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 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.
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. As an example, a change in control can happen when more than 50 percent of the party's stock is sold.
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.
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