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
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,
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.
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