The Contract That Cancels Itself When You Buy the Company: 6 Rules for Change-of-Control Clauses

You can do everything right in an acquisition and still close on a smaller company than the one you paid for. The price is agreed, the financing is in place, the quality of earnings report is clean. Then, a week after closing, the target's largest customer sends a two-line letter: under section 14.3 of the supply agreement, a change of control allows termination on 30 days' notice, and they are exercising it.

Nobody lied. The clause was in the data room the whole time. It was simply page 41 of a contract signed nine years earlier by a manager who had since left, and nobody on the deal team read it with the question that mattered: what happens to this contract the day we become the owner?

Change-of-control and anti-assignment clauses sit in customer agreements, supplier contracts, leases, software licenses, distribution deals, bank facilities and franchise agreements. A recent article on JD Supra described them as "the change of control problem nobody owns in M&A," and that is exactly right. The legal team assumes the business team knows which contracts matter. The business team assumes legal has read them all.

I have bought and integrated businesses across wine, real estate, hospitality and distribution, in Europe and in the United States. Here are the six rules I apply to change-of-control clauses before any deal goes to signing.

What a change-of-control clause actually does

A change-of-control clause gives the other party to a contract specific rights if ownership or control of your target changes. The most common versions are:

• Consent: the contract cannot continue under new ownership without the counterparty's written approval.
• Termination: the counterparty may end the contract, usually on short notice, after a change of control.
• Renegotiation or payment: a fee, a price reset or new terms are triggered.
• Default: in loan agreements, a change of control is often an event of default that makes the debt repayable.

A close cousin is the anti-assignment clause, which says the contract cannot be transferred to someone else without consent. Whether a clause bites depends as much on how you structure the deal as on what the clause says.

Rule 1: Know which structure triggers which clause

In an asset purchase, the buyer becomes a new party to every contract it takes over, so almost every anti-assignment clause is triggered and needs consent. In a share purchase, the company keeping the contracts does not change, only its owner, so a plain anti-assignment clause usually does not apply. A change-of-control clause, by contrast, is written precisely to catch a share sale.

Mergers sit in between, and the courts do not always agree. In Meso Scale Diagnostics v. Roche (2013), the Delaware Court of Chancery held that a reverse triangular merger generally is not an assignment by operation of law. But in SQL Solutions v. Oracle (1991), a federal court in California treated a reverse triangular merger as a transfer of a copyright license that required consent.

The practical lesson: decide the structure with the contract map in front of you, not before you have it. Sometimes switching from assets to shares removes most of the consent problem at the cost of taking on more historical liability, and that trade-off belongs in the price discussion.

Rule 2: Map every contract by value, not by page count

A target with 300 contracts does not have 300 problems. It usually has eight to fifteen that carry most of the value. Build a simple map during due diligence:

• Revenue at risk: which customer contracts, if terminated, would remove a meaningful share of sales or margin?
• Operations at risk: which supplier, software, logistics or lease contracts would stop the business if they ended next month?
• Financing at risk: which bank facilities, guarantees or leases accelerate on a change of control?
• Clause type: consent, termination, fee or default, and the notice period for each.

The question is never "does this contract have a change-of-control clause?" It is "what would it cost us if this counterparty used it?" Our list of due diligence red flags that should stop a deal covers the broader review; this map is the contract-specific part of it.

Rule 3: Treat consents as conditions, not as paperwork

Once you know which contracts matter, decide which consents you need before you will close. The critical ones belong in the purchase agreement as conditions to closing: no consent from the anchor customer, no obligation to complete.

Some advisors resist this because it gives the seller an execution risk. That is the point. If the value of the business depends on a contract that a third party can cancel, the seller should carry the risk of obtaining that third party's approval. For the less critical consents, a covenant requiring the seller to use reasonable efforts to obtain them is usually enough.

Put it on the table early. The letter of intent is the right place to say that named key consents will be closing conditions, before you grant exclusivity and lose your leverage.

Rule 4: Plan the approach to each counterparty

Asking for consent is a commercial conversation, not a legal formality. Handled badly, it hands your counterparty a free option to renegotiate.

• Sequence it. Agree with the seller who calls whom and when. Confidentiality usually means approaching counterparties only after signing, so build the timetable around that.
• Lead with continuity. The counterparty wants to know that the people, quality, prices and service they rely on will not change. Say so in writing.
• Have the seller make the call. The relationship belongs to the people who built it. The buyer joins the conversation, not the other way round.
• Expect a price. Landlords and large customers sometimes use consent to ask for better terms. Decide in advance how much of that cost the seller bears.

A consent request without a continuity message is an invitation to renegotiate.

Rule 5: Do not forget the contracts that are not commercial

The clauses that hurt most are often outside the sales and purchasing files.

• Bank debt: most credit agreements treat a change of control as an event of default. Plan to refinance or obtain a waiver before closing.
• Leases: many commercial leases treat a change in control of the tenant as an assignment that needs the landlord's consent.
• Software and IP licenses: licensors often prohibit transfer, and some charge a new fee to the acquirer.
• Government contracts: in the United States, the Anti-Assignment Act and the novation process in FAR Subpart 42.12 mean a government contract cannot simply move to a new owner in an asset deal.
• Executive agreements: "golden parachute" clauses can give managers a payment, or a right to resign with severance, when control changes.

In carve-outs these issues multiply, because many contracts are held by the seller's group rather than the business you are buying. That is one reason a solid transition services agreement matters so much.

Rule 6: Price what you cannot secure

Some consents will not arrive before closing. You then have three tools, and you can combine them:

• Price adjustment: reduce the price by the value at risk, discounted by a realistic probability of losing the contract.
• Escrow or holdback: hold back part of the price until the consent is obtained or the contract survives a defined period.
• Specific indemnity: the seller compensates you if a named contract is terminated because of the transaction.

Never accept a general "we are confident the customer will stay" in place of one of these mechanisms. Confidence is not a contractual term. If one customer drives a large share of the target's margin, our analysis of customer concentration risk explains why that risk deserves its own line in the valuation.

Key Takeaways

• Change-of-control and anti-assignment clauses can let a customer, landlord, lender or licensor walk away the day you take ownership.
• Deal structure decides which clauses bite: asset deals trigger anti-assignment clauses, share deals trigger change-of-control clauses, and mergers depend on the jurisdiction.
• Map contracts by the value at risk, not by volume. A few contracts usually carry most of the business.
• Make the critical consents conditions to closing and say so as early as the letter of intent.
• Approach each counterparty with a continuity message, led by the seller, on an agreed timetable.
• Check bank debt, leases, software licenses, government contracts and executive agreements, not only commercial contracts.
• Whatever you cannot secure, price it through an adjustment, an escrow or a specific indemnity.

Frequently Asked Questions

What is a change of control in business?

A change of control happens when ownership or effective control of a company passes to someone else, typically through a share sale, merger or the transfer of a majority of voting rights. Contracts define it precisely, often as the acquisition of more than 50% of the shares or the power to appoint most of the board.

Does a share purchase require consent from customers and suppliers?

Usually not, if the contract only contains an anti-assignment clause, because the company that holds the contract does not change. If the contract contains a change-of-control clause, a share purchase is exactly what it is designed to catch, and consent or notice will be required.

Is a merger an assignment of contracts?

It depends on the merger type and the jurisdiction. In Delaware, the Court of Chancery held in 2013 that a reverse triangular merger generally is not an assignment by operation of law, while other courts have treated some mergers as transfers, especially for intellectual property licenses. Ask counsel to confirm for each material contract.

What happens if a key consent is not obtained before closing?

If the consent was a condition to closing, the buyer can refuse to close or renegotiate. If it was not, the buyer should be protected by a price adjustment, an escrow or a specific indemnity. Without any of these, the buyer simply absorbs the loss if the counterparty terminates.

The Bottom Line

A business is worth what its contracts allow it to keep earning. Read the most important ones with one question in mind, what happens the day we own this company, and make the answer part of the price, the structure and the closing conditions.

If you are building a group through acquisitions and want to see how a company founded in 1890 approaches growth over generations, learn more about Manzanos Enterprises.