Assignability Clauses in M&A – Pre-Transaction Implications
by Jonathan K. Hustis
Your client seeks to be acquired, sooner or later, and has asked you for help getting ready. Here is one topic among many to consider and address.
Background: Assignability Clauses. Assignability clauses in corporate commercial contracts can be key factors in acquisition readiness. Ignoring them creates greater risk of surprises and breach, and likely deal costs. Any significant commercial agreements should be considered: leases, loans, liens, licenses, alliances, supply/service agreements, etc.
By “assignability clause” we mean language that (1) restricts your company’s ability to assign or convey a contract, or (2) affects your company’s contract rights or obligations in a sale, change of control or merger.
A buyer bases its purchase price on assumed future business results. Achieving those results may depend on a contract continuing after an acquisition. Not surprisingly, acquisition agreements typically require that existing contracts not be violated by the acquisition and that they remain enforceable after acquisition, except as agreed in an exceptions schedule.
So, be aware of assignability clauses in company commercial agreements, and assess their impact. This should preferably be done before price and terms are negotiated, but certainly before the acquisition agreement is negotiated and signed.
Pre-Emptive Avoidance.Anticipate and keep unnecessary assignability clauses out of your commercial agreements portfolio. For example:
- Educate executives and staff to identify assignability clauses in proposed commercial agreements; require that no assignability clauses be included without counsel’s approval.
- Where approval is given, include standard negotiated exceptions permitting assignability in case of (i) a strategic corporate transaction such as disposition of all assets of the company or relevant business subdivision, or the merger, sale or change of control of an entity; or (ii) the internal assignment of the contract to an affiliate entity under common corporate control.
- Where a standard negotiated exception is not negotiable, learn what concern the other party has. Then narrow the exception to fit the concern. For example prohibit assignability without the vendor or customer’s consent, but only for an identified set of potential acquirers. Require that consent not be unreasonably withheld.
Pre-Emptive Due Diligence.Some contracts were created before you were able to set controls, or were acquired in acquisition transactions from predecessors. Sometimes controls have been bypassed. You can still proactively research, before an acquisition arises, which contracts have assignability clauses, how material they are, and how those clauses are written.
- Require a checklist at the execution of any new contract, including specific identification of assignability clauses.
- When you acquire a company, catalog the acquisition records that reference these agreements, so that you’ll have them available if you later sell the company.
- Require contracts to be collected, catalogued and filed centrally with a contract administrator, with a specific filter for assignability.
- Create a data store of assignability clauses that are identified by the filter, preferably with each clause available for immediate reference.
Online Agreements, a Special Case. Critical license and service agreements, website use agreements, etc., are now frequently formed online with “click-wrap” terms and conditions. With these agreements, there is often no negotiation. Online vendors may include onerous assignability clauses that present obstacles in an acquisition. So it is important to:
- Educate company employees; require a process for entering into online contracts that includes the identification and prior approval of assignability clauses, and filing for future reference.
- Require dated files in *.pdf or other fixed, screen-shot formats to be catalogued and stored, to document offer and acceptance, and all online contract terms.
Remember that archiving the Internet URL used to link with online terms is not enough. Online terms may change without notice and without any change in the URL link. Have your contracting employees save the versions extant at the time of the contract formation.
Deal Time.Where unacceptable assignability clauses slip into your commercial contracts, you may have to negotiate waivers with suppliers and customers, renegotiate contracts, or find alternative suppliers during acquisition discussions or before closing. So identify assignability clauses early enough to get waivers, modifications and replacements done without delaying or missing an acquisition deadline. Engage your company contacts with these vendors early, communicating and monitoring deadlines for waivers or replacements. Be sure to consider the impact on technical operations of a vendor change.
In summary, to maximize business value for a potential acquirer, and for your shareholders, be prepared.
Jonathan K. Hustis is an attorney with Phillips & Reiters, PLLC in Dallas. His general counsel practice includes businesses in telecommunications, information technology and software. He can be reached at email@example.com.