment; Binding Effect; Severability

This Agreement may not be assigned by any party hereto without the other party’s written consent; provided, that Buyer may transfer or assign in whole or in part to one or more Buyer Designee its right to purchase all or a portion of the Purchased Assets, but no such transfer or assignment will relieve Buyer of its obligations hereunder. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the successors, legal representatives and permitted assigns of each party hereto. The provisions of this Agreement are severable, and in the event that any one or more provisions are deemed illegal or unenforceable the remaining provisions shall remain in full force and effect unless the deletion of such provision shall cause this Agreement to become materially adverse to either party, in which event the parties shall use reasonable commercial efforts to arrive at an accommodation that best preserves for the parties the benefits and obligations of the offending provision.

Security Exchange Commission - Edgar Database,  EX-2.4 2 dex24.htm ASSET PURCHASE AGREEMENT , Viewed May 10, 2021, < https://www.sec.gov/Archives/edgar/data/1002047/000119312511171858/dex24.htm >.

Common Contracts with Assignment Clauses

Common contracts with assignment clauses include:

• Real estate contracts
• Sales contract
• Asset purchase agreement
• Purchase and sale agreement
• Bill of sale
• Assignment and transaction financing agreement

Assignment Clause FAQs

Assignment clauses are powerful when used correctly. Check out the assignment clause FAQs below to learn more:

What is an assignment clause in real estate?

Assignment clauses in real estate transfer legal obligations from one owner to another party. They also allow house flippers to engage in a contract negotiation with a seller and then assign the real estate to the buyer while collecting a fee for their services. Real estate lawyers assist in the drafting of assignment clauses in real estate transactions.

What does no assignment clause mean?

No assignment clauses prohibit the transfer or assignment of contract obligations from one part to another.

What’s the purpose of the transfer and assignment clause in the purchase agreement?

The purpose of the transfer and assignment clause in the purchase agreement is to protect all involved parties’ rights and ensure that assignments are not to be unreasonably withheld. Contract lawyers can help you avoid legal mistakes when drafting your business contracts’ transfer and assignment clauses.

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Change of Control Clause

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

• United States

Change of Control Clause

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

• USA (National/Federal)

Assignment and Change of Control Clauses in License Agreements

By: Larry Schroepfer

There's a provision in license agreements (and many, many other agreements for that matter) that's often relegated to the "boilerplate" at the end of the document, and it's whether either or both parties can assign their rights under the agreement to third parties.  Sandwiched somewhere between "Severability" and "Entire Agreement", this clause often says simply, "neither party may assign its rights under this Agreement without the other party's consent". 

But this one doesn't belong in the boilerplate.  Particularly in a licensing context, there are potentially serious consequences attached to whether the licensee can or cannot assign.

From a licensor perspective, it wants to be able to control who is practicing its patent or technology, and the terms (financial and otherwise) under which the licensee is doing so.  Just because the licensor is willing to license a startup or small niche player doesn't mean that it would be willing to license its biggest competitor.  Nor does it mean that it would extend the same terms if it did decide to license the competitor.  So the licensor wants to prohibit the licensee from assigning the license or otherwise engaging in any transaction under which a third party acquire rights to the patent/technology.

From a licensee perspective, the ability to assign, at least in connection with an acquisition by a third party, can be absolutely critical.  Particularly with a startup or small company, unless it is one of the fortunate few that are capable of going straight to IPO, its "end game scenario" assumes that it will be acquired at some point.    

So a prudent licensee will ask for the right to assign the agreement in connection with an acquisition of its assets and business to which the licensed patent/technology relate.  But the licensor is frequently unwilling to grant this kind of carte blanche, because it really doesn't solve the licensor's problem when it comes to the identity of the acquirer. 

So what do you do?  Here's a few thoughts:

• The most common "solution" is to add a provision that says licensor's consent to assignment or other transfer cannot be unreasonably withheld, and everybody thinks the situation's well in hand.  But they're wrong: this solves nothing .  If the licensor withholds consent and takes the position that its refusal is reasonable, the licensee's only recourse is to sue (or arbitrate if the agreement includes an ADR clause), but there is no acquirer in the world that is going to wait around until this dispute slowly grinds through the legal process.  While it's true that the licensor could be liable if it wrongfully withheld consent, in the absence of wrongful intent, this claim is difficult to sustain, and it doesn't put the pieces back together again for the licensee in any event. 
• One solution is to grant the licensee the ability to assign to an acquirer, but limit the scope of the license in that situation to only the product volume that the licensee sold prior to the acquisition (plus, perhaps, some reasonable increase to account for "organic" growth).  This allows the acquisition to go forth and the licensee to continue "business as usual", but if the acquirer wants to substantially expand the license to additional products or volumes that are orders of magnitude more than what the licensee sold, it will need to come back to the licensor and negotiate for those rights.
• A variant of this approach is to provide that the license remains in effect only so long as the licensee continues as a separate subsidiary (or, perhaps, separate business unit), and that it only covers sales by that subsidiary/business unit.  This would not, however, fully protect the licensor if the acquirer substantially "ramps up" the business.  I've sometimes seen provisions covering both product volume limitations and separate entity requirements, which goes a long way to limit the effect of an assignment or change of control from the licensor point of view, but which the licensee and its acquirer may find too restrictive.
• If the licensor is particularly concerned about the license "falling into the hands" of its principal competitors, one approach is to generate a blacklist of companies to which the license would not transfer if they acquired the licensee.  Conversely, the agreement might include a whitelist of companies to which the license could transfer, but to no one else.  However, a note of caution: before resorting to this approach, the parties should check with antitrust/competition counsel, since this could be problematic, particularly in the EU.
• Finally, a friend and astute business person whom I respect used to talk about reducing problems to "problems that can be cured by the payment of money".  Applying that approach here, the parties could agree to a "Change of Control Fee" which would be payable if the licensee were acquired.  There are various ways to fix the amount of this fee -- it might be a simple negotiated lump sum, an amount based on the acquirer's size, an amount based on the sales volume of licensed products, or doubtless other criteria.  The point is that a potential acquirer would know right up-front how much it had to pay for rights under the license, and could take that into account in determining whether to buy the licensee (or how much to pay for the licensee).

One other point: I have seen many, many otherwise astute lawyers who don't seem to understand that if the stock of a company is purchased by a third party, there is no "assignment" of the agreement, and therefore a simple clause that says the licensee may not "assign the agreement" doesn't work.  Sometimes people think they are solving this problem by including any assignment "by operation of law".  This might cover a merger, but if all that happens is that the stock of a company changes hands while the license remains in that company, there is no assignment of anything, whether by operation of law or otherwise.  So if the licensor really wants to restrict disposition of the license if the licensee is acquired, it needs to go further and address the consequences of the licensee's "Change of Control" (as appropriately defined to include stock acquisitions) in addition to "Assignment".

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This Bulletin is not intended as legal advice.  Readers should seek professional legal counseling before acting on the information it contains.

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Marlene Laro mlaro@potomaclaw.com 703.517.6449

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