What is a change of control clause?

A Change of Control Clause refers to a contract provision addressing a company’s significant change in ownership and control. In short, referring to the decision-making powers from one entity to another. Contract review is often undertaken during the due diligence process on a corporate transaction, by the Buyer. It is not uncommon for the termination of a contract due to the company’s change of ownership. Therefore, allowing the buyer to assess whether their interests are protected and provide benefits, post-completion. Every agreement needs to be reviewed carefully to see whether the proposed transaction is enough to warrant a change in control.

In simpler terms, if a company is sold, merged or undergoes any other change within its ownership or control, the change of control clause will come into effect (if warranted). The clause generally outlines the rights and obligations of all parties involved in the specific terms and conditions stated in the contract.

What is the purpose?

The purpose of the clause is to protect the interests of the parties involved in the contract when there is a significant change in the ownership or control of the company. It allows the parties to keep their rights, benefits, and obligations under new ownership, only proving if the change of control clause allows this. The clause may have triggered the contract to terminate due to a change of control.

Furthermore, the clause assists in maintaining stability in contractual relationships without disruptions, which can occur during the change of control. Parties are given enhanced negotiation power, resulting in better terms or benefits. In short, the change of control clause ensures fairness by requiring the controlling entity to honour existing agreements or provide compensation where needed, protecting the interests of all parties involved.

What is the impact of a change of control clause?

There is always the possibility of a change in the change of control clause, which can have an impact on the contract. The outcome depends on the existing conditions outlined in the clause. 

Some examples include:

• Contract Termination: in some cases, the change of control clause may allow one or both parties to terminate the entire contract if certain conditions related to the change of control are met. For example, if there is a change in ownership of the business – then the parties may have the right to terminate.
• Renegotiation: it is possible for the clause to provide renegotiation of existing contractual terms, following a change in control. In simpler terms, the parties will discuss modifications and negotiations in order to align with the new ownership, which allows the opportunity to accommodate new terms.
• Continuation: alternatively, the change of control clause may specify that the contract will continue regardless of the change in control. In short, the existing parties are contractually bound by the terms of the contract despite the change in control or ownership.
• Consent or Approval Requirements: in contrast to the above, there is the prospect that the change of control clause may state that any change of control, requires the consent and approval of the other party. Ensuring that the other party has a say in the decision. Overall, allowing the protection of their personal interests.

For the buyer, the change of control clause has several implications. It is crucial for the client to carefully review the clause to understand its terms and conditions and identify the triggers of the clause. Once a change occurs, clients are advised to assess the impact of their interests, evaluate the new owner as well as their intentions and prospects.

Seek legal advice

Seeking legal advice can provide further guidance on understanding clients’ rights and obligations. These include termination rights, renegotiation options, or consent requirements. Furthermore, correctly understanding the implications that can occur during a change of control clause ensures that clients are taking appropriate actions to protect their interests and ascertain compliance with the contract. Accessing legal advice on matters involving change of control clauses will provide valuable guidance while keeping your personal interests at heart throughout the process.

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