How to Manage Assignment Restrictions in Commercial Contracts?
Mergers and Acquisitions (M&A) are among the most complex commercial transactions, capable of reshaping a company’s future. However, there is a “hidden danger” that can prevent large-scale mergers from concluding successfully or significantly diminish their value: Assignment and Change of Control Clauses within the target company’s commercial contracts.
In this blog post, we examine the impact of these restrictions on M&A processes and how they should be managed legally.
I. What are Change of Control and Assignment Restrictions?
Change of Control restrictions in commercial contracts are provisions that grant the other party (supplier, customer, licensor) the right to terminate or renegotiate the contract in the event of a change in the ownership structure or management control of one party (the target company).
Impact on the M&A Process
Following an acquisition, there is a risk that key customer, supplier, or technology license contracts—often the target company’s most valuable assets—cannot be transferred or may be terminated by the counterparty. This situation directly threatens the synergies and revenue expected by the acquiring investor.
Example: A technology company is being acquired. If the software license agreement providing the company’s primary revenue includes a “Change of Control” clause, the licensor may terminate the contract immediately after the acquisition, effectively halting that revenue stream.
II. Legal Risk Management Strategies
To manage this critical risk, one must act meticulously during two main phases of the M&A process: Legal Due Diligence and Contract Negotiation.
1. The Legal Due Diligence Phase
Due diligence is the only way to identify these restrictions.
Creating a List of Key Contracts: First, a list of all “Key Contracts” vital for the continuity of the company’s revenue, operations, or technology must be compiled.
Scanning for “Assignment and Change of Control”: Each of these key contracts must be systematically scanned for terms such as “Assignment,” “Change of Control,” “Transfer,” “Sale of Shares,” or “Termination.”
Preparation of a Risk Matrix: A risk matrix is prepared for each identified restriction. This matrix should include:
Importance of the contract (High, Medium, Low),
The counterparty (From whom must consent be obtained?),
The consent process (Simple notification or written consent?).
2. Contract Management and Security
Once a restriction is identified, the management of the risk begins.
A. The Consent Process The most definitive solution is to obtain written and unconditional consent from the counterparties of contracts containing restrictive clauses before the transfer. This process requires sensitive communication, jointly managed by the acquirer’s counsel and the target company’s management. A request for consent should not be made before the M&A transaction is announced; it is typically managed strategically after due diligence is completed and closer to the closing date.
B. Determining the Transaction Structure Turkish Commercial Law allows M&A transactions to be executed in various forms. To bypass assignment restrictions, the structure of the deal can be modified:
Asset Sale instead of Share Sale: If the restriction only covers a “transfer of shares,” acquiring specific assets and desired contracts (Asset Deal) may be a solution. (However, this may also require consent for the asset transfer itself).
Merger: When an acquisition is made via a statutory merger, in some jurisdictions, this might not be considered an automatic “assignment.” A detailed analysis is required as the legal effect varies based on applicable laws.
C. Representations, Warranties, and Indemnity Clauses Strong Indemnity and warranty clauses should be added to the Share Purchase Agreement (SPA), stating that the target company (or sellers) will compensate for damages arising from these contracts. If a key contract is terminated, this indemnity will cover the acquiring investor’s losses.
III. The Importance of Communication and Transparency
Change of control clauses strengthen the counterparty’s psychological leverage. Therefore:
Early Notification Strategy: For critical contracts requiring consent, the process of informing the counterparty and requesting consent must be managed with a professional and reassuring tone.
Negotiation Preparation: The counterparty may demand improvements in contract terms (price increases, extension of duration, etc.) in exchange for consent. One must be prepared for these negotiations and conduct a cost/benefit analysis.
In M&A processes, assignment restrictions in commercial contracts are a risk factor that cannot be ignored. For a successful M&A transaction, it is essential to meticulously identify these restrictions during the due diligence phase, select a legally appropriate transaction structure, and proactively manage the consent process with counterparties for critical contracts. This complex process should be managed by a legal advisory team specialized in corporate and contract law.
Would you like to receive support regarding legal risk analysis and contract management in your company merger or acquisition processes?