Why does Change of Control Provisions matter?
These clauses live in dozens of documents a founder signed over years without expecting them to matter until an acquisition is actually happening. Discovering during diligence that your three largest customer contracts, your office lease, and your venture debt agreement all require third-party consent to assign can turn a clean deal into a scramble to secure a dozen approvals on a deadline, and any counterparty who withholds consent, or uses it as leverage to renegotiate, can materially delay or complicate closing.
What does Change of Control Provisions look like in practice?
Suppose a company's largest customer contract includes a clause letting the customer terminate if the vendor undergoes a change of control. During acquisition diligence, the buyer's counsel flags this as a risk to the revenue it is paying for, and the seller has to approach that customer for consent before closing, alerting a customer to an unannounced acquisition earlier than planned, and giving them leverage to demand better pricing as the price of their consent.
What are the common mistakes with Change of Control Provisions?
- Signing customer contracts, leases, and loan agreements without reviewing whether they contain change-of-control clauses that could complicate a future sale.
- Discovering these clauses for the first time during diligence rather than auditing key contracts proactively before starting a sale process.
- Underestimating how much leverage a change-of-control consent gives the counterparty being asked, especially a large customer whose business the buyer is counting on retaining.
- Assuming an asset sale avoids this issue entirely, assigning contracts in an asset sale often requires the same consents, for a different underlying reason.
Related concepts
- Asset Sale vs. Stock SaleThe two basic ways to structure an acquisition, the buyer purchases specific assets and liabilities out of the company (asset sale), or the buyer purchases the company's equity itself, liabilities included (stock sale), and the choice changes who owns what, who owes what, and how much tax each side pays.
- Customer Contract DiligenceThe review of a company's customer agreements during diligence to verify that the revenue they represent is real, durable, and actually transferable, checking term length, renewal and termination rights, pricing commitments, and any change-of-control or assignment restrictions.
- Material Adverse Change (MAC) ClauseA provision letting the buyer walk away from a signed acquisition agreement, without penalty, if something happens to the target business between signing and closing that significantly and adversely affects its value, operations, or prospects.