By Jeff Wolfe
At the Forrest Firm, we often represent clients as they negotiate and enter into strategic transactions with other companies, such as mergers and acquisitions, strategic alliances, and joint ventures, and licensing. One of our most important jobs as corporate attorneys is guiding our clients through the process of due diligence associated with these types of transactions, especially with regard to the mergers and acquisitions that occur between companies on a regular basis.
Recently, we began a series of articles focusing on due diligence from our legal perspective. In the first installment of the series, we discussed the big picture of due diligence, taking an overall view of the process of due diligence and its proper execution in the context of a strategic transaction. Today, let’s take a look at one of the main functions of due diligence, which is to identify any required consents or approvals for a transaction to move forward.
For a business attorney involved in due diligence, consents and approvals typically fall into two areas: the corporate side (i.e., ownership and board approvals) or on the contract side (customer consent, lender consent, landlord consent, etc.). On the contract side, legal counsel is looking for notice or approval requirements that are contained in an anti-assignment provision or a change of control provision (may also be the definition of an event of default in certain contracts, such as debt financings).
Generally, all rights under a contract may be assigned unless prohibited by law or public policy. However, the parties to a contract can limit the application of this general rule by including an anti-assignment provision or a change of control provision.
How an assignment or change of control provision will be interpreted depends on the type of transaction proposed, specifically whether the transaction is a direct merger, forward triangular merger (where the acquiring company purchases the target company through a subsidiary of the acquirer), reverse triangular merger (where an acquiring company creates a subsidiary to purchase the target, which, in turn, absorbs the acquirer’s subsidiary), asset acquisition, or stock purchase. For this analysis, the specific state law as well as the exact contractual language will need to be analyzed, but the general rule is that an anti-assignment provision (e.g., “This Agreement may not be assigned to any person or entity without the prior written consent of the other party hereto”) will trigger consent in an asset acquisition but not a merger or stock purchase.
However, if this provision includes the phrase “by operation of law or otherwise”, it should probably be assumed to apply to direct mergers and forward triangular mergers. Lastly, if the provision states that a merger or change of control is deemed an assignment (or the contract includes a traditional change of control provisions), then written consent will be required for the aforementioned transaction structures.
For a stand-alone change of control provision, there is also a wide scope and variety of language used (i.e., different events trigger application of the provision). Some common examples of events that trigger a change control provision include change of ownership, sale of assets, or change in board members. Please note that that anti-assignment provisions and change of control provisions are not always clearly labeled (or may even be mislabeled).
Stay tuned to this space for our next installment, where we’ll outline due diligence concerns with regard to corporate records.