Change of Control

A change-of-control provision is a contractual clause in an agreement that specifies rights, obligations, or consequences triggered by a transfer of ownership or control of one of the contracting parties. In M&A, change-of-control clauses appear in two contexts: in commercial contracts (customer agreements, supplier contracts, debt agreements, leases) and in employment agreements — each creating different implications for a transaction.

Change-of-control in commercial contracts: Many significant commercial contracts include provisions that give one party the right to terminate, renegotiate, or receive consent before the contract can continue following a change-of-control of the counterparty. Government contracts are particularly strict — a change in ownership of a contractor often requires a novation agreement with the government agency. Software licenses, franchise agreements, and partnership agreements similarly may require consent or provide termination rights. In an M&A context, buyers must audit every material contract for these provisions and factor the risk into the deal structure.

Change-of-control in debt agreements: Acquisition financing, revolving credit facilities, and bonds typically include change-of-control provisions that accelerate the debt — making it immediately due and payable — upon a change of ownership above a specified threshold (often 50%). This means a company being acquired must either repay its existing debt at close (most common) or obtain lender consent for the debt to continue. Change-of-control provisions in debt instruments are a primary reason M&A transactions include a "debt-free, cash-free" pricing adjustment that requires the seller to repay all debt at closing.

Change-of-control in employment agreements: Key executive employment agreements frequently include "single trigger" or "double trigger" change-of-control provisions. Single trigger provisions pay a benefit (severance, equity acceleration, or cash payment) immediately upon a change of control. Double trigger provisions require both a change of control AND an adverse employment event (termination, demotion, forced relocation) before the benefit is paid. The choice of trigger structure significantly affects both the cost to the acquirer and the retention effectiveness of the provision.

Identifying change-of-control triggers: Due diligence must include a systematic review of all material contracts for change-of-control language. This is not just the anti-assignment clause (which governs voluntary assignment) — it's a separate provision that may exist even where assignment is permitted. Change-of-control provisions are often buried in boilerplate sections that deal teams miss in rapid diligence.