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Anti-Assignment Provisions and Assignments by ‘Operation of Law’: What Do I Have to Do? What Should I Do?

Introduction.

One of the key roles of legal due diligence in mergers and acquisitions (M&A) is to assist in the efficient and successful completion of any proposed M&A transaction. Due diligence is not merely a procedural formality but can serve as a proactive shield against unforeseen challenges and risks. One essential aspect of the legal due diligence process is reviewing third-party contracts to which the target entity is party, in order to better understand the scope of its commercial relationships and to anticipate any issues that may arise via the underlying contractual relationships as a result of completing the proposed M&A transaction.

A frequent reality in many M&A transactions is the requirement to obtain consents from third parties upon the “change of control” of the target entity and/or the transfer or assignment of a third-party contract to which the target is party. Notwithstanding the wording of such contracts, in many instances, the business team from the purchaser will often ask the question: “When is consent actually required?” While anti-assignment and change of control provisions are fairly ubiquitous in commercial contracts, the same cannot be said for when the requirement to obtain consent is actually triggered. The specifics of the proposed transaction’s structure will often dictate the purchaser’s next steps when deciding whether the sometimes-cumbersome process of obtaining consents with one or multiple third parties is actually needed.

This article examines what anti-assignment provisions are and how to approach them, depending on the situation at hand, including in the context of transactions where a change of control event may be triggered. This article also discusses how to interpret whether consent is required when faced with an anti-assignment provision which states that an assignment, including an assignment by operation of law , which requires consent from the non-assigning party.

Understanding Anti-Assignment Provisions

Generally, an anti-assignment provision prohibits the transfer or assignment of some or all of the assigning party’s rights and obligations under the contract in question to another person without the non-assigning party’s prior written consent. By way of example, a standard anti-assignment provision in a contract may read as follows:

Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written consent of Company XYZ.

In this case, Company ABC requires Company XYZ’s prior written consent to assign the contract. Seems simple enough. However, not all anti-assignment provisions are cut from the same cloth. For example, some anti-assignment provisions expand on the prohibition against general contractual assignment by including a prohibition against assignment by operation of law or otherwise . As is discussed in greater detail below, the nuanced meaning of this phrase can capture transactions that typically would not trigger a general anti-assignment provision and can also trigger the requirement to get consent from the non-assigning party for practical business reasons.

To explore this further, it is helpful to consider anti-assignment provisions in the two main structures of M&A transactions: (i) asset purchases and (ii) share purchases.

Context of M&A Transactions: Asset Purchases and Share Purchases

There are key differences between what triggers an anti-assignment provision in an asset purchase transaction versus a share purchase transaction.

i) Asset Purchases

An anti-assignment provision in a contract that forms part of the “purchased assets” in an asset deal will normally be triggered in an asset purchase transaction pursuant to which the purchaser acquires some or all of the assets of the target entity, including some or all of its contracts. Because the target entity is no longer the contracting party once the transaction ultimately closes (since it is assigning its rights and obligations under the contract to the purchaser), consent from the non-assigning party will be required to avoid any potential liability, recourse or termination of said contract as a result of the completion of the transaction.

ii) Share Purchases

Provisions which prohibit the assignment or transfer of a contract without the prior approval of the non-assigning party will not normally, under Canadian law, be captured in a share purchase transaction pursuant to which the purchaser acquires a portion or all of the shares of the target entity. In other words, no new entity is becoming party to that same contract. General anti-assignment provisions are not typically triggered by a share purchase because the contracts are not assigned or transferred to another entity and instead there is usually a “change of control” of the target entity. In such cases, the target entity remains the contracting party under the contract and the consent analysis will be premised on whether the contract requires consent of the third party for a “direct” or “indirect” change of control of the target entity and not the assignment of the contract.

Importantly, some anti-assignment provisions include prohibitions against change of control without prior written consent. For example, the provision might state the following:

Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written approval of Company XYZ. For the purposes of this agreement, any change of control of Company ABC resulting from an amalgamation, corporate reorganization, arrangement, business sale or asset shall be deemed an assignment or transfer.

In that case, a change of control as a result of a share purchase will be deemed an assignment or transfer, and prior written consent will be required.

A step in many share purchase transactions where the target is a Canadian corporation that often occurs on or soon after closing is the amalgamation of the purchasing entity and the target entity. So, what about anti-assignment provisions containing by operation of law language – do amalgamations trigger an assignment by operation of law? The short answer: It depends on the jurisdiction in which the anti-assignment provision is being scrutinized (typically, the governing law of the contract in question).

Assignments by Operation of Law

In Canada, the assignment of a contract as part of an asset sale, or the change of control of a party to a contract pursuant to a share sale – situations not normally effected via legal statute or court-ordered proceeding in M&A transactions – will not in and of itself effect an assignment of that contract by operation of law . [1]

Still, one must consider the implications of amalgamations, especially in the context of a proposed transaction when interpreting whether consent is required when an anti-assignment provision contains by operation of law language. Under Canadian law, where nuances often blur the lines within the jurisprudence, an amalgamation will not normally effect the assignment of a contract by operation of law . The same does not necessarily hold true for a Canadian amalgamation scrutinized under U.S. legal doctrines or interpreted by U.S. courts. [2]

Difference Between Mergers and Amalgamations

As noted above, after the closing of a share purchase transaction, the purchasing entity will often amalgamate with the target entity ( click here to read more about amalgamations generally). When two companies “merge” in the U.S., we understand that one corporation survives the merger and one ceases to exist which is why, under U.S. law, a merger can result in an assignment by operation of law . While the “merger” concept is commonly used in the U.S., Canadian corporations combine through a process called “amalgamation,” a situation where two corporations amalgamate and combine with neither corporation ceasing to exist. For all of our Canadian lawyer readers, you will remember the Supreme Court of Canada’s description of an amalgamation as “a river formed by the confluence of two streams, or the creation of a single rope through the intertwining of strands.” [3] Generally, each entity survives and shares the pre-existing rights and liabilities of the other, including contractual relationships, as one corporation. [4]

MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V.

As a practical note and for the reasons below, particularly in cross-border M&A transactions, it would be wise to consider seeking consent where a contract prohibits assignment by operation of law without the prior consent of the other contracting party when your proposed transaction contemplates an amalgamation.

In MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V. (a Superior Court of Delaware decision), the court interpreted a Canadian (British Columbia) amalgamation as an assignment by operation of law , irrespective of the fact that the amalgamation was effected via Canadian governing legislation. In essence, the Delaware court applied U.S. merger jurisprudence to a contract involving a Canadian amalgamation because the contract in question was governed by Delaware law. This is despite the fact that, generally, an amalgamation effected under Canadian common law jurisdictions would not constitute an assignment by operation of law if considered by a Canadian court. As previously mentioned, under Canadian law, unlike in Delaware, neither of the amalgamating entities cease to exist and, technically, there is no “surviving” entity as there would be with a U.S.-style merger. That being said, we bring this to your attention to show that it is possible that a U.S. court (if the applicable third-party contract is governed by U.S. law or other foreign laws) or other U.S. counterparties could interpret a Canadian amalgamation to effect an assignment by operation of law . In this case, as prior consent was not obtained as required by the anti-assignment provision of the contract in question, the Delaware court held that the parties to that agreement were bound by the anti-assignment provision’s express prohibition against all assignments without the other side’s consent. [5]

To avoid the same circumstances that resulted from the decision in MTA Canada Royalty Corp. , seeking consent where an anti-assignment provision includes a prohibition against assignment by operation of law without prior consent can be a practical and strategic option when considering transactions involving amalgamations. It is generally further recommended to do so in order to avoid any confusion for all contracting parties post-closing.

Practical Considerations

The consequences of violating anti-assignment provisions can vary. In some cases, the party attempting to complete the assignment is simply required to continue its obligations under the contract but, in others, assignment without prior consent constitutes default under the contract resulting in significant liability for the defaulting party, including potential termination of the contract. This is especially noteworthy for contracts with third parties that are essential to the target entity’s revenue and general business functions, as the purchaser would run the risk of losing key contractual relationships that contributed to the success of the target business. As such, identifying assignment provisions and considering whether they are triggered by a change of control and require consent is an important element when reviewing the contracts of a target entity and completing legal due diligence as part of an M&A transaction.

There can be a strategic and/or legal imperative to seek consent in many situations when confronted with contractual clauses that prohibit an assignment, either by operation of law or through other means, absent the explicit approval of the non-assigning party. However, the structure of the proposed transaction will often dictate whether consent is even required in the first place. Without considering this nuanced area of M&A transactions, purchasers not only potentially expose themselves to liability but also risk losing key contractual relationships that significantly drive the value of the transaction.

The Capital Markets Group at Aird & Berlis will continue to monitor developments in cross-border and domestic Canadian M&A transactions, including developments related to anti-assignment provisions and commercial contracts generally. Please contact a member of the group if you have questions or require assistance with any matter related to anti-assignment provisions and commercial contracts generally, or any of your cross-border or domestic M&A needs.

[1] An assignment by operation of law can be interpreted as an involuntary assignment required by legal statute or certain court-ordered proceedings. For instance, an assignment of a contract by operation of law may occur in, among other situations: (i) testamentary dispositions; (ii) court-ordered asset transfers in bankruptcy proceedings; or (iii) court-ordered asset transfers in divorce proceedings.

[2] MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V ., C. A. No. N19C-11-228 AML, 2020 WL 5554161 (Del. Super. Sept. 16, 2020) [ MTA Canada Royalty Corp. ].

[3] R. v. Black & Decker Manufacturing Co. , [1975] 1 S.C.R. 411.

[4] Certain Canadian jurisdictions, such as the Business Corporations Act (British Columbia), explicitly state that an amalgamation does not constitute an assignment by operation of law (subsection 282(2)).

[5] MTA Canada Royalty Corp .

With extensive experience in a broad range of corporate finance and commercial matters, Jeffrey offers clients a practical and business-minded approac...

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Courts Consider Anti-Assignment Clauses And Reverse Triangular Mergers

In a reverse triangular merger, the acquiring company forms a subsidiary that merges with and into the target with the outstanding shares of the target being converted into securities of the acquiring corporation or some other consideration. Does a reverse triangular merger constitute an assignment of a target corporation's contracts? Because the reverse triangular merger is an exceedingly common acquisition technique, one would expect that this question was answered long ago. Surprisingly, however, this isn't the case.

Earlier this year, Vice Chancellor Donald F. Parsons analyzed whether a reverse triangular merger violated an anti-assignment clause that read as follows: "Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties . . .". He concluded:

In sum, Meso could have negotiated for a "change of control provision." They did not. Instead, they negotiated for a term that prohibits "assignments by operation of law or otherwise." Roche has provided a reasonable interpretation of Section 5.08 that is consistent with the general understanding that a reverse triangular merger is not an assignment by operation of law. On the other hand, I find Meso's arguments as to why language that prohibits "assignments by operation of law or otherwise" should be construed to encompass reverse triangular mergers unpersuasive and its related construction of Section 5.08 to be unreasonable.

Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH , 62 A.3d 62, 88 (Del. Ch. 2013). See I’ve Been Thinking About Conversion, But I Haven’t Decided To Convert .

Here in California, U.S. District Court Judge Samuel Conti recently addressed the issue even more recently as follows:

No California state court has resolved this matter, and the Court is not inclined to guess at possible conclusions. The Court therefore begins from the presumption that a reverse triangular merger, which leaves intact the acquired corporation, does not effect a transfer of rights from the wholly owned subsidiary to its acquirer as a matter of law. What little applicable law there is could be analogized from California cases on stock sales, like Farmland Irrigation Co. v. Dopplmaier , 48 Cal. 2d 208, 223, 308 P.2d 732 (Cal. 1957), which suggested that if a plaintiff had sold all of his stock in a corporation, there could be no contention that the corporation's licenses would be extinguished as a matter of law, since the two contracting parties were still extant and in privity.

Florey Inst. of Neuroscience & Mental Health v. Kleiner Perkins Caufield & Byers, 2013 U.S. Dist. LEXIS 138904 (N.D. Cal. Sept. 26, 2013).

Both jurists confronted, and declined to follow, Judge Marilyn Hall Patel's earlier decision in SQL Solutions v. Oracle Corp. , 1991 U.S. Dist. LEXIS 21097 (N.D. Cal. Dec. 18, 1991) with Vice Chancellor Parsons saying: "I decline to adopt the approach outlined in SQL Solutions , however, because doing so would conflict with Delaware's jurisprudence surrounding stock acquisitions, among other things. Under Delaware law, stock purchase transactions, by themselves, do not result in an assignment by operation of law." Judge Conti said "Plaintiff relies solely on SQL Solutions to argue that assignment occurred as a matter of law when an acquired corporation became another corporation's wholly owned subsidiary. That case did not analyze nonassignment clauses and also found that federal copyright law forbid transfer."

Hollywood, Somali Pirates and Homer

Over the weekend, I saw the recently released film, Captain Phillips . The movie tells the story of the takeover of the MV Maersk by Somali pirates. When the Navy uses a Somali speaker to communicate with the pirates, one of the pirates asks "Who's this?". The translator answers "nemo", the Latin word for "no one". The interchange, of course, is an echo of the famous encounter of Odysseus and the Cyclops, Polyphemus in Homer's Odyssey :

Κύκλωψ, εἰρωτᾷς μ᾽ ὄνομα κλυτόν, αὐτὰρ ἐγώ τοι ἐξερέω: σὺ δέ μοι δὸς ξείνιον, ὥς περ ὑπέστης. Οὖτις ἐμοί γ᾽ ὄνομα: Οὖτιν δέ με κικλήσκουσι μήτηρ ἠδὲ πατὴρ ἠδ᾽ ἄλλοι πάντες ἑταῖροι. Cyclops, you are asking my renowned name, nevertheless I will declare: "Give to me the hospitality, you were promising. My name is no one: no one is what my mother, father and all my comrades call me."

Homer, Odyssey Book 9, lines 364 -367 (my translation). Matters went downhill from there for both Polyphemus and the pirates.

Keith Paul Bishop


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Spotting issues with assignment clauses in M&A Due Diligence

Written by: Kira Systems

January 19, 2016

6 minute read

Although not nearly as complex as change of control provisions , assignment provisions may still present a challenge in due diligence projects. We hope this blog post will help you navigate the ambiguities of assignment clauses with greater ease by explaining some of the common variations. (And, if you like it, please check out our full guide on Reviewing Change of Control and Assignment Provisions in Due Diligence. )

What is an Assignment Clause?

First, the basics:

Anti-assignment clauses are common because without them, generally, contracts are freely assignable. (The exceptions are (i) contracts that are subject to statutes or public policies prohibiting their assignment, such as intellectual property contracts, or (ii) contracts where an assignment without consent would cause material and adverse consequences to non-assigning counterparties, such as employment agreements and consulting agreements.) For all other contracts, parties may want an anti-assignment clause that allows them the opportunity to review and understand the impact of an assignment (or change of control) before deciding whether to continue or terminate the relationship.

In the mergers and acquisitions context, an assignment of a contract from a target company entity to the relevant acquirer entity is needed whenever a contract has to be placed in the name of an entity other than the existing target company entity after consummation of a transaction. This is why reviewing contracts for assignment clauses is so critical.

A simple anti-assignment provision provides that a party may not assign the agreement without the consent of the other party. Assignment provisions may also provide specific exclusions or inclusions to a counterparty’s right to consent to the assignment of a contract. Below are five common occurrences in which assignment provisions may provide exclusions or inclusions.

Common Exclusions and Inclusions

Exclusion for change of control transactions.

In negotiating an anti-assignment clause, a company would typically seek the exclusion of assignments undertaken in connection with change of control transactions, including mergers and sales of all or substantially all of the assets of the company. This allows a company to undertake a strategic transaction without worry. If an anti-assignment clause doesn’t exclude change of control transactions, a counterparty might materially affect a strategic transaction through delay and/or refusal of consent. Because there are many types of change of control transactions, there is no standard language for these. An example might be:

In the event of the sale or transfer by [Party B] of all or substantially all of its assets related to this Agreement to an Affiliate or to a third party, whether by sale, merger, or change of control, [Party B] would have the right to assign any or all rights and obligations contained herein and the Agreement to such Affiliate or third party without the consent of [Party A] and the Agreement shall be binding upon such acquirer and would remain in full force and effect, at least until the expiration of the then current Term.

Exclusion for Affiliate Transactions

A typical exclusion is one that allows a target company to assign a contract to an affiliate without needing the consent of the contract counterparty. This is much like an exclusion with respect to change of control, since in affiliate transfers or assignments, the ultimate actors and responsible parties under the contract remain essentially the same even though the nominal parties may change. For example:

Either party may assign its rights under this Agreement, including its right to receive payments hereunder, to a subsidiary, affiliate or any financial institution, but in such case the assigning party shall remain liable to the other party for the assigning party’s obligations hereunder. All or any portion of the rights and obligations of [Party A] under this Agreement may be transferred by [Party A] to any of its Affiliates without the consent of [Party B].

Assignment by Operation of Law

Assignments by operation of law typically occur in the context of transfers of rights and obligations in accordance with merger statutes and can be specifically included in or excluded from assignment provisions. An inclusion could be negotiated by the parties to broaden the anti-assignment clause and to ensure that an assignment occurring by operation of law requires counterparty approval:

[Party A] agrees that it will not assign, sublet or otherwise transfer its rights hereunder, either voluntarily or by operations of law, without the prior written consent of [Party B].

while an exclusion could be negotiated by a target company to make it clear that it has the right to assign the contract even though it might otherwise have that right as a matter of law:

This Guaranty shall be binding upon the successors and assigns of [Party A]; provided, that no transfer, assignment or delegation by [Party A], other than a transfer, assignment or delegation by operation of law, without the consent of [Party B], shall release [Party A] from its liabilities hereunder.

This helps settle any ambiguity regarding assignments and their effects under mergers statutes (particularly in forward triangular mergers and forward mergers since the target company ceases to exist upon consummation of the merger).

Direct or Indirect Assignment

More ambiguity can arise regarding which actions or transactions require a counterparty’s consent when assignment clauses prohibit both direct and indirect assignments without the consent of a counterparty. Transaction parties will typically choose to err on the side of over-inclusiveness in determining which contracts will require consent when dealing with material contracts. An example clause prohibiting direct or indirect assignment might be:

Except as provided hereunder or under the Merger Agreement, such Shareholder shall not, directly or indirectly, (i) transfer (which term shall include any sale, assignment, gift, pledge, hypothecation or other disposition), or consent to or permit any such transfer of, any or all of its Subject Shares, or any interest therein.

“Transfer” of Agreement vs. “Assignment” of Agreement

In some instances, assignment provisions prohibit “transfers” of agreements in addition to, or instead of, explicitly prohibiting “assignments”. Often, the word “transfer” is not defined in the agreement, in which case the governing law of the contract will determine the meaning of the term and whether prohibition on transfers are meant to prohibit a broader or narrower range of transactions than prohibitions on assignments. Note that the current jurisprudence on the meaning of an assignment is broader and deeper than it is on the meaning of a transfer. In the rarer case where “transfer” is defined, it might look like this:

As used in this Agreement, the term “transfer” includes the Franchisee’s voluntary, involuntary, direct or indirect assignment, sale, gift or other disposition of any interest in…

The examples listed above are only of five common occurrences in which an assignment provision may provide exclusions or inclusions. As you continue with due diligence review, you may find that assignment provisions offer greater variety beyond the factors discussed in this blog post. However, you now have a basic understand of the possible variations of assignment clauses. For a more in-depth discussion of reviewing change of control and assignment provisions in due diligence, please download our full guide on Reviewing Change of Control and Assignment Provisions in Due Diligence.

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Anti-Assignment Clause Prohibiting Assignment by Operation of Law Applies to Subsequent Merger

In MTA Canada Royalty v. Compania Minera Pangea, Judge Abigail LeGrow considered whether an agreement’s anti-assignment clause operated to void an assignment that occurred as a result of a subsequent merger between a contracting party to the agreement and a third party.

October 07, 2020 at 09:03 AM

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In MTA Canada Royalty v. Compania Minera Pangea, S.A. de C.V. , C.A. No. N19C-11-228 AML CCLD (Del. Super. Sept. 16, 2020), Judge Abigail LeGrow considered whether an agreement’s anti-assignment clause operated to void an assignment that occurred as a result of a subsequent merger between a contracting party to the agreement and a third party. She held that the anti-assignment clause prohibiting an assignment “by operation of law” without the other party’s consent applied to a subsequent merger in which the contracting party was not the surviving entity.

In 2016, the defendant, Compania Minera Pangea, S.A. de C.V. (CMP), purchased certain mineral rights in a mine located in Mexico from Alberta Ltd. They executed an assignment and assumption agreement that provided, in addition to a cash payment to Alberta of $5.25 million at closing, an additional $1 million payment to Alberta conditioned on the mine remaining in operation after a specified date. The agreement, which was governed by Delaware law, included an anti-assignment clause prohibiting Alberta from assigning its rights to any other party without CMP’s consent. The clause read, in part:

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Do Change of Control Transactions Constitute an Assignment by Operation of Law?

Commercial landlords often rely on anti-assignment provisions to restrict the ability of tenants to assign their interest in a lease to a third party. Such provisions often restrict assignments by “operation of law,” which are generally considered involuntary assignments mandated via a court order. Commercial landlords may assume that a change of control transaction violates a basic anti–assignment clause. Landlords wishing to restrict change of control of a tenant entity, however, should have clear anti-assignment provisions in their leases that expressly restrict such transactions and characterize such “changes of control” as assignments.

A change of control is a significant change in the equity, ownership, or management of a business entity. This can occur through a merger, consolidation or acquisition.

The general rule is that change of control of a corporate entity is not an assignment by operation of law, and therefore does not violate a basic anti-assignment provision. Courts have reasoned that a landlord entering into a lease with a corporate tenant should be aware that a corporation, or limited liability company, is an entity which exists separate and apart from its ownership, and that a change in ownership of the corporate entity does not change the tenant entity under the lease.

Courts in many states including Florida, New York and Delaware have held that a change of control is not an assignment by operation of law. In Sears Termite & Pest Control, Inc. v. Arnold , a Florida court held, “[t]he fact that there is a change in the ownership of corporate stock does not affect the corporation’s existence or its contract rights, or liabilities.” Further, in Meso Scale Diagnostics LLC v. Roche Diagnostics GMBH , a Delaware court ruled, “[g]enerally mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger.”

Importantly, the rule is different if the tenant entity does not survive the transaction. In MTA Canada Royalty Corp. v. Compania Minera Pangea , a Delaware Superior Court held that a merger in which the contracting entity does not survive may be held to be an assignment by operation of law.

If a landlord intends for a change of control of a tenant to violate the anti-assignment clause in its lease, the landlord should ensure that its lease expressly states that a change of control constitutes an assignment.

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Articles | By Mary Beth Kerrigan | 07/06/22

Top Ten Issues in Mergers and Acquisitions Transactions

Updated July 6, 2022

When negotiating the terms of an M&A transaction that spans over several months, the parties should address many issues up front (preferably at the letter of intent stage or as soon as possible after the execution of a letter of intent). The target company and the acquiring company should consider the following issues when contemplating a transaction.

1. Deal Structure

Three alternatives exist for structuring an acquisition: (i) stock purchase, (ii) asset sale, and (iii) merger. The acquirer and target often have competing legal interests and considerations within each option. It is important to recognize and address material issues when negotiating a specific deal structure. Primary considerations relating to deal structure include: (i) transferring liability, (ii) third party contractual consent requirements, (iii) stockholder approval, and (iv) tax consequences.

Transferring Liability . Unless contractually negotiated to the contrary, upon the consummation of an equity sale, the target’s liabilities are transferred to the acquirer by operation of law. Similarly, the surviving entity in a merger will assume by operation of law all liabilities of the selling entity. However, in an asset sale, with limited exceptions, only those liabilities that are designated as assumed liabilities are assigned to the acquirer while the non-designated liabilities remain obligations of the target.

Third Party Consents . To the extent that the target’s existing contracts prohibit the assignment of contractual rights and obligations to an acquirer without the consent of the other party to the contract, a pre-closing consent to assignment may be required. No such consent requirement exists for an equity purchase or merger unless the relevant contracts contain specific prohibitions against assignment upon a change of control or by operation of law, respectively.

Stockholder Approval . In most circumstances, the target’s board of directors can grant approval of an asset sale at the corporate level without obtaining individual stockholder approval. However, all selling stockholders are required to grant approval pursuant to a stock sale. When unanimity is otherwise unachievable in the stock sale context, a merger structure may be appropriate as an alternative pursuant to which the acquirer and target negotiate a mutually acceptable stockholder approval threshold sufficient to consummate the deal. Note, however, that under Delaware law (and most other jurisdictions that follow a similar corporate doctrine), non-consenting stockholders to an asset sale or merger are entitled to exercise appraisal rights, legal rights of a company’s shareholders to demand a judicial proceeding or independent valuation of the company’s shares to determine a fair value of the stock price, when they dispute the adequacy of the deal consideration.

Tax Consequences . A transaction can be taxable or tax-free depending upon structure. Asset sales and equity purchases have immediate tax consequences for both parties. However, certain mergers and/or reorganizations/recapitalizations can be structured such that at least a portion of the sale proceeds (in the form of acquirer’s stock a/k/a “boot”) can receive tax deferred treatment. From an acquirer’s perspective, an asset sale may be most desirable because a “step up” in basis occurs such that the acquirer’s tax basis in the assets is equal to the purchase price, which is usually the fair market value. This approach enables the acquirer to significantly depreciate the assets and improve profitability post-closing. With a stock purchase structure, the selling shareholders pay long term capital gains provided they owned the stock for at least a year. However, the acquirer would only obtain a cost basis in the stock purchased and not the assets, which would remain unchanged and may cause an unfavorable result if the fair market value is higher. A third possibility would be to defer at least some of the tax liability via a merger/recapitalization pursuant to which the boot remains tax free until its eventual future sale. Compromises are possible including, by way of example, a “338(h)(10) election” pursuant to which the parties consummate a stock purchase with all the aforementioned results being the same except, for tax purposes, the deal is deemed an asset deal and the acquirer obtains the desired basis step-up in the assets.

2. Consideration: Cash versus Equity

The type of consideration for a transaction may be a decisive factor for both parties. Deal financing centers on the following:

Cash . Cash is the most liquid and least risky method from the target’s perspective as there is no doubt as to the true market value of the transaction and cash consideration removes uncertainty on the value which may effectively pre-empt rival bids that include equity components. From the acquirer’s perspective, cash can be sourced from working capital/excess cash or untapped credit lines but doing so may decrease the acquirer’s debt rating and/or affect its capital structure and/or control on a going-forward basis.

Equity . This structure involves the payment of the acquiring company’s equity, issued to the stockholders of the target, at a determined ratio relative to the target’s value. The issuance of equity may improve the acquirer’s debt rating thereby reducing future cost of debt financings. There are transaction costs associated with equity consideration and risks related to stockholders meeting (potential rejection of the deal), registration (if the acquirer is public) and brokerage fees. That said, the issuance of equity may provide more flexible deal structures.

The ultimate payment method may be determinative of what value the acquirer places on itself. An acquirer tends to offer equity when it believes its equity is overvalued and cash when the equity is perceived as undervalued.

3. Working Capital Adjustments

M&A transactions often include a working capital adjustment as a component of the purchase price. The acquirer wants to ensure that it acquires a target with adequate working capital to meet the requirements of the business post-closing, including obligations to customers and trade creditors. The target wants to receive consideration for the asset infrastructure that enabled the business to operate and generate the profits that triggered the acquirer’s desire to buy the business in the first place. An effective working capital adjustment protects the acquirer against the target initiating (i) accelerated collection of debt, or (ii) delayed purchase of inventory/selling inventory for cash or payment of creditors. The typical working capital adjustment includes the difference between the sum of cash, inventory, accounts receivable, and prepaid items excluding accounts payable and accrued expenses. In terms of measuring the working capital, the definitive agreement will include a mechanism that compares the actual working capital at the closing against a target level, typically required for normal business operations based on a historical review of the target’s operations over a defined period of time. Certain unusual or atypical factors, “one-offs”, add-backs, and cyclical items will also be considered as part of the working capital calculation. The final determination for the post-closing working capital adjustment will usually occur within a few months of the closing and, to the extent that disagreements between the parties arise concerning the calculation, dispute procedures are set forth in the definitive agreement.

4. Escrows and Earn-Outs

The letter of intent should clearly indicate any contingency to the payment of the purchase price in a transaction, including any escrow and any contingent consideration based upon future performance (commonly referred to as an “earn-out”). The purpose of an indemnification escrow is to provide recourse for an acquirer in the event there are breaches of the representations and warranties made by the target (or upon the occurrence of certain other events). Although escrows are standard in M&A transactions, the terms of an escrow can vary significantly. Typical terms include an escrow dollar amount in the range of 10% to 15% of the overall consideration with an escrow period ranging from 12 to 24 months from the date of the closing and a requirement of the use of a third-party escrow agent. Depending on the target’s business and the acquirer’s ability to negotiate, occasionally, special escrows can be set up to address particular issues that arise in due diligence, such as sales tax or data privacy issues.

Earn-out provisions are less common and provide contingent additional payments from an acquirer to the target or its shareholders. Earn-out provisions are most often used to bridge the gap on valuation that may exist between the target and the acquirer, and are typically tied to the future performance of the business such that the business acquired meets certain financial or other economic milestones after the transaction is closed. Typical milestones include future revenue and other financial metrics. When drafting earn-out terms, it is important to have the milestones be as objective as possible and include a dispute mechanism. From the target’s perspective, the concern with earn-outs is that post-closing the target loses control over the company and decisions made by the acquirer post-closing can dramatically impact the ability to achieve the milestones that were established.

5. Representations and Warranties

The acquirer will expect the definitive agreement to include detailed representations and warranties by the target with respect to such matters as authority, capitalization, intellectual property, tax, financial statements, compliance with law, employment, data privacy, ERISA, and material contracts. It is critical for the target and its counsel to review these representations carefully because breaches can quickly result in indemnification claims from the acquirer. The disclosure schedules (which describe exceptions to the representations) should be considered the target’s “insurance policy” and should be as detailed as possible. One of the more debated representations is the “10b-5” representation, which requires the target to make a general statement that no rep or warranty contains any untrue statement or omits to state a material fact necessary to make any of them not misleading. Target companies are typically uncomfortable with such a broad statement, but without such a representation an acquirer often will question whether the target is withholding certain information. Acquirers and targets also struggle with the appropriateness of knowledge qualifiers referenced in the representations, which limit the scope of a contractual provision. The target typically tries to narrow the scope of indemnification as much as possible by inserting knowledge qualifiers in many of the material representations (for example, with respect to whether the target’s intellectual property has infringed the rights of any other third party), but the acquirer will want these types of risk to lie with the target.

6. Target Indemnification

Target indemnification provisions are always highly negotiated in any M&A transaction. One of the initial issues to be determined is what types of indemnification claims will be capped at the escrow amount. In some instances, all claims may be capped at the escrow. It is common to have a few exceptions to this cap – any claims resulting from fraud and/or intentional misrepresentation usually are capped at the overall purchase price. In addition, caps for breaches of “fundamental reps” (such as capitalization or tax) usually exceed the escrow as well. Another business term related to indemnification to negotiate relates to whether there will be a “basket” for indemnification purposes. In order to avoid the nuisance of disputes over small amounts, there is typically a minimum claim amount that must be reached before the acquirer may seek indemnification. Once this minimum threshold is met, the provision could include a true deductible (such that the acquirer is only permitted to recover any amounts in excess of the minimum threshold) or a “first dollar” approach (such that once the minimum threshold is met, the acquirer is permitted to recover all amounts, including the deductible amount).

7. Joint and Several Liability

Related to the concept of indemnification is the issue of joint and several liability. As most transactions involve multiple target stockholders, one of the primary issues to consider regarding indemnification, from the acquirer’s perspective, is to what extent each of the target’s stockholders will participate in any indemnification obligations post-closing (i.e., whether joint and several, or several but not joint, liability will be appropriate). Under joint liability, each of the target’s stockholder is individually liable to the acquirer for 100% of the future potential damages. However, if the liability is several, each stockholder pays only a relative contribution to the damages. It goes without saying that the acquirer will almost always desire to make each target stockholder responsible for the full amount of any future potential claims. However, target stockholders will generally resist this approach but, even more so, where there are controlling stockholders and/or financial investors (both of which traditionally resist joint and several liability in every situation).

8. Closing Conditions

A section of the definitive agreement will include a list of closing conditions which must be met for the parties to close the transaction. These conditions are often negotiated at the time of the definitive agreement (although sometimes a detailed list will be included in the letter of intent) and may include such items as appropriate board approval, the absence of any material adverse change in the target’s business or financial conditions, the absence of litigation and requisite stockholder approval. One of the more heavily negotiated closing conditions is the stockholder voting threshold which must be achieved for approval of the transaction. Although the target’s operative documents and state law may require a lower threshold, acquirers typically request a very high threshold of approval (90% – 100%) out of concern that stockholders who have not approved the transaction might exercise appraisal rights. To minimize the risk that a closing condition is not met which would give the acquirer leverage to walk away from the transaction, the target should review its stockholder structure carefully before committing to such a high threshold (although from a target perspective, the more stockholders approve the transaction, the better).

9. HSR/Timing Issues

In connection with any transaction, the parties should review long-term lead items as soon as possible. For example, the parties should complete an analysis to determine whether a Hart-Scott-Rodino filing, aimed to notify the FTC and the Department of Justice of large mergers and acquisitions before they occur, will be required to be made and, if so, at what point such filing will be completed (occasionally it is filed after the letter of intent is executed but more often is filed upon the execution of definitive agreement). Although the 30-day waiting period can be waived, the necessity of making an HSR filing can significantly delay the closing of a transaction. A second potential lead items is determining if any third-party notices or consents (as further described above) are required and the process by which such notices or consents shall be made.

10. Non-competes & Non-solicits

Within the context of an M&A transaction, a covenant not to compete or solicit is a promise by the selling shareholder(s) of the target to not, for a certain post-closing time frame or after termination of employment with the target/acquirer, (i) engage in a defined business activity that is competitive with the target’s/acquirer’s business, or (ii) attempt to lure away customers or employees of the target/acquirer. Enforceability of such restrictions requires that the restrictions be (A) reasonable in time and scope, and (B) supported by consideration. Because the M&A context involves the sale of a business and considerable financial benefit to the selling shareholders, courts generally have deemed such exchange of benefits or consideration adequate for purposes of enforceability both in terms of scope (i.e., any material business competitive with that of the target /acquirer) and multiple years of duration. Non-compete covenants are usually not applicable to institutional investors.

For more information on merger and acquisition issues, please contact Mary Beth Kerrigan .

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Prohibition of assignment clause did not prevent a transfer of rights by operation of law

What happened, what did the court of appeal say, what does this mean for me.

Dassault Aviation SA v Mitsui Sumitomo Insurance Co. Ltd [2024] EWCA Civ 5 involved a contract for the sale of two aircraft and spare parts.

Under the contract, which was governed by English law, Dassault Aviation would sell the aircraft to Mitsui Bussan Aerospace (MBA). Under a separate contract (governed by Japanese law), MBA would subsequently on-sell the aircraft to the Japanese Coastguard.

MBA was concerned that, if Dassault delivered the aircraft late to MBA, this would affect delivery times under MBA’s contract with the Coastguard and MBA could be liable for late delivery to the Coastguard.

To protect itself against this risk, MBA took out an insurance policy from Mitsui Sumitomo Insurance (MSI) (which, despite the name, was not connected in any way with MBA). The insurance policy was governed by Japanese law.

As it happened, the aircraft were delivered late. MBA claimed under the insurance policy, and MSI duly paid the claim.

Under article 25 of the Japanese Insurance Act (No. 56 of 2008), where an insurer pays out under a Japanese policy of insurance, the insurer is automatically subrogated to any claim the policyholder may have in connection with the event that led to the pay-out. In other words, the policyholder’s right to claim damages passes automatically to the insurer.

Essentially, the same position applies in England and Wales under the common law. See the box “ What is subrogation? ” for more information.

In this scenario, this would mean that MBA’s right to claim against Dassault for breach of contract (due to the late delivery by Dassault) would pass to MSI, so that MSI could claim directly against Dassault.

However, the sale contract between Dassault and MBA contained the following clause (the assignment prohibition):

“[T]his Contract shall not be assigned or transferred in whole or in part by any Party to any third party, for any reason whatsoever, without the prior written consent of the other Party and any such assignment, transfer or attempt to assign or transfer any interest or right hereunder shall be null and void without the prior written consent of the other Party.”

Dassault argued that the prohibition prevailed and prevented MBA’s rights under the contract from transferring to MSI under the Insurance Act. If correct, this would mean that MSI would have no right to claim against Dassault to recover the amount it had paid out to MBA.

Subrogation is a broad doctrine which essentially states that, if a person (X) pays or discharges a debt or obligation of someone else (Y), then X steps into Y’s shoes and acquires Y’s rights.

Under English law, subrogation applies in a wide range of circumstances, including the following.

When an insurer pays out to a policyholder . The insurer is subrogated to the policyholder’s rights and can take action in place of the policyholder. For example, an individual might take out buildings and contents insurance on their property and, at some point during the policy term, a leak develops, flooding the property and causing damage. The damage is caused by faulty workmanship by a plumber. The individual may be able to claim against the plumber in negligence but instead claims under their insurance policy. The insurer is subrogated to the claim in negligence against the plumber in place of the individual.
When a guarantor pays out under a guarantee . For example, a person (X) borrows a sum of money from a lender. Another person (Y) gives a guarantee for X’s obligation to repay the sum. The lender calls on the guarantee and Y repays the sum instead of X. By way of subrogation, Y can bring proceedings against X to claim back the amount Y has paid out to the lender. (This is also described as a right of reimbursement, rather than subrogation.)
Where a person pays someone else’s secured debt . For example, a person (K) takes out a mortgage loan from a bank, which is secured by a mortgage over K’s property. The mortgage becomes payable, but K’s colleague (L) pays the mortgage off instead of K. Until K reimburses L, L is subrogated to the mortgage security over the property. If K does not reimburse L, L can enforce the mortgage and take possession of the property (and sell it).
Where an agent pays out for their principal . For example, an individual appoints an agent to negotiate a purchase of land on the individual’s behalf. The purchase contract is settled and the individual is required to pay the purchase price. However, for whatever reason (perhaps for ease), the agent pays the purchase price. The seller transfers the land to the individual. By virtue of subrogation, until the agent is paid back, the agent has all the rights over the land which the seller had before the sale.

Subrogation can be complicated and how it works in practice varies greatly depending on the legal and factual circumstances. In many respects, subrogation is less a doctrine and more a form of remedy which a person who has discharged someone else’s obligations can seek in an appropriate form. The principal point of subrogation is that the person whose obligations have been discharged should not be unjustly enriched by failing to perform those obligations themselves.

However, one common factor to all types of subrogation is that it involves an automatic transfer of rights , which occurs by operation of law and does not require a specific assignment by anyone.

Initially, the dispute was referred to arbitration at the ICC in London. The arbitration panel held (by a majority) that MBA’s rights under the sale contract had transferred to MSI under the Insurance Act.

Dassault appealed to the High Court of England and Wales. The High Court overturned the arbitrators’ decision, finding that the prohibition was wide enough to capture a transfer by operation of law.

The High Court noted the words “by any Party” in the assignment prohibition were ambiguous and needed to be interpreted. It therefore embarked on the traditional process of contractual interpretation that applies when the wording of a contract is unclear. See the box “ How will the court interpret a contract? ” for more information.

It held that the words indicated an element of action or willingness by a Party, and that this was what was required for the prohibition to apply. A transfer would fall outside the prohibition only if it were outside the voluntary control of the transferring party (here, MBA).

In this case, although MBA had not directly assigned its rights to MSI, it had entered willingly into the insurance policy and made a claim under it, with the direct and predictable result that its rights would be transferred to MSI under the Insurance Act. In the High Court’s view, this amounted to an assignment by MBA and was caught by the prohibition.

MSI appealed to the Court of Appeal of England and Wales.

The court re-examined the words “by any Party” and found that they were unambiguous and clear. They covered a transfer effected by a party to the sale contract, but that did not include a transfer that occurred automatically by operation of law (as was the case under the Insurance Act).

The judges disagreed with the High Court’s approach that the key question was whether the transfer was outside MBA’s voluntary control. Rather, it was a simple case of reading the contract to decide whether the transfer had been made by MBA.

It had not. The transfer had taken place automatically under the Insurance Act and so was not prohibited by the assignment prohibition.

In reaching its decision, the court noted that the sale contract between Dassault and MBA contained provisions that specifically contemplated the parties taking out insurance (Dassault insurance against loss or damage to certain specific equipment, and MBA insurance in connection with ferry flight delivering the aircraft).

Although these specific provisions did not cover the insurance policy that MBA had placed with MSI, they did indicate that the parties were happy for insurance to cover the arrangements, suggesting in turn that they understood that rights under the contract might transfer to an insurer.

The court found, therefore, that MBA’s rights had transferred to MSI and the assignment prohibition did not apply.

If the wording of an agreement is clear, the courts will assume that it reflects the parties’ intentions and enforce the literal word of the contract. This will be the case even if the result is unusual or uncommercial.

The only exception to this is where the parties’ agreement is in some way restricted by law. For example, the court may find that a clause is unenforceable as a restraint of trade, a contractual penalty, and unreasonable exclusion or limitation of liability, or an attempt to carry out unlawful acts. In these cases, the courts may be able to strike parts of the contract out to make it work.

However, if the wording of a contract is ambiguous and could have more than one meaning, the court must embark on a process of contractual interpretation (also called construction).

The law on contractual interpretation is now settled, following three landmark cases ( Rainy Sky SA v Kookmin Bank [2011] UKSC 50; Arnold v Britton [2015] UKSC 36; and Wood v Capita Insurance Services Ltd [2017] UKSC 24).

In short, the court will examine the wording of the contract and ascertain what a reasonable person with all the relevant background knowledge at the time of the contract would have understood.

The court will look not only at the text of the contract, but also the surrounding context at the time. This is a single exercise, and the court will not automatically prefer the wording (textualism) over the surrounding circumstances (contextualism) or vice versa. However, the weight the court will give the text and the context will vary depending on the nature and formality of the contract.

If, after doing this, the court finds there is still more than one plausible interpretation of the contract, it will prefer the interpretation that is most consistent with business common sense.

The case shows the importance of formulating any prohibition of assignment provisions properly.

Here, the court felt that the wording of the sale contract was clear. By using the words “by any Party”, the prohibition extended only to direct attempts by a party to assign their rights.

Had those words not appeared (e.g. “ [T]his Contract shall not be assigned or transferred in whole or in part to any third party… ”), the court may have been required to embark on a deeper analysis of the clause to understand whether it would have prohibited transfers by operation of law. Indeed, the court might have concluded that it would have done so.

The case revolved around automatic transfers under Japanese law. The position might well be different under English law. This point was not argued – both Dassault and MSI appear to have accepted that, had the contract been governed by English law, the transfer of rights to MSI would have taken place – and so the court did not need to decide the issue.

But that does not mean that it is impossible to exclude the right to subrogation through a prohibition of assignment, and contract parties may wish to ensure any contractual prohibitions are worded broadly enough that they at least make an attempt to do so.

However, whether this is appropriate will need to be judged on a case-by-case basis, and may be more obviously covered by agreeing a subrogation waiver. For example, it is very common for a buyer of a business to deploy warranty and indemnity (W&I) insurance and for the seller(s) to require the W&I insurer to expressly waive any rights of subrogation.

Conversely, most liability insurance policies contain an express obligation on the insured party not to enter into any agreement with a third party that might restrict the insurer’s right of recovery. A prohibition of assignment that excludes a right of subrogation may do exactly that and could, in theory, invalidate the insurance policy itself.

Where insurance arrangements are contemplated under a contract, the parties should have a mind to the potential implications from an insurance-law perspective, including any potential subrogation following a claim under an insurance policy.

Any contractual provisions that do contemplate insurance are unlikely to stipulate a particular governing law for the insurance, so it may not be possible to make an informed assessment. In addition, the party taking out insurance may well not inform the other party that they are doing so and/or might take out insurance of a type not contemplated by the contract.

In each case, this could lead to a contract party facing legal proceedings under the contract by a third party whose identity is not known at the date of the contract.

Ultimately, where a contract party intends in advance to procure insurance in relation to the subject matter of the contract, it is important to seek legal advice to ensure that the policy and the contract operate smoothly and clearly alongside each other.

Access the court’s decision on whether a contract prohibited an assignment by operation of law ( Dassault Aviation SA v Mitsui Sumitomo Insurance Co. Ltd [2024] EWCA Civ 5)

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A Guide to Understanding Anti-Assignment Clauses

Introduction

With the increasing trend of globalization in the business world, Israeli companies and investors are commonly entering into agreements with U.S.-based entities. One of the most frequently found clauses in U.S. commercial agreements is an anti-assignment provision that prevents either or both of the parties from assigning the agreement to a third party prior to receiving the consent of the non-assigning party. Many transactions will also require the due diligence review of a large number of U.S. commercial agreements that the target has entered into. The following post will provide an overview and general guidance on the proper analysis of anti-assignment clauses.

Silent Provision and Change of Control Provision

In the event that an agreement does not contain an anti-assignment provision, a contract is generally assignable without the consent of the non-assigning party. See Peterson v. District of Columbia Lottery and Charitable Games Control Board , 673 A.2d 664 (D.C. 1996) (“The right to assign is presumed, based upon principles of unhampered transferability of property rights and of business convenience.”) Exceptions include where the assignment affects the duties of the other party to the contract, where the contract is considered to be a personal contract and when the assignment violates public policy (i.e. tort liability).

On the other hand, many contracts contain provisions that not only prevent the assignment of the contract, but also state that a change of control of the target is deemed an assignment or the contract contains a separate clause requiring consent in the event of a change of control. This type of provision will often be triggered in transactions in which a buyer is acquiring the target company. A careful review of change of control clauses is thus especially imperative and often very fact specific to the deal at hand.

Deal Structures

One of the commonly used anti-assignment provisions reads as follows: “No party may assign any of its rights under this Agreement, by operation of law or otherwise, to a third party without the prior written consent of the non-assigning party.” In the situation where the target has entered into agreements that contain this clause, whether or not an assignment is considered to have taken place in the event of the acquisition of the target will largely depend on the specific deal structure of the transaction.

The commonly used deal structures are an asset acquisition, a stock acquisition and a merger.

Asset Acquisition : In an asset acquisition the buyer only acquires those assets and liabilities of a target that are specifically listed in the Asset Purchase Agreement. Any agreement that has an anti-assignment clause will be triggered in the event of an asset acquisition. Indeed, one of the disadvantages of structuring a corporate acquisition as an asset acquisition is that contracts that will be transferred must be assigned
Stock Acquisition : In a stock acquisition, a buyer acquires a target’s stock directly from the selling shareholders. After the closing of the Stock Purchase Agreement, the target will continue as it existed prior to the acquisition with respect to its ownership of asset and liabilities. Thus, in essence, the anti-assignment clause was never triggered in the first place. See Baxter Pharm. v. ESI Lederle , 1999 WL 160148 (Del. Ch. 1999).
A direct merger occurs when the target merges with and into the buyer, and the buyer continues as the surviving entity. In a similar fashion to an asset acquisition, this type of merger will trigger the anti-assignment clause
A forward triangular merger occurs when the target merges with and into the buyer’s merger subsidiary, with the merger subsidiary surviving the merger. This type of merger will trigger the anti-assignment clause. See Tenneco Automotive Inc. v. El Paso Corporation , 2002 WL 45930 (Del. Ch. 2002) and Star Cellular Telephone Company, Inc. v. Baton Rouge CGSA, Inc., 19 Del. J. Corp. L. 875 (Del. Ch. 1993).
A reverse triangular merger occurs when the buyer’s subsidiary merges with and into the target, with the target surviving as a wholly owned subsidiary of the buyer. In effect, the target continues to exist after the closing. The Delaware Chancery Court in Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, 2013 WL 655021 (Del. Ch. Feb. 22, 2013) held that the acquisition of a target in a reverse triangular merger did not violate an existing agreement of the target that prohibited assignments by operation of law. The court noted that generally, mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger. Thus there is a significant difference between a reverse triangular merger and both a direct merger and forward triangular merger, as in those cases the target was not the surviving company of the merger. Note, however, that the matter is not uniformly resolved. In SQL Solutions, Inc. v. Oracle Corp. (N.D. Cal. 1991), a United States District Court in the Northern District of California applied California law and federal IP principles to hold that a reverse triangular merger constitutes an assignment by operation of law.

Additional Considerations

Damages and Termination : Some courts have held that a contractual provision prohibiting assignment operates only to limit the parties’ right to assign the contract (for which the remedy would be damages for breach of a covenant not to assign) but the provision does not limit the power to actually assign the contract (which would invalidate the assignment), unless the contract explicitly states that a non-conforming assignment shall be “void” or “invalid.” See, e.g., Bel-Ray Co v. Chemrite (Pty.) Ltd ., 181 F. 3d 435 (3d Cir. 1999). It is also imperative to review the termination section of an agreement, as certain agreements contain a provision by which the non-assigning party has the right to terminate the agreement in the event of an assignment.

As described above, any review of U.S. commercial agreements is highly dependent on the structure of the deal and at times, the specific jurisdiction governing the agreement. With offices across the United States, and specifically in Delaware, New York, and California, all states with highly sophisticated and oft-invoked commercial laws, Greenberg Traurig is uniquely situated in a position to offer high value legal services to Israeli clients.

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Every corporate lawyer knows that there is a difference between an anti-assignment clause, which restricts a party from assigning its rights under the agreement in question (or triggers a default in the agreement if an assignment occurs), and a change of control provision, which triggers a termination or default of an agreement if there is a change of control of a party to the contract. Generally speaking a change in control of a party to an agreement is not an assignment of that agreement by the party who experienced the change of control. But an anti-assignment clause can be drafted in such a way that a change of control of a party is deemed to constitute an assignment of the underlying agreement. It is critical, however, to review any of these provisions carefully before jumping to any conclusions as to what (or more importantly, who) they do or do not prohibit. In a recent Delaware Superior Court case, , 2021 WL 6068705 (Del Super. Dec. 22, 2021), a distribution agreement between American Bottling Company (ABC) and BA Sports Nutrition, LLC (BodyArmor) contained a provision allowing BodyArmor to terminate the agreement “With Cause,” and thereby avoid payment of a significant termination fee, if “[ABC] transfers or attempts to , any of its rights or privileges hereunder in violation of Section 10.2 [of the Distribution Agreement].” Section 10.2 of the Distribution Agreement provided as follows: and [ABC’s] duties and privileges , without the prior written approval of [BodyArmor] (which consent shall not be unreasonably withheld) assignment, pledge or hypothecation, merger, consolidation, reorganization or similar event, change in the management or control of [ABC], sale or transfer of securities or otherwise by operation of law, or sale of all or a substantial portion of [ABC’s] business or assets, or otherwise. Dr. Pepper Snapple Group (DPSG) was ABC’s publicly traded great-grand parent (i.e., ABC was wholly-owned by DPSG through two intermediate subsidiaries). DPSG entered into a merger transaction pursuant to which “(1) Keurig Green Mountain, Inc. would became an indirect wholly owned subsidiary of DPSG, (2) [JAB Holding Company (JAB)] would receive a majority of DPSG’s shares, (3) and DPSG would change its name to Keurig Dr. Pepper.” Importantly, “neither ABC nor its parent or grandparent entities was one of the merging entities.” But DPSG’s ownership did change significantly from being entirely publicly owned to being 87% owned by JAB, with the remainder of its stock continuing to be publicly traded. And following the merger there was in fact significant changes in the management of ABC, including many people that BodyArmor had worked with and valued at ABC. Unhappy with the changes occurring post-merger at ABC, BodyArmor sought a new distribution arrangement with The Coca-Cola Company (Coca-Cola). BodyArmor was confident that the above quoted provision permitted them to replace ABC as their distributor, without payment of any termination fee, because they believed it was a change of control provision that was triggered by the DPSG merger, and ABC had not sought BodyArmor’s consent. Coca-Cola’s attorneys apparently concurred in BodyArmor’s interpretation of the merger’s effect under Section 10.2 and the related termination provision (in part based upon their view that ABC had “ its rights or privileges [under the Distribution Agreement]” and “because [they ‘presumed that’] ABC was part of an integrated organization that underwent a change of control”). Accordingly, BodyArmor formally terminated the Distribution Agreement with ABC “With Cause,” and entered into a new arrangement with Coca-Cola. ABC then sued BodyArmor for breach of contract and Coca-Cola for tortious interference. In a motion for summary judgment by ABC, the court ruled that the only reasonably interpretation of Section 10.2, and the corresponding termination provision, was that an actual “transfer” of the Distribution Agreement must have occurred to trigger BodyArmor’s right to terminate “With Cause.” According to the court, simply because there was evidence “that a change in management or change of control occurred at ABC or at its parent or grandparent levels is not enough to indicate a transfer occurred.” Only if a change in management or change of control actually effectuated (i.e., was the means by which) a transfer occurred would the fact that there was a change in management or a change of control matter. According to the court, “[t]he word ‘by’ confirms that the examples that follow must actually affect a transfer and do not themselves constitute a transfer.” And the court was unpersuaded that the first sentence of 10.2 somehow converted what was in essence an anti-assignment provision into a provision providing BodyArmor a free termination right if the personnel at ABC changed. Even more critical to the court’s analysis was the fact that ABC was not a player in the merger. “ABC did not cause any transfer of control as required by [Section 10.2] because ABC did not effectuate the Merger.” As noted in a prior Weil Private Equity blog post, adding “directly or indirectly” to an anti-assignment clause is rarely considered enough to convert an anti-assignment clause into a change of control provision. The question always is who is the person being restricted and who is the person who actually effectuated the complained-about act. Here it was only ABC (as the only DPSG-related entity that was an actual party to the agreement) that was actually restricted, not its upstream parents. And ABC did nothing, “directly or indirectly.” Indeed, ABC’s control actually didn’t change, only its great-grandparent’s did; and “[t]he fact that certain individuals assigned to oversee ABC’s performance under the Distribution Agreement changed did transfer ABC’s right and duties to a new person or entity.” When analyzing change of control and anti-assignment provisions always determine who is being restricted before jumping to the question of whether the contemplated transaction constitutes a change of control or assignment, whether directly or indirectly. (↵ returns to text) Glenn West Weil , Weil’s Global Private Equity Watch, September 22, 2020, Glenn West Weil , Weil’s Global Private Equity Watch, April 27, 2020, Borealis Power Holdings Inc. v. Hunt Strategic Utility Investment, L.L.C., 2020 WL 2630929 (Del. May 22, 2020); Sixth Street Partners Management Co., LP v. Dyal Capital Partners III (A) LP, 2021 WL 1553944 (Del. Ch. April 20, 2021), 253 A.3d 92 (Del. May 14, 2021). But parties can expressly agree that the actions of non-parties affect the rights of the parties (i.e., an up stream change of control can be deemed to be an assignment of the contract by the restricted party if appropriately worded). West, note 2, at n.10.

Every corporate lawyer knows that there is a difference between an anti-assignment clause, which restricts a party from assigning its rights under the agreement in question (or triggers a default in the agreement if an assignment occurs), and a change of control provision, which triggers a termination or default of an agreement if there is a change of control of a party to the contract. Generally speaking a change in control of a party to an agreement is not an assignment of that agreement by the party who experienced the change of control. But an anti-assignment clause can be drafted in such a way that a change of control of a party is deemed to constitute an assignment of the underlying agreement. It is critical, however, to review any of these provisions carefully before jumping to any conclusions as to what (or more importantly, who) they do or do not prohibit.

In a recent Delaware Superior Court case, , 2021 WL 6068705 (Del Super. Dec. 22, 2021), a distribution agreement between American Bottling Company (ABC) and BA Sports Nutrition, LLC (BodyArmor) contained a provision allowing BodyArmor to terminate the agreement “With Cause,” and thereby avoid payment of a significant termination fee, if “[ABC] transfers or attempts to , any of its rights or privileges hereunder in violation of Section 10.2 [of the Distribution Agreement].” Section 10.2 of the Distribution Agreement provided as follows:

and [ABC’s] duties and privileges , without the prior written approval of [BodyArmor] (which consent shall not be unreasonably withheld) assignment, pledge or hypothecation, merger, consolidation, reorganization or similar event, change in the management or control of [ABC], sale or transfer of securities or otherwise by operation of law, or sale of all or a substantial portion of [ABC’s] business or assets, or otherwise.

Dr. Pepper Snapple Group (DPSG) was ABC’s publicly traded great-grand parent (i.e., ABC was wholly-owned by DPSG through two intermediate subsidiaries). DPSG entered into a merger transaction pursuant to which “(1) Keurig Green Mountain, Inc. would became an indirect wholly owned subsidiary of DPSG, (2) [JAB Holding Company (JAB)] would receive a majority of DPSG’s shares, (3) and DPSG would change its name to Keurig Dr. Pepper.” Importantly, “neither ABC nor its parent or grandparent entities was one of the merging entities.” But DPSG’s ownership did change significantly from being entirely publicly owned to being 87% owned by JAB, with the remainder of its stock continuing to be publicly traded. And following the merger there was in fact significant changes in the management of ABC, including many people that BodyArmor had worked with and valued at ABC.

Unhappy with the changes occurring post-merger at ABC, BodyArmor sought a new distribution arrangement with The Coca-Cola Company (Coca-Cola). BodyArmor was confident that the above quoted provision permitted them to replace ABC as their distributor, without payment of any termination fee, because they believed it was a change of control provision that was triggered by the DPSG merger, and ABC had not sought BodyArmor’s consent. Coca-Cola’s attorneys apparently concurred in BodyArmor’s interpretation of the merger’s effect under Section 10.2 and the related termination provision (in part based upon their view that ABC had “ its rights or privileges [under the Distribution Agreement]” and “because [they ‘presumed that’] ABC was part of an integrated organization that underwent a change of control”). Accordingly, BodyArmor formally terminated the Distribution Agreement with ABC “With Cause,” and entered into a new arrangement with Coca-Cola. ABC then sued BodyArmor for breach of contract and Coca-Cola for tortious interference.

In a motion for summary judgment by ABC, the court ruled that the only reasonably interpretation of Section 10.2, and the corresponding termination provision, was that an actual “transfer” of the Distribution Agreement must have occurred to trigger BodyArmor’s right to terminate “With Cause.” According to the court, simply because there was evidence “that a change in management or change of control occurred at ABC or at its parent or grandparent levels is not enough to indicate a transfer occurred.” Only if a change in management or change of control actually effectuated (i.e., was the means by which) a transfer occurred would the fact that there was a change in management or a change of control matter. According to the court, “[t]he word ‘by’ confirms that the examples that follow must actually affect a transfer and do not themselves constitute a transfer.” And the court was unpersuaded that the first sentence of 10.2 somehow converted what was in essence an anti-assignment provision into a provision providing BodyArmor a free termination right if the personnel at ABC changed.

Even more critical to the court’s analysis was the fact that ABC was not a player in the merger. “ABC did not cause any transfer of control as required by [Section 10.2] because ABC did not effectuate the Merger.” As noted in a prior Weil Private Equity blog post, adding “directly or indirectly” to an anti-assignment clause is rarely considered enough to convert an anti-assignment clause into a change of control provision. The question always is who is the person being restricted and who is the person who actually effectuated the complained-about act.

Here it was only ABC (as the only DPSG-related entity that was an actual party to the agreement) that was actually restricted, not its upstream parents. And ABC did nothing, “directly or indirectly.” Indeed, ABC’s control actually didn’t change, only its great-grandparent’s did; and “[t]he fact that certain individuals assigned to oversee ABC’s performance under the Distribution Agreement changed did transfer ABC’s right and duties to a new person or entity.”

When analyzing change of control and anti-assignment provisions always determine who is being restricted before jumping to the question of whether the contemplated transaction constitutes a change of control or assignment, whether directly or indirectly.

(↵ returns to text)
Glenn West Weil , Weil’s Global Private Equity Watch, September 22, 2020, Glenn West Weil , Weil’s Global Private Equity Watch, April 27, 2020, Borealis Power Holdings Inc. v. Hunt Strategic Utility Investment, L.L.C., 2020 WL 2630929 (Del. May 22, 2020); Sixth Street Partners Management Co., LP v. Dyal Capital Partners III (A) LP, 2021 WL 1553944 (Del. Ch. April 20, 2021), 253 A.3d 92 (Del. May 14, 2021). But parties can expressly agree that the actions of non-parties affect the rights of the parties (i.e., an up stream change of control can be deemed to be an assignment of the contract by the restricted party if appropriately worded). West, note 2, at n.10.

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In a reverse triangular merger, the acquiring company forms a subsidiary that merges with and into the target with the outstanding shares of the target being converted into securities of the acquiring corporation or some other consideration. Does a reverse triangular merger constitute an assignment of a target corporation’s contracts? Because the reverse triangular merger is an exceedingly common acquisition technique, one would expect that this question was answered long ago. Surprisingly, however, this isn’t the case.

Earlier this year, Vice Chancellor Donald F. Parsons analyzed whether a reverse triangular merger violated an anti-assignment clause that read as follows: “Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties . . .”. He concluded:

In sum, Meso could have negotiated for a “change of control provision.” They did not. Instead, they negotiated for a term that prohibits “assignments by operation of law or otherwise.” Roche has provided a reasonable interpretation of Section 5.08 that is consistent with the general understanding that a reverse triangular merger is not an assignment by operation of law. On the other hand, I find Meso’s arguments as to why language that prohibits “assignments by operation of law or otherwise” should be construed to encompass reverse triangular mergers unpersuasive and its related construction of Section 5.08 to be unreasonable.

Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH , 62 A.3d 62, 88 (Del. Ch. 2013). See I’ve Been Thinking About Conversion, But I Haven’t Decided To Convert .

Here in California, U.S. District Court Judge Samuel Conti recently addressed the issue even more recently as follows:

No California state court has resolved this matter, and the Court is not inclined to guess at possible conclusions. The Court therefore begins from the presumption that a reverse triangular merger, which leaves intact the acquired corporation, does not effect a transfer of rights from the wholly owned subsidiary to its acquirer as a matter of law. What little applicable law there is could be analogized from California cases on stock sales, like Farmland Irrigation Co. v. Dopplmaier , 48 Cal. 2d 208, 223, 308 P.2d 732 (Cal. 1957), which suggested that if a plaintiff had sold all of his stock in a corporation, there could be no contention that the corporation’s licenses would be extinguished as a matter of law, since the two contracting parties were still extant and in privity.

Florey Inst. of Neuroscience & Mental Health v. Kleiner Perkins Caufield & Byers, 2013 U.S. Dist. LEXIS 138904 (N.D. Cal. Sept. 26, 2013).

Both jurists confronted, and declined to follow, Judge Marilyn Hall Patel’s earlier decision in SQL Solutions v. Oracle Corp. , 1991 U.S. Dist. LEXIS 21097 (N.D. Cal. Dec. 18, 1991) with Vice Chancellor Parsons saying: “I decline to adopt the approach outlined in SQL Solutions , however, because doing so would conflict with Delaware’s jurisprudence surrounding stock acquisitions, among other things. Under Delaware law, stock purchase transactions, by themselves, do not result in an assignment by operation of law.” Judge Conti said “Plaintiff relies solely on SQL Solutions to argue that assignment occurred as a matter of law when an acquired corporation became another corporation’s wholly owned subsidiary. That case did not analyze nonassignment clauses and also found that federal copyright law forbid transfer.”

Hollywood, Somali Pirates and Homer

Over the weekend, I saw the recently released film, Captain Phillips . The movie tells the story of the takeover of the MV Maersk by Somali pirates. When the Navy uses a Somali speaker to communicate with the pirates, one of the pirates asks “Who’s this?”. The translator answers “nemo”, the Latin word for “no one”. The interchange, of course, is an echo of the famous encounter of Odysseus and the Cyclops, Polyphemus in Homer’s Odyssey :

Κύκλωψ, εἰρωτᾷς μ᾽ ὄνομα κλυτόν, αὐτὰρ ἐγώ τοι ἐξερέω: σὺ δέ μοι δὸς ξείνιον, ὥς περ ὑπέστης. Οὖτις ἐμοί γ᾽ ὄνομα: Οὖτιν δέ με κικλήσκουσι μήτηρ ἠδὲ πατὴρ ἠδ᾽ ἄλλοι πάντες ἑταῖροι. Cyclops, you are asking my renowned name, nevertheless I will declare: “Give to me the hospitality, you were promising. My name is no one: no one is what my mother, father and all my comrades call me.”

Home, Odyssey Book 9, lines 364 -367 (my translation). Matters went downhill from there for both Polyphemus and the pirates.

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COMMENTS

Mergers and Restrictions on Assignments by "Operation of Law"
Nonetheless, " [w]hen an anti-assignment clause includes language referencing an assignment 'by operation of law,' Delaware courts generally agree that the clause applies to mergers in which the contracting company is not the surviving entity.". [3] Here the anti-assignment clause in the original acquisition agreement did purport to ...
Assigning Contracts in the Context of M&A Transactions
Direct Stock Purchase. In a direct stock purchase, the acquiror purchases all the outstanding shares of the target directly from its stockholders. ... by operation of law, no assignment would be deemed to occur); (2) whether the contract is "personal" in nature; and (3) how the proposed deal structure impacts the treatment of the target's ...
Anti-Assignment Provisions and Assignments by 'Operation of Law': What
A step in many share purchase transactions where the target is a Canadian corporation that often occurs on or soon after closing is the amalgamation of the purchasing entity and the target entity. So, what about anti-assignment provisions containing by operation of law language - do amalgamations trigger an assignment by operation of law?
Mergers and Restrictions on Assignments by "Operation of Law"
[4] And, although Delaware has recognized that a merger in which the contracting party is the survivor (a reverse triangular merger) is not an assignment by operation of law "because the ...
Courts Consider Anti-Assignment Clauses And Reverse Triangular Mergers
Under Delaware law, stock purchase transactions, by themselves, do not result in an assignment by operation of law." Judge Conti said "Plaintiff relies solely on SQL Solutions to argue that assignment occurred as a matter of law when an acquired corporation became another corporation's wholly owned subsidiary. That case did not analyze ...
M&A, Overview
If the governing law for the stock purchase transaction is in a jurisdiction other than Delaware, practitioners should confirm the approvals required in that jurisdiction. ... by operation of law, inherit all of the target company's employee benefit plans. ... a contract may prohibit the assignment of the contract without consent of the ...
Spotting issues with assignment clauses in M&A Due Diligence
Assignment by Operation of Law. Assignments by operation of law typically occur in the context of transfers of rights and obligations in accordance with merger statutes and can be specifically included in or excluded from assignment provisions. An inclusion could be negotiated by the parties to broaden the anti-assignment clause and to ensure ...
PDF M&A ACADEMY ANATOMY OF AN ACQUISITION AGREEMENT
of target company's assets, rights, and liabilities by operation of law. Target company ceases to exist as a separate entity. • Forward Triangular Merger — target company merges with and into Buyer subsidiary; Buyer subsidiary assumes all of the target company's assets, rights, and liabilities by operation of law.
PDF Corporate Law & Accountability Report
ciple of assignment by operation of law in examining the contrasts between stock purchases, forward trian-gular mergers and reverse triangular mergers.13 Generally, the acquisition of the equity of a contract party does not, in and of itself, constitute an assignment by operation of law. As explained by the Delaware Court of Chancery in Baxter ...
M&A ACADEMY ANATOMY OF AN ACQUISITION AGREEMENT
Considerations: Structure typical in the acquisition of an entity that is operating as an ongoing business. Target company becomes wholly owned subsidiary of Buyer (in some cases subject to post-closing merger) Buyer acquires target company subject to all of its assets and liabilities. Typically more tax beneficial to Sellers.
Anti-Assignment Provisions and Assignments by 'Operation of Law': What
Assignments by Operation of Law. In Canada, the assignment of a contract as part of an asset sale, or the change of control of a party to a contract pursuant to a share sale - situations not ...
Anti-Assignment Clause Prohibiting Assignment by Operation of Law
When an anti-assignment clause contains language referencing an assignment by operation of law, Delaware courts generally find that the clause applies to mergers in which the contracting company ...
M&A, Drafting Guide
The required third-party consent closing condition takes on heightened importance if the target's contracts do not permit assignment without the prior approval of a third party or specifically deem a change of control to be a proscribed assignment. In a stock purchase or most merger transactions, third-party approvals are generally required ...
Do Change of Control Transactions Constitute an Assignment by Operation
A change of control is a significant change in the equity, ownership, or management of a business entity. This can occur through a merger, consolidation or acquisition. The general rule is that ...
M&A, Closing Checklist
Stock Purchase (Annotated) Editor's Note: Attorneys participating in a stock purchase transaction use a closing checklist to ensure that they have completed work on all documents and actions required for closing under the stock purchase agreement. This checklist contemplates a two-party transaction in which a private corporation ("Buyer ...
PDF TRANSACTIONAL REAL ESTATE Reverse Triangular Mergers and Non-Assignment
in a transfer by operation of law, reasoning that "[b]oth stock acquisitions and reverse triangular mergers involve changes in legal ownership and the law should reflect parallel results."21 If Meso is followed by courts in other juris-dictions, the uncertainty as to whether RTM'S violate restrictions on assignment may be signifi -
M&A Transactions
No such consent requirement exists for an equity purchase or merger unless the relevant contracts contain specific prohibitions against assignment upon a change of control or by operation of law, respectively. Stockholder Approval. In most circumstances, the target's board of directors can grant approval of an asset sale at the corporate ...
Prohibition of assignment clause did not prevent a transfer of rights
The purchase contract is settled and the individual is required to pay the purchase price. However, for whatever reason (perhaps for ease), the agent pays the purchase price. ... Access the court's decision on whether a contract prohibited an assignment by operation of law (Dassault Aviation SA v Mitsui Sumitomo Insurance Co. Ltd [2024] EWCA ...
PDF DELVACCA presents: Avoiding Boilerplate Blunders in Mergers and
Assignment - Mergers. Many courts narrowly construe anti-assignment provisions as prohibiting only voluntary assignments. To prohibit other types of assignments, add "by operation of law, merger or otherwise". May need to be even more explicit for some states (including TX and CA) that have statutes providing that mergers do not constitute ...
A Guide to Understanding Anti-Assignment Clauses
Any agreement that has an anti-assignment clause will be triggered in the event of an asset acquisition. Indeed, one of the disadvantages of structuring a corporate acquisition as an asset ...
A Critical Determination: Who Is the Restricted Person in a Change of
Every corporate lawyer knows that there is a difference between an anti-assignment clause, which restricts a party from assigning its rights under the agreement in question (or triggers a default in the agreement if an assignment occurs), and a change of control provision, which triggers a termination or default of an agreement if there is a change of control of a party to the contract.
PDF Anti-Assignment Provisions in Leases
parties" to treat the transfer of stock as an assignment, the anti-assignment clause was not violated. The court in Richardson v. La Ran-cherita of La Jolla, 98 Cal. App. 3d 73, 159 Cal Rptr. 285 (Cal. App. 1979), similarly held that a lease to a corporate tenant restricting assignment, either voluntarily or by operation of law, was not violated
Courts Consider Anti-Assignment Clauses And ...
What little applicable law there is could be analogized from California cases on stock sales, like Farmland Irrigation Co. v. Dopplmaier, 48 Cal. 2d 208, 223, 308 P.2d 732 (Cal. 1957), which ...
Suspended Counterparty Program
FHFA established the Suspended Counterparty Program to help address the risk to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks ("the regulated entities") presented by individuals and entities with a history of fraud or other financial misconduct. Under this program, FHFA may issue orders suspending an individual or entity from ...
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Top Ten Issues in Mergers and Acquisitions Transactions

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3. Working Capital Adjustments

4. Escrows and Earn-Outs

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7. Joint and Several Liability

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Prohibition of assignment clause did not prevent a transfer of rights by operation of law

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A Guide to Understanding Anti-Assignment Clauses

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