contract assignment merger

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Few things are more fundamental to M&A due diligence than determining whether any of the material contracts to which the target is a party require a counterparty’s consent as a condition to the proposed acquisition. And that determination is significantly influenced by the specific language set forth in the contract’s anti-assignment/change of control provision, as well as the form the proposed acquisition takes—i.e., whether the transaction is an asset purchase the target, a purchase of equity the target, or a merger the target (and if a merger, whether that merger is direct or triangular, and forward or reverse). A recent Delaware Superior Court decision, , 2020 WL 5554161 (Del. Super. Sept. 16, 2020), is a stark reminder of the importance of carefully analyzing change of control/anti-assignment provisions and taking advantage of all available structuring alternatives to avoid untoward results that can occur from completing an acquisition deemed to require a counterparty’s consent. involved a claim by a successor to a selling party under an acquisition agreement for payment by the buyer of a Conditional Payment owing to the selling party if the mining property sold pursuant to that agreement remained in operation after a date certain. It appears that the requirements for triggering the obligation to make the Conditional Payment were satisfied, but because of some transactions undertaken by the selling party, and the impact of an anti-assignment clause in the acquisition agreement, the buyer claimed that the person actually asserting entitlement to that Conditional Payment was not so entitled (indeed, no one was because the selling party had ceased to exist). Following the acquisition of the mining property by the buyer, the stockholders of the selling party sold all of their shares in the selling party to a third party, but purported to carve out the Conditional Payment Obligation owing to the selling party from the sale of stock of the selling entity. So, when the Conditional Payment came due, the selling party’s former stockholders, rather than the selling party, sued to collect the Conditional Payment when it was not forthcoming from the buyer. In an earlier decision, 2019 WL 3976078 (Del. Super. Aug. 22, 2019), the court held that the selling party’s former stockholders had no standing to claim the Conditional Payment because the only person entitled to that Conditional Payment was the selling party itself, and there really is no such thing as carving out assets of an entity in favor the entity’s stockholders selling the stock of that entity, without the entity itself assigning (by way of a dividend) those assets to its stockholders. And, of course, if an assignment had occurred it was prohibited by the anti-assignment provision in the agreement creating the Conditional Payment Obligation. Thus, the court dismissed the former stockholders’ claim outright. was the second bite at the apple. If the selling entity’s former stockholders, who purported to retain the right to the Conditional Payment, had no standing to pursue collection of the Conditional Payment themselves, then presumably the selling party still could (and one would assume the selling party would then have an obligation to turn over the Conditional Payment to the former stockholders when collected). But alas, it turns out that, following the acquisition of the stock of the selling party by the third party, the third party undertook a number of transactions under Canadian law to amalgamate the selling party into an entirely new entity as the surviving entity of that amalgamation; the selling entity had ceased to exist as a matter of Canadian law. Thus, the plaintiff in this second bite lawsuit to collect what was presumably otherwise owed was not the selling party to the original acquisition agreement, but a successor to that selling party. While the amalgamation was a creature of Canadian law, the original acquisition agreement containing the anti-assignment clause was governed by Delaware law. The parties apparently conceded that the amalgamation was the equivalent of a merger under Delaware law. The buyer argued that the anti-assignment clause in the original acquisition agreement was violated when the amalgamation occurred without the buyer’s consent; and that the successor had no standing to claim the Conditional Payment. However, under Delaware law, a general prohibition on a party transferring or assigning an agreement does not automatically prohibit a merger involving a contracting party, even one in which the contracting party is not the survivor of such merger. As noted by the Delaware Court of Chancery in , 1993 WL 294847, at 8 (Del. Ch. Aug. 2, 1993): 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 the surviving entity.” Here the anti-assignment clause in the original acquisition agreement did purport to include a prohibition on assignments “by operation of law.” And, although Delaware has recognized that a merger in which the contracting party the survivor (a reverse triangular merger) is not an assignment by operation of law “because the contract rights remain with the contracting party and do not pass to another entity,” the amalgamation here resulted in a new entity acquiring the contract rights of the original selling party and the original selling party ceasing to exist. Thus, the effect of the anti-assignment clause and its applicability to the amalgamation resulted in the buyer having no obligation for the payment of the Conditional Payment to anyone. Although the court appears to acknowledge the seeming “unfairness of allowing [the buyer] to avoid making a payment it allegedly owes[,]” the court nonetheless concludes that “it is not this Court’s function to save sophisticated contracting parties from an unfair or unanticipated result of their own corporate transactions.” After all, “[t]he parties could have avoided this result through careful drafting during contract negotiations or by utilizing a different corporate structure when [the selling party and the surviving new entity] combined.” (↵ returns to text) Glenn West Weil , Weil’s Global Private Equity Watch, April 27, 2020, . , 2019 WL 3976078, at 2. We have previously addressed how these kind of anti-assignment “workarounds” can sometimes work (or not). Glenn West & Maryam Naghavi, , Weil , Weil’s Global Private Equity Watch, May 2, 2018, . 2020 WL 5554161, at 3. 2020 WL 5554161, at 5.

Few things are more fundamental to M&A due diligence than determining whether any of the material contracts to which the target is a party require a counterparty’s consent as a condition to the proposed acquisition. And that determination is significantly influenced by the specific language set forth in the contract’s anti-assignment/change of control provision, as well as the form the proposed acquisition takes—i.e., whether the transaction is an asset purchase the target, a purchase of equity the target, or a merger the target (and if a merger, whether that merger is direct or triangular, and forward or reverse). A recent Delaware Superior Court decision, , 2020 WL 5554161 (Del. Super. Sept. 16, 2020), is a stark reminder of the importance of carefully analyzing change of control/anti-assignment provisions and taking advantage of all available structuring alternatives to avoid untoward results that can occur from completing an acquisition deemed to require a counterparty’s consent.

involved a claim by a successor to a selling party under an acquisition agreement for payment by the buyer of a Conditional Payment owing to the selling party if the mining property sold pursuant to that agreement remained in operation after a date certain. It appears that the requirements for triggering the obligation to make the Conditional Payment were satisfied, but because of some transactions undertaken by the selling party, and the impact of an anti-assignment clause in the acquisition agreement, the buyer claimed that the person actually asserting entitlement to that Conditional Payment was not so entitled (indeed, no one was because the selling party had ceased to exist).

Following the acquisition of the mining property by the buyer, the stockholders of the selling party sold all of their shares in the selling party to a third party, but purported to carve out the Conditional Payment Obligation owing to the selling party from the sale of stock of the selling entity. So, when the Conditional Payment came due, the selling party’s former stockholders, rather than the selling party, sued to collect the Conditional Payment when it was not forthcoming from the buyer. In an earlier decision, 2019 WL 3976078 (Del. Super. Aug. 22, 2019), the court held that the selling party’s former stockholders had no standing to claim the Conditional Payment because the only person entitled to that Conditional Payment was the selling party itself, and there really is no such thing as carving out assets of an entity in favor the entity’s stockholders selling the stock of that entity, without the entity itself assigning (by way of a dividend) those assets to its stockholders. And, of course, if an assignment had occurred it was prohibited by the anti-assignment provision in the agreement creating the Conditional Payment Obligation. Thus, the court dismissed the former stockholders’ claim outright.

was the second bite at the apple. If the selling entity’s former stockholders, who purported to retain the right to the Conditional Payment, had no standing to pursue collection of the Conditional Payment themselves, then presumably the selling party still could (and one would assume the selling party would then have an obligation to turn over the Conditional Payment to the former stockholders when collected). But alas, it turns out that, following the acquisition of the stock of the selling party by the third party, the third party undertook a number of transactions under Canadian law to amalgamate the selling party into an entirely new entity as the surviving entity of that amalgamation; the selling entity had ceased to exist as a matter of Canadian law. Thus, the plaintiff in this second bite lawsuit to collect what was presumably otherwise owed was not the selling party to the original acquisition agreement, but a successor to that selling party.

While the amalgamation was a creature of Canadian law, the original acquisition agreement containing the anti-assignment clause was governed by Delaware law. The parties apparently conceded that the amalgamation was the equivalent of a merger under Delaware law. The buyer argued that the anti-assignment clause in the original acquisition agreement was violated when the amalgamation occurred without the buyer’s consent; and that the successor had no standing to claim the Conditional Payment. However, under Delaware law, a general prohibition on a party transferring or assigning an agreement does not automatically prohibit a merger involving a contracting party, even one in which the contracting party is not the survivor of such merger. As noted by the Delaware Court of Chancery in , 1993 WL 294847, at *8 (Del. Ch. Aug. 2, 1993):

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 the surviving entity.” Here the anti-assignment clause in the original acquisition agreement did purport to include a prohibition on assignments “by operation of law.” And, although Delaware has recognized that a merger in which the contracting party the survivor (a reverse triangular merger) is not an assignment by operation of law “because the contract rights remain with the contracting party and do not pass to another entity,” the amalgamation here resulted in a new entity acquiring the contract rights of the original selling party and the original selling party ceasing to exist. Thus, the effect of the anti-assignment clause and its applicability to the amalgamation resulted in the buyer having no obligation for the payment of the Conditional Payment to anyone.

Although the court appears to acknowledge the seeming “unfairness of allowing [the buyer] to avoid making a payment it allegedly owes[,]” the court nonetheless concludes that “it is not this Court’s function to save sophisticated contracting parties from an unfair or unanticipated result of their own corporate transactions.” After all, “[t]he parties could have avoided this result through careful drafting during contract negotiations or by utilizing a different corporate structure when [the selling party and the surviving new entity] combined.”

(↵ returns to text)
Glenn West Weil , Weil’s Global Private Equity Watch, April 27, 2020, . , 2019 WL 3976078, at *2. We have previously addressed how these kind of anti-assignment “workarounds” can sometimes work (or not). Glenn West & Maryam Naghavi, , Weil , Weil’s Global Private Equity Watch, May 2, 2018, . 2020 WL 5554161, at *3. 2020 WL 5554161, at *5.

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Don’t Confuse Change of Control and Assignment Terms

David Tollen
September 11, 2020

An assignment clause governs whether and when a party can transfer the contract to someone else. Often, it covers what happens in a change of control: whether a party can assign the contract to its buyer if it gets merged into a company or completely bought out. But that doesn’t make it a change of control clause. Change of control terms don’t address assignment. They say whether a party can terminate if the other party goes through a merger or other change of control. And they sometimes address other change of control consequences.

Don’t confuse the two. In a contract about software or other IT, you should think through the issues raised by each. (Also, don’t confuse assignment of contracts with assignment of IP .)

Here’s an assignment clause:

Assignment. Neither party may assign this Agreement or any of its rights or obligations hereunder without the other’s express written consent, except that either party may assign this Agreement to the surviving party in a merger of that party into another entity or in an acquisition of all or substantially all its assets. No assignment becomes effective unless and until the assignee agrees in writing to be bound by all the assigning party’s obligations in this Agreement. Except to the extent forbidden in this Section __, this Agreement will be binding upon and inure to the benefit of the parties’ respective successors and assigns.

As you can see, that clause says no assignment is allowed, with one exception:

Assignment to Surviving Entity in M&A: Under the clause above, a party can assign the contract to its buyer — the “surviving entity” — if it gets merged into another company or otherwise bought — in other words, if it ceases to exist through an M&A deal (or becomes an irrelevant shell company).

Consider the following additional issues for assignment clauses:

Assignment to Affiliates: Can a party assign the contract to its sister companies, parents, and/or subs — a.k.a. its “Affiliates”?
Assignment to Divested Entities: If a party spins off its key department or other business unit involved in the contract, can it assign the contract to that spun-off company — a.k.a. the “divested entity”? That’s particularly important in technology outsourcing deals and similar contracts. They often leave a customer department highly dependent on the provider’s services. If the customer can’t assign the contract to the divested entity, the spin-off won’t work; the new/divested company won’t be viable.
Assignment to Competitors: If a party does get any assignment rights, can it assign to the other party’s competitors ? (If so, you’ve got to define “Competitor,” since the word alone can refer to almost any company.)
All Assignments or None: The contract should usually say something about assignments. Otherwise, the law might allow all assignments. (Check your jurisdiction.) If so, your contracting partner could assign your agreement to someone totally unacceptable. (Most likely, though, your contracting partner would remain liable.) If none of the assignments suggested above fits, forbid all assignments.

Change of Control

Here’s a change of control clause:

Change of Control. If a party undergoes a Change of Control, the other party may terminate this Agreement on 30 days’ written notice. (“Change of Control” means a transaction or series of transactions by which more than 50% of the outstanding shares of the target company or beneficial ownership thereof are acquired within a 1-year period, other than by a person or entity that owned or had beneficial ownership of more than 50% of such outstanding shares before the close of such transactions(s).)

Contract terminated, due to change of control.

Termination on Change of Control: A party can terminate if controlling ownership of the other party changes hands.

Change of control and assignment terms actually address opposite ownership changes. If an assignment clause addresses change of control, it says what happens if a party goes through an M&A deal and no longer exists (or becomes a shell company). A change of control clause, on the other hand, matters when the party subject to M&A does still exist . That party just has new owners (shareholders, etc.).

Consider the following additional issues for change of control clauses:

Smaller Change of Ownership: The clause above defines “Change of Control” as any 50%-plus ownership shift. Does that set the bar too high? Should a 25% change authorize termination by the other party, or even less? In public companies and some private ones, new bosses can take control by acquiring far less than half the stock.
No Right to Terminate: Should a change of control give any right to terminate, and if so, why? (Keep in mind, all that’s changed is the party’s owners — possibly irrelevant shareholders.)
Divested Entity Rights: What if, again, a party spins off the department or business until involved in the deal? If that party can’t assign the contract to the divested entity, per the above, can it at least “sublicense” its rights to products or service, if it’s the customer? Or can it subcontract its performance obligations to the divested entity, if it’s the provider? Or maybe the contract should require that the other party sign an identical contract with the divested entity, at least for a short term.

Some of this text comes from the 3rd edition of The Tech Contracts Handbook , available to order (and review) from Amazon here , or purchase directly from its publisher, the American Bar Association, here.

Want to do tech contracts better, faster, and with more confidence? Check out our training offerings here: https://www.techcontracts.com/training/ . Tech Contracts Academy has options to fit every need and schedule: Comprehensive Tech Contracts M aster Classes™ (four on-line classes, two hours each), topical webinars (typically about an hour), customized in-house training (for just your team). David Tollen is the founder of Tech Contracts Academy and our primary trainer. An attorney and also the founder of Sycamore Legal, P.C. , a boutique IT, IP, and privacy law firm in the San Francisco Bay Area, he also serves as an expert witness in litigation about software licenses, cloud computing agreements, and other IT contracts.

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Feldman & Feldman

Civil litigation law firm, what happens to existing contracts after a business is sold.

In many cases, a company’s contracts are one of the major reasons why a suitor wants to buy it. In most instances, the buyer of the business should be able to assume a contract the seller had. The question is usually what process the buyer will need to follow in order to substitute themselves into an existing contract.

Most Contracts Are Assignable, Meaning the Rights and Obligations Remain Intact

In the best-case scenario, a business’ existing contract will be freely assignable to a new party. The new party will inherit all of the rights and obligations under the contract. The mere fact that a sale took place is enough to allow for the assignment of a contract. Note that the party that sells the business may not be off the hook if the incoming party to the contract fails to perform in accordance with their contractual obligations. However, the seller of the business may be able to seek indemnification from the buyer in case of a breach of the contract or a lawsuit.

The original contract will often include a clause that states whether the agreement is assignable. If it is, the customer or counterparty does not have any say over who is on the other side of the agreement; but they can still sue the new party for breach of contract because they still maintain their rights under the agreement.

Assignment Can Make a Business Agreement More Efficient

If a contract is assignable, there is no new agreement necessary. When a transaction closes, the new company will simply take over performance as the successor-in-interest to the old company. The merger agreement will already assign the rights and obligations under existing contracts to the buyer without a new, specific process for each existing agreement. In general, the principle of assignment makes business transactions more efficient and saves the parties from a complex legal process.

The general rule is that a contract is assignable unless there is a provision in it to the contrary. An anti-assignment clause is generally enforceable; however, the clause must be in the agreement at the time of the business transaction in order to be enforceable. The counterparty to a contract cannot argue against assignment in court when there is no language in the contract concerning assignment just because they do not approve of the new business entity coming into the deal.

At the same time, the incoming business will still have an obligation to perform under the terms of existing contracts. If it fails to perform, it may be sued for breach of contract. Just because there is a new owner does not mean the counterparty forfeits its rights under the contract. The counterparty may not have a say in who performs the contract, but they can still file a lawsuit just the same.

Novation Is a More Complex and Less Certain Way of Transferring Contracts

The complex process that assignment saves parties to a contract from is called novation . This process requires a separate agreement for each contract where the substitution of a party is needed. While novation is not necessarily an anti-assignment process, it will keep a seller from automatically assigning agreements upon the completion of a deal. The original party to a contract must approve and agree to the substitution of a new party.

For example, contracts with a government entity often require novation when there is a merger or sale of the business. Novation is not automatic. There may be requirements that the new party must meet in order to take over an existing contract. The contractual counterparty may try to use a merger transaction and their consent as leverage to negotiate better terms. Never assume a contract will be novated just because a deal has taken place; however, if the counterparty refuses to novate the contract, it will give the other business the right to terminate the deal. If many contracts require novation, the merger process can be complex. The buyer of the company is assuming the risk that not all contracts can be novated because the process would happen after the deal closes.

Some contracts may not be able to survive a business merger. For example, some personal services contracts require the original party to perform. Additionally, some contracts may have specific provisions that prohibit assignment regardless of the circumstances. And, some leases may completely prohibit assignment. Finally, public policy may mandate that certain contracts are not assignable.

A party may not even need a full merger agreement in order to trigger the need for assignment or novation provisions. There may be a stock sale or other business transaction that results in a change of control over the company. In this case, there may be a need to assign or novate contracts, depending on their terms.

Pay Close Attention to the Language of Each Contract Before the Deal Closes

If you are considering purchasing a business, you will get the chance to review relevant contracts before the deal closes and after you have agreed to the terms. There is a due diligence period where you will be able to view corporate financials and agreements. During due diligence, you should scrutinize the terms of key contracts to determine locate any potential anti-assignment provisions. You should also review agreements to understand what your legal obligations may be after the deal closes. Determining which contracts are assignable is a necessary component of assessing the value of the business you’re contemplating purchasing.

If you are selling a business, you need to develop an in-depth understanding of the reliability and trustworthiness of your counterparty. You should contact a contract lawyer to ensure you have adequate protection from a potential lawsuit in case the buyer does not perform in accordance with the obligations in your company’s contracts.

Assignment Clause

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Assignment clause defined.

Assignment clauses are legally binding provisions in contracts that give a party the chance to engage in a transfer of ownership or assign their contractual obligations and rights to a different contracting party.

In other words, an assignment clause can reassign contracts to another party. They can commonly be seen in contracts related to business purchases.

Here’s an article about assignment clauses.

Assignment Clause Explained

Assignment contracts are helpful when you need to maintain an ongoing obligation regardless of ownership. Some agreements have limitations or prohibitions on assignments, while other parties can freely enter into them.

Here’s another article about assignment clauses.

Purpose of Assignment Clause

The purpose of assignment clauses is to establish the terms around transferring contractual obligations. The Uniform Commercial Code (UCC) permits the enforceability of assignment clauses.

Assignment Clause Examples

Examples of assignment clauses include:

Example 1 . A business closing or a change of control occurs
Example 2 . New services providers taking over existing customer contracts
Example 3 . Unique real estate obligations transferring to a new property owner as a condition of sale
Example 4 . Many mergers and acquisitions transactions, such as insurance companies taking over customer policies during a merger

Here’s an article about the different types of assignment clauses.

Assignment Clause Samples

Sample 1 – sales contract.

Assignment; Survival . Neither party shall assign all or any portion of the Contract without the other party’s prior written consent, which consent shall not be unreasonably withheld; provided, however, that either party may, without such consent, assign this Agreement, in whole or in part, in connection with the transfer or sale of all or substantially all of the assets or business of such Party relating to the product(s) to which this Agreement relates. The Contract shall bind and inure to the benefit of the successors and permitted assigns of the respective parties. Any assignment or transfer not in accordance with this Contract shall be void. In order that the parties may fully exercise their rights and perform their obligations arising under the Contract, any provisions of the Contract that are required to ensure such exercise or performance (including any obligation accrued as of the termination date) shall survive the termination of the Contract.

Reference :

Security Exchange Commission - Edgar Database, EX-10.29 3 dex1029.htm SALES CONTRACT , Viewed May 10, 2021, < https://www.sec.gov/Archives/edgar/data/1492426/000119312510226984/dex1029.htm >.

Sample 2 – Purchase and Sale Agreement

Assignment . Purchaser shall not assign this Agreement or any interest therein to any Person, without the prior written consent of Seller, which consent may be withheld in Seller’s sole discretion. Notwithstanding the foregoing, upon prior written notice to Seller, Purchaser may designate any Affiliate as its nominee to receive title to the Property, or assign all of its right, title and interest in this Agreement to any Affiliate of Purchaser by providing written notice to Seller no later than five (5) Business Days prior to the Closing; provided, however, that (a) such Affiliate remains an Affiliate of Purchaser, (b) Purchaser shall not be released from any of its liabilities and obligations under this Agreement by reason of such designation or assignment, (c) such designation or assignment shall not be effective until Purchaser has provided Seller with a fully executed copy of such designation or assignment and assumption instrument, which shall (i) provide that Purchaser and such designee or assignee shall be jointly and severally liable for all liabilities and obligations of Purchaser under this Agreement, (ii) provide that Purchaser and its designee or assignee agree to pay any additional transfer tax as a result of such designation or assignment, (iii) include a representation and warranty in favor of Seller that all representations and warranties made by Purchaser in this Agreement are true and correct with respect to such designee or assignee as of the date of such designation or assignment, and will be true and correct as of the Closing, and (iv) otherwise be in form and substance satisfactory to Seller and (d) such Assignee is approved by Manager as an assignee of the Management Agreement under Article X of the Management Agreement. For purposes of this Section 16.4, “Affiliate” shall include any direct or indirect member or shareholder of the Person in question, in addition to any Person that would be deemed an Affiliate pursuant to the definition of “Affiliate” under Section 1.1 hereof and not by way of limitation of such definition.

Security Exchange Commission - Edgar Database, EX-10.8 3 dex108.htm PURCHASE AND SALE AGREEMENT , Viewed May 10, 2021, < https://www.sec.gov/Archives/edgar/data/1490985/000119312510160407/dex108.htm >.

Sample 3 – Share Purchase Agreement

Assignment . Neither this Agreement nor any right or obligation hereunder may be assigned by any Party without the prior written consent of the other Parties, and any attempted assignment without the required consents shall be void.

Security Exchange Commission - Edgar Database, EX-4.12 3 dex412.htm SHARE PURCHASE AGREEMENT , Viewed May 10, 2021, < https://www.sec.gov/Archives/edgar/data/1329394/000119312507148404/dex412.htm >.

Sample 4 – Asset Purchase Agreement

Assignment . This Agreement and any of the rights, interests, or obligations incurred hereunder, in part or as a whole, at any time after the Closing, are freely assignable by Buyer. This Agreement and any of the rights, interests, or obligations incurred hereunder, in part or as a whole, are assignable by Seller only upon the prior written consent of Buyer, which consent shall not be unreasonably withheld. This Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and permitted assigns.

Security Exchange Commission - Edgar Database, EX-2.1 2 dex21.htm ASSET PURCHASE AGREEMENT , Viewed May 10, 2021, < https://www.sec.gov/Archives/edgar/data/1428669/000119312510013625/dex21.htm >.

Sample 5 – Asset Purchase Agreement

Assignment; Binding Effect; Severability

This Agreement may not be assigned by any party hereto without the other party’s written consent; provided, that Buyer may transfer or assign in whole or in part to one or more Buyer Designee its right to purchase all or a portion of the Purchased Assets, but no such transfer or assignment will relieve Buyer of its obligations hereunder. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the successors, legal representatives and permitted assigns of each party hereto. The provisions of this Agreement are severable, and in the event that any one or more provisions are deemed illegal or unenforceable the remaining provisions shall remain in full force and effect unless the deletion of such provision shall cause this Agreement to become materially adverse to either party, in which event the parties shall use reasonable commercial efforts to arrive at an accommodation that best preserves for the parties the benefits and obligations of the offending provision.

Security Exchange Commission - Edgar Database, EX-2.4 2 dex24.htm ASSET PURCHASE AGREEMENT , Viewed May 10, 2021, < https://www.sec.gov/Archives/edgar/data/1002047/000119312511171858/dex24.htm >.

Common Contracts with Assignment Clauses

Common contracts with assignment clauses include:

Real estate contracts
Sales contract
Asset purchase agreement
Purchase and sale agreement
Bill of sale
Assignment and transaction financing agreement

Assignment Clause FAQs

Assignment clauses are powerful when used correctly. Check out the assignment clause FAQs below to learn more:

What is an assignment clause in real estate?

Assignment clauses in real estate transfer legal obligations from one owner to another party. They also allow house flippers to engage in a contract negotiation with a seller and then assign the real estate to the buyer while collecting a fee for their services. Real estate lawyers assist in the drafting of assignment clauses in real estate transactions.

What does no assignment clause mean?

No assignment clauses prohibit the transfer or assignment of contract obligations from one part to another.

What’s the purpose of the transfer and assignment clause in the purchase agreement?

The purpose of the transfer and assignment clause in the purchase agreement is to protect all involved parties’ rights and ensure that assignments are not to be unreasonably withheld. Contract lawyers can help you avoid legal mistakes when drafting your business contracts’ transfer and assignment clauses.

ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.

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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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Acquiring Contracts in an M&A Transaction

When acquiring a business, often a key component is the contracts to which the company is a party to. Ensuring the transfer of any such contracts can have significant impacts on the structure and timing of the acquisition of a business.

The General Rule and Exceptions

The general rule is that contracts are freely assignable and can be transferred from one party to another. There are, however, exceptions to this general rule. Contracts that are personal in nature, involving personal relations or personal skills, are not assignable. Also, an assignment of a contract cannot result in an increase of the burden on the remaining third party to the contract. Finally, contracts may expressly prohibit assignment of the contract or provide that an assignment can only occur under certain conditions. In the context of most M&A transactions, the relevant exception will be anti-assignment provisions in the contract itself.

Anti-Assignment Provisions

A standard assignment clause will prohibit the transfer of a contract without consent and may specify whether such consent can or cannot be unreasonably withheld. These provisions are typically included to ensure that each of the parties have control over who they engage in commercial arrangements and continue to do business with. A simple prohibition against assignment however, will not be triggered in the sale of a company by way of a share sale. Therefore, anti-assignment provisions are often include language that addresses the transfer of ownership on the sale of the shares of a company by prohibiting a change of control of a party to a contract without consent.

Asset Purchases

In an asset purchase transaction, the vendor is the company that owns the assets being sold. The resulting transfer of assets will include those desired contracts to which the company is a party to. Such transfer of contracts will be done by way of an assignment, thereby triggering any assignment provision and the corresponding need to obtain consent of the other party(ies) to such contract(s).

Share Purchases

In a share purchase transaction, the vendor is the shareholder(s) of the target company. The vendor sells the shares to the purchaser and there is no transfer of assets as they remain the assets of the target company. In this context, an assignment of a contract is not needed as the parties to the contract remain the same. The need to obtain consent would then only arise if the assignment provision specifically prohibited a change of control.

Seeking Consent

When proceeding with either an asset or share purchase where the consent of third parties is required, the timing of obtaining such consents must be considered. The contracts themselves may dictate when consent must be obtained and may require all costs be covered with respect to such consent. Obtaining the consent of third parties also raises issues with respect to the confidentiality of a transaction, where one or both parties wish to keep the proposed transaction confidential. The impact of not obtaining required consents should be considered, especially if such contracts are material to the business. Because of these various issues it is important to review any contracts that will be transferred or remain with the target company early in the process and discuss how any required consents will be obtained.

Assigning Contracts

To effect an assignment in the context of an asset purchase, the parties should enter into an assignment agreement whereby the vendor assigns and the purchaser assumes the contract and all rights, obligations and benefits thereunder. Often a contract will specify that the vendor will not be released of its obligations on an assignment. In such instances, the vendor and purchaser should address each of their obligations going forward. Typically, the purchaser will be solely responsible and will indemnify the vendor for any non-performance or breach by the purchaser under the contract from and after the date of assignment. If consent for the assignment is required from a third party, such party can either be made a party to the assignment agreement or its separate written consent can be obtained. If consent is not required, notice should be given to the third party that the assignment has or will occur. To effect an assignment in the context of a share purchase, only the documents effecting the sale and transfer of shares is needed as between the vendor and purchaser. Depending on the presence and content of any change of control provisions in each contract the target company is a party to, notice to or consent of the third party to each of the contracts may be necessary.

Although generally contracts are assignable, when contemplating the purchase or sale of a business consideration should be given to any contracts that will be assigned or remain with the target company. Each contract should be carefully reviewed in the context of the specific type of transaction so as to determine whether any consents or notices will be required before or after completion of the proposed transaction. Specifically, in the context of an asset purchase, only anti-assignment provisions will necessitate obtaining consent, and in the context of a share purchase, only change of control provisions will necessitate obtaining consent. Each party should also have regard to the timing and confidentiality issues that may arise in obtaining any necessary consents and all assignments or changes in control should be properly documented.

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Do existing contracts get automatically transferred to the acquiring company?

Company A and Company B have a business relationship lasting for years. All kinds of agreements are in place between them. License Agreements, Supply Agreements, Development Agreements and so on.

Company A gets acquired by Company C. After closing, former Company A now operates as Company AC. What happens to all the existing contracts where Company A was a Party? Do they get automatically transferred?

Having to assign all the existing contracts seems to be an "impossible" task, but i do not know the leagl basis for the transfer. Can anyone shed some light both in US and European jurisdictions?

contract-law

Depends upon how the transaction is structured. The question provides insufficient factual detail to know. – ohwilleke Commented Oct 24, 2019 at 19:01

5 Answers 5

Contracts are generally assignable, meaning that one company can assign their rights, duties and obligations under the contract. Assignment may be specifically barred by the contract, or it may have certain terms (prior written consent, etc.) attached, but if not, a contract is likely freely assignable. Though a contract is not necessarily "automatically transferred" the reason Company C buys Company A is for its ability to earn Company C over time, which includes the contract between A & B. So unless the original contract has a "no assignments clause" or if an assignment is otherwise impossible or illegal, it is likely that A can freely assign the contract to C.

The OP asks if contracts are automatically assigned to AC, which I would interpret as subject to the universal "unless prohibited by law, or precluded by specific clause" caveat. In lieu of any explicit clause in the A-Customer or A-B contracts regarding assignment, i.e. if A doesn't ever think of the issue, and falls off the face of the planet, what happens to the A-Customer contract? Citations of case law would be appropriate. – user6726 Commented May 31, 2017 at 0:41

There are several legal concepts going on in your question here, all of which are relevant to the answer:

separate legal entities
privity of contract
novation of contracts

The answer to your question is it depends on the law of governing the contract. Each State in the US (California, New York, Georgia, …) and each country in the EU (England, France, Spain, …) has its own system of contract law.

Each contract that you refer to in your question might be governed by the law of a different country.

Separate Legal Entities

In HL Bolton Engineering Co Ltd v TJ Graham Sons Ltd 1957 1 QB 159, Denning LJ described companies like this:

A company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere [employees] and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such.

The hallmarks of a separate legal entity are that it can:

buy, sell and own property of any kind in its own name
agree to legally binding contracts, and
sue and be sued in its own name.

Privity of Contract

The doctrine of privity of contract consists of two general rules, one of which is:

a person who is not a party to a contract cannot sue on the contract to obtain the promised performance.

There are exceptions to privity of contract in some countries’ systems of law.

Novation of Contracts

There is no such thing as an assignment of a contract.

It was held in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd 1993 UKHL 4 (22 July 1993):

It is trite law that it is, in any event, impossible to assign "the contract" as a whole, i.e. including both burden and benefit. The burden of a contract can never be assigned without the consent of the other party to the contract in which event such consent will give rise to a novation. Although it is true that the phrase "assign this contract" is not strictly accurate, lawyers frequently use those words inaccurately to describe an assignment of the benefit of a contract since every lawyer knows that the burden of a contract cannot be assigned.

In short, contracts are not assigned:

ownership of assets is assigned.
contractual rights are "transferred": they're novated.

The legal obligations under a contract cannot be "assigned" or transferred to another person, without agreement from the other contracting party(ies).

To transfer (or “assign”, which is a misnomer) contractual obligations the requirements of novation must be satisfied.

In novation, there is no assignment of rights and obligations: a new contract is created with new rights and obligations, with a new contracting party.

Sales of Companies

So, to answer your question, what sometimes happens is the buyer of Company A (ie Company C) puts the contracting parties of Company A on notice that Company A has been acquired and that Company C will now be fulfilling Company A’s contracts.

Is that an “assignment” of the contract?

Well no, but of the contracting parties of Company A then order products or receive products from Company C, and everyone is happy.

The contracting parties to Company A could say to Company A “You’re in breach of contract for not performing my contract. I can sue you for my loss, caused by your non-performance of the contract”.

Company A could then say, “Well that might be the case, but then you need to mitigate your loss for my breach of contract. There’s a company over there called Company C that can perform the contract that we used to have together on the same terms with you.”.

In respect of your reference to Company AC, please see the heading "Separate Legal Entities" above. As I understand it, there is some sort of doctrine of merger of companies in some States of the US (such as Delaware, I believe), but I don't get into that here, because I'm not a US lawyer. That doctrine of merger might be relevant to the answer to your question under the law of some States of the US.

To an English contract lawyer, going by what you say in your question, Company AC is a trading name of Company C (or vice versa) or Company C changed it's name to "Company AC".

It might work differently in the governing law of the share purchase agreement or asset sale agreement.

If you’re thinking of relying on any of the above for an actual acquisition, please seek medical help.

Nit: "England" is not a member state of the EU, "the United Kingdom" is. Further, for most purposes (in particular contract law), "England" is not a jurisdiction, "England and Wales" is. (There is some divergence between the two because laws passed by the Welsh Assembly do not apply in England.) – Martin Bonner supports Monica Commented Oct 23, 2019 at 8:15
"the United Kingdom" does not have its own system of contract law. England does. England can be the lex fori (it is after all, a country, as is Wales) and indeed the lex loci contractus. Contracting parties that say that "UK law" is the law governing their contract cause themselves problems. – lellis Commented Oct 23, 2019 at 15:55
I am well aware that there is no (or very little) such thing as "UK law". My point is that "England" does not have its own system of contract law. "England and Wales" does. – Martin Bonner supports Monica Commented Oct 23, 2019 at 16:38
“If you’re thinking of relying on any of the above for an actual acquisition, please seek medical help.“ - yes, that is exactly what I was thinking ;) – paul black Commented Oct 24, 2019 at 20:22

Parties to contracts must be people.

People are people and companies are (legally) people but businesses are not people.

Company A is bound by the provisions of its contracts so long as the contracts have not been terminated. One of the ways that a contract will be terminated is if Company A ceases to exist; this is similar to the fact that the death of a (natural) person will also terminate a contract.

If Company C wants to keep the rights and obligations of Company A's contracts then they must:

keep Company A operating as a subsidiary and extract the benefits through dividend or share buy-back payments or the operation of another contract,
The contract itself says they aren’t
They are personal services contracts. That is, contracts where only the contracted individual can perform the service, for example, employment contracts. Because of this quirk, most jurisdictions have transmission of business laws that allow employment contracts to be transferred if those laws are followed.
Notwithstanding, the obligations of the contract are not transferable and while Company C can get the benefit, Company A remains liable for the obligations. The assignment is only enforcable if the other party to the contract is informed of it.
Novate the contract. With the agreement of all parties, Company C can be substituted for Company A and assume all the rights and obligations under the contract. That agreement can be already in the contract; that is it may be a term of the contract that one party or the other can novate the contract and the counterparty must facilitate this.
make new contracts on the same or similar terms with the other party.

Contracts are never "automatically transferred", the party transferring from and the one transferring to have to make the transfer happen, usually they make a contract. Because contracts usually contain both rights and obligations, transferring one will be good consideration for both sides.

A company, like a natural person, can change their name while legally remaining the same company and this will not terminate any contracts.

If the company changes owners in whole or in part, it is still the same company and this will not terminate any contracts. If, instead, the company sells its business (which is an asset of the company that it can sell, like a car or a building), then the contracts are novated as part of that sale if the other party agrees, or assigned if they don't.

What about if former company A only changes its designation to company AC, as described above, and company AC keeps reg nr, address... of acquired company? Also, does your answer applies equally to cases where the company C aquires all or the majority of shares of A? – paul black Commented Feb 26, 2016 at 0:38

Because the case is equity/stock purchase (as opposed to assets purchase), the answer is "yes".

From here :

All asset and liabilities transfer at carrying value The only way to eliminate unwanted liabilities is to contractually sell them back to the target

All liabilities transfer to the buyer by operation of law, wanted or not. However, the buyer can contractually allocate liabilities to the seller by selling them back.

So, what happens is the contracts get transferred automatically from A to C, but then, if the parties agree, the contracts will be transferred back to A/AC.

Because A has changed its name to AC (as opposed to staying unrelated to C), it would be reasonable to assume that this is exactly what happened: AC has got the contracts back.

Agreew with last commenter's view. The contract should have an assignemnt/permitted transfer provision whereby certain parties can assume the contract without consent of the counterparty. Nevertheless, if Company A is purchased and now operates as a JV Company AC and there's no change of control in that company A still operates its own business as if it were independently owned, then the contract effectively woult not have been assigned and and thus the assingment clause would not trigger. This could be the case where even though company A's owners no longer full own company a following the dilution or being taken out by Company C, they still retain manageral control over Company A and as such there's no change of control triggered.

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Assignment provisions in contracts

Author’s note, Nov. 22, 2014: For a much-improved update of this page, see the Common Draft general provisions article .

(For more real-world stories like the ones below, see my PDF e-book, Signing a Business Contract? A Quick Checklist for Greater Peace of Mind , a compendium of tips and true stories to help you steer clear of various possible minefields. Learn more …. )

Table of Contents

Legal background: Contracts generally are freely assignable

When a party to a contract “ assigns ” the contract to someone else, it means that party, known as the assignor , has transferred its rights under the contract to someone else, known as the assignee , and also has delegated its obligations to the assignee.

Under U.S. law, most contract rights are freely assignable , and most contract duties are freely delegable, absent some special character of the duty, unless the agreement says otherwise. In some situations, however, the parties will not want their opposite numbers to be able to assign the agreement freely; contracts often include language to this effect.

Intellectual-property licenses are an exception to the general rule of assignability. Under U.S. law, an IP licensee may not assign its license rights, nor delegate its license obligations, without the licensor’s consent, even when the license agreement is silent. See, for example, In re XMH Corp. , 647 F.3d 690 (7th Cir. 2011) (Posner, J; trademark licenses); Cincom Sys., Inc. v. Novelis Corp. , 581 F.3d 431 (6th Cir. 2009) (copyright licenses); Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp. , 284 F.3d 1323 (Fed. Cir. 2002) (patent licenses). For additional information, see this article by John Paul, Brian Kacedon, and Douglas W. Meier of the Finnegan Henderson firm.

Assignment consent requirements

Model language

[Party name] may not assign this Agreement to any other person without the express prior written consent of the other party or its successor in interest, as applicable, except as expressly provided otherwise in this Agreement. A putative assignment made without such required consent will have no effect.

Optional: Nor may [Party name] assign any right or interest arising out of this Agreement, in whole or in part, without such consent.

Alternative: For the avoidance of doubt, consent is not required for an assignment (absolute, collateral, or other) or pledge of, nor for any grant of a security interest in, a right to payment under this Agreement.

Optional: An assignment of this Agreement by operation of law, as a result of a merger, consolidation, amalgamation, or other transaction or series of transactions, requires consent to the same extent as would an assignment to the same assignee outside of such a transaction or series of transactions.

• An assignment-consent requirement like this can give the non-assigning party a chokehold on a future merger or corporate reorganization by the assigning party — see the case illustrations below.

• A party being asked to agree to an assignment-consent requirement should consider trying to negotiate one of the carve-out provisions below, for example, when the assignment is connection with a sale of substantially all the assets of the assignor’s business {Link} .

Case illustrations

The dubai port deal (ny times story and story ).

In 2006, a Dubai company that operated several U.S. ports agreed to sell those operations. (The agreement came about because of publicity and political pressure about the alleged national-security implications of having Middle-Eastern companies in charge of U.S. port operations.)

A complication arose in the case of the Port of Newark: The Dubai company’s lease agreement gave the Port Authority of New York and New Jersey the right to consent to any assignment of the agreement — and that agency initially demanded $84 million for its consent.

After harsh criticism from political leaders, the Port Authority backed down a bit: it gave consent in return for “only” a $10 million consent fee, plus $40 million investment commitment by the buyer.

Cincom Sys., Inc. v. Novelis Corp., No. 07-4142 (6th Cir. Sept. 25, 2009) (affirming summary judgment)

A customer of a software vendor did an internal reorganization. As a result, the vendor’s software ended up being used by a sister company of the original customer. The vendor demanded that the sister company buy a new license. The sister company refused.

The vendor sued, successfully, for copyright infringement, and received the price of a new license, more than $450,000 as its damages. The case is discussed in more detail in this blog posting.

The vendor’s behavior strikes me as extremely shortsighted, for a couple of reasons: First, I wouldn’t bet much on the likelihood the customer would ever buy anything again from that vendor. Second, I would bet that the word got around about what the vendor did, and that this didn’t do the vendor’s reputation any good.

Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, No. 5589-VCP (Del. Ch. Apr. 8, 2011) (denying motion to dismiss).

The Delaware Chancery Court refused to rule out the possibility that a reverse triangular merger could act as an assignment of a contract, which under the contract terms would have required consent. See also the discussion of this opinion by Katherine Jones of the Sheppard Mullin law firm.

Assignment with transfer of business assets

Consent is not required for an assignment of this Agreement in connection with a sale or other disposition of substantially all the assets of the assigning party’s business.

Optional: Alternatively, the sale or other disposition may be of substantially all the assets of the assigning party’s business to which this Agreement specifically relates.

Optional: The assignee must not be a competitor of the non-assigning party.

• A prospective assigning party might argue that it needed to keep control of its own strategic destiny, for example by preserving its freedom to sell off a product line or division (or even the whole company) in an asset sale.

• A non-assigning party might argue that it could not permit the assignment of the agreement to one of its competitors, and that the only way to ensure this was to retain a veto over any assignment.

• Another approach might be to give the non-assigning party, instead of a veto over asset-disposition assignments, the right to terminate the contract for convenience . (Of course, the implications of termination would have to be carefully thought through.)

Assignment to affiliate

[Either party] may assign this Agreement without consent to its affiliate.

Optional: The assigning party must unconditionally guarantee the assignee’s performance.

Optional: The affiliate must not be a competitor of the non-assigning party.

Optional: The affiliate must be a majority-ownership affiliate of the assigning party.

• A prospective assigning party might argue for the right to assign to an affiliate to preserve its freedom to move assets around within its “corporate family” without having to seek approval.

• The other party might reasonably object that there is no way to know in advance whether an affiliate-assignee would be in a position to fulfill the assigning party’s obligations under the contract, nor whether it would have reachable assets in case of a breach.

Editorial comment: Before approving a blanket affiliate-assignment authorization, a party should consider whether it knew enough about the other party’s existing- or future affiliates to be comfortable with where the agreement might end up.

Consent may not be unreasonably withheld or delayed

Consent to an assignment of this Agreement requiring it may not be unreasonably withheld or delayed.

Optional: For the avoidance of doubt, any damages suffered by a party seeking a required consent to assignment of this Agreement, resulting from an unreasonable withholding or delay of such consent, are to be treated as direct damages.

• Even if this provision were absent, applicable law might impose a reasonableness requirement; see the discussion of the Shoney case in the commentary to the Consent at discretion provision.

• A reasonableness requirement might not be of much practical value, whether contractual or implied by law. Such a requirement could not guarantee that the non-assigning party would give its consent when the assigning party wants it. And by the time a court could resolve the matter, the assigning party’s deal could have been blown.

• Still, an unreasonable-withholding provision should make the non-assigning party think twice about dragging its feet too much, becuase of the prospect of being held liable for damages for a busted transaction. Cf. Pennzoil vs. Texaco and its $10.5 billion damage award for tortious interference with an M&A deal.

• Including an unreasonable-delay provision might conflict with the Materiality of assignment breach provision, for reasons discussed there in the summary of the Hess Energy case.

Consent at discretion

A party having the right to grant or withhold consent to an assignment of this Agreement may do so in its sole and unfettered discretion.

• If a party might want the absolute right to withhold consent to an assignment in its sole discretion, it would be a good idea to try to include that in the contract language. Otherwise, there’s a risk that court might impose a commercial-reasonableness test under applicable law (see the next bullet). On the other hand, asking for such language but not getting it could be fatal to the party’s case that it was implicitly entitled to withhold consent in its discretion.

• If a commercial- or residential lease agreement requires the landlord’s consent before the tentant can assign the lease, state law might impose a reasonableness requirement. I haven’t researched this, but ran across an unpublished California opinion and an old law review article, each collecting cases. See Nevada Atlantic Corp. v. Wrec Lido Venture, LLC, No. G039825 (Cal. App. Dec. 8, 2008) (unpublished; reversing judgment that sole-discretion withholding of consent was unreasonable); Paul J. Weddle, Pacific First Bank v. New Morgan Park Corporation: Reasonable Withholding of Consent to Commercial Lease Assignments , 31 Willamette L. Rev. 713 (1995) (first page available for free at HeinOnline ).

Shoney’s LLC v. MAC East, LLC, No. 1071465 (Ala. Jul. 31, 2009)

In 2009, the Alabama Supreme Court rejected a claim that Shoney’s restaurant chain breached a contract when it demanded a $70,000 to $90,000 payment as the price of its consent to a proposed sublease. The supreme court noted that the contract specifically gave Shoney’s the right, in its sole discretion , to consent to any proposed assignment or sublease.

Significantly, prior case law from Alabama was to the effect that a refusal to consent would indeed be judged by a commercial-reasonableness standard. But, the supreme court said, “[w]here the parties to a contract use language that is inconsistent with a commercial-reasonableness standard, the terms of such contract will not be altered by an implied covenant of good faith. Therefore, an unqualified express standard such as ‘sole discretion’ is also to be construed as written.” Shoney’s LLC v. MAC East, LLC , No. 1071465 (Ala. Jul. 31, 2009) (on certification by Eleventh Circuit), cited by MAC East, LLC v. Shoney’s [LLC] , No. 07-11534 (11th Cir. Aug. 11, 2009), reversing No. 2:05-cv-1038-MEF (WO) (M.D. Ala. Jan. 8, 2007) (granting partial summary judgment that Shoney’s had breached the contract).

Termination by non-assigning party

A non-assigning party may terminate this Agreement, in its business discretion , by giving notice to that effect no later than 60 days after receiving notice, from either the assigning party or the assignee, that an assignment of the Agreement has become effective.

Consider an agreement in which a vendor is to provide ongoing services to a customer. A powerful customer might demand the right to consent to the vendor’s assignment of the agreement, even in strategic transactions. The vendor, on the other hand, might refuse to give any customer that kind of control of its strategic options.

A workable compromise might be to allow the customer to terminate the agreement during a stated window of time after the assignment if it is not happy with the new vendor.

Assignment – other provisions

Optional: Delegation: For the avoidance of doubt, an assignment of this Agreement operates as a transfer of the assigning party’s rights and a delegation of its duties under this Agreement.

Optional: Promise to perform: For the avoidance of doubt, an assignee’s acceptance of an assignment of this Agreement constitutes the assignee’s promise to perform the assigning party’s duties under the Agreement. That promise is enforceable by either the assigning party or by the non-assigning party.

Optional: Written assumption by assignee: IF: The non-assigning party so requests of an assignee of this Agreement; THEN: The assignee will seasonably provide the non-assigning party with a written assumption of the assignor’s obligations, duly executed by or on behalf of the assignee; ELSE: The assignment will be of no effect.

Optional: No release: For the avoidance of doubt, an assignment of this Agreement does not release the assigning party from its responsibility for performance of its duties under the Agreement unless the non-assigning party so agrees in writing.

Optional: Confidentiality: A non-assigning party will preserve in confidence any non-public information about an actual- or proposed assignment of this Agreement that may be disclosed to that party by a party participating in, or seeking consent for, the assignment.

The Delegation provision might not be necessary in a contract for the sale of goods governed by the Uniform Commercial Code, because a similar provision is found in UCC 2-210

The Confidentiality provision would be useful if a party to the agreement anticipated that it might be engaging in any kind of merger or other strategic transaction.

Materiality of assignment breach

IF: A party breaches any requirement of this Agreement that the party obtain another party’s consent to assign this Agreement; THEN: Such breach is to be treated as a material breach of this Agreement.

A chief significance of this kind of provision is that failure to obtain consent to assignment, if it were a material breach, would give the non-assigning party the right to terminate the Agreement.

If an assignment-consent provision requires that consent not be unreasonably withheld , then failure to obtain consent to a reasonable assignment would not be a material breach, according to the court in Hess Energy Inc. v. Lightning Oil Co. , No. 01-1582 (4th Cir. Jan. 18, 2002) (reversing summary judgment). In that case, the agreement was a natural-gas supply contract. The customer was acquired by a larger company, after which the larger company took over some of the contract administration responsibilities such as payment of the vendor’s invoices. The vendor, seeking to sell its gas to someone else at a higher price, sent a notice of termination, on grounds that the customer had “assigned” the agreement to its new parent company, in violation of the contract’s assignment-consent provision. The appeals court held that, even if the customer had indeed assigned the contract (a point on which it expressed considerable doubt) without consent, the resulting breach of the agreement was not material, and therefore the vendor did not have the right to terminate the contract.

See also (list is generated automatically) :

Notebook update: Reverse triangular merger might be an assignment of a contract, requiring consent Just updated the Notebook with a citation to a case in which the Delaware Chancery Court refused to rule out the possibility that a reverse...
Assignment-consent requirements can cause serious problems in future M&A transactions A lot of contracts provide that Party A must obtain the prior written consent of Party B if it wishes to assign the agreement to a...
SCOTX rejects implied obligation not to unreasonably withhold consent to assignment of contract In a recent Texas case, two sophisticated parties in the oil and gas business — let’s call them Alpha and Bravo — were negotiating a contract....
Ken Adams and the marketplace of ideas I (used to) comment occasionally at Ken Adams’s blog. Recent examples: Here, here, here, here, and here. Ken and I disagree on a number of issues; some...

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What Is an Assignment of Contract?

Assignment of Contract Explained

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Assignment of contract allows one person to assign, or transfer, their rights, obligations, or property to another. An assignment of contract clause is often included in contracts to give either party the opportunity to transfer their part of the contract to someone else in the future. Many assignment clauses require that both parties agree to the assignment.

Learn more about assignment of contract and how it works.

What Is Assignment of Contract?

Assignment of contract means the contract and the property, rights, or obligations within it can be assigned to another party. An assignment of contract clause can typically be found in a business contract. This type of clause is common in contracts with suppliers or vendors and in intellectual property (patent, trademark , and copyright) agreements.

How Does Assignment of Contract Work?

An assignment may be made to anyone, but it is typically made to a subsidiary or a successor. A subsidiary is a business owned by another business, while a successor is the business that follows a sale, acquisition, or merger.

Let’s suppose Ken owns a lawn mowing service and he has a contract with a real estate firm to mow at each of their offices every week in the summer. The contract includes an assignment clause, so when Ken goes out of business, he assigns the contract to his sister-in-law Karrie, who also owns a lawn mowing service.

Before you try to assign something in a contract, check the contract to make sure it's allowed, and notify the other party in the contract.

Assignment usually is included in a specific clause in a contract. It typically includes transfer of both accountability and responsibility to another party, but liability usually remains with the assignor (the person doing the assigning) unless there is language to the contrary.

What Does Assignment of Contract Cover?

Generally, just about anything of value in a contract can be assigned, unless there is a specific law or public policy disallowing the assignment.

Rights and obligations of specific people can’t be assigned because special skills and abilities can’t be transferred. This is called specific performance. For example, Billy Joel wouldn't be able to transfer or assign a contract to perform at Madison Square Garden to someone else—they wouldn't have his special abilities.

Assignments won’t stand up in court if the assignment significantly changes the terms of the contract. For example, if Karrie’s business is tree trimming, not lawn mowing, the contract can’t be assigned to her.

Assigning Intellectual Property

Intellectual property (such as copyrights, patents, and trademarks) has value, and these assets are often assigned. The U.S. Patent and Trademark Office (USPTO) says patents are personal property and that patent rights can be assigned. Trademarks, too, can be assigned. The assignment must be registered with the USPTO's Electronic Trademark Assignment System (ETAS) .

The U.S. Copyright Office doesn't keep a database of copyright assignments, but they will record the document if you follow their procedure.

Alternatives to Assignment of Contract

There are other types of transfers that may be functional alternatives to assignment.

Licensing is an agreement whereby one party leases the rights to use a piece of property (for example, intellectual property) from another. For instance, a business that owns a patent may license another company to make products using that patent.

Delegation permits someone else to act on your behalf. For example, Ken’s lawn service might delegate Karrie to do mowing for him without assigning the entire contract to her. Ken would still receive the payment and control the work.

Do I Need an Assignment of Contract?

Assignment of contract can be a useful clause to include in a business agreement. The most common cases of assignment of contract in a business situation are:

Assignment of a trademark, copyright, or patent
Assignments to a successor company in the case of the sale of the business
Assignment in a contract with a supplier or customer
Assignment in an employment contract or work for hire agreement

Before you sign a contract, look to see if there is an assignment clause, and get the advice of an attorney if you want to assign something in a contract.

Key Takeaways

Assignment of contract is the ability to transfer rights, property, or obligations to another.
Assignment of contract is a clause often found in business contracts.
A party may assign a contract to another party if the contract permits it and no law forbids it.

Legal Information Institute. " Assignment ." Accessed Jan. 2, 2021.

Legal Information Institute. " Specific Performance ." Accessed Jan. 2, 2021.

U.S. Patent and Trademark Office. " 301 Ownership/Assignability of Patents and Applications [R-10.2019] ." Accessed Jan. 2, 2021.

Licensing International. " What is Licensing ." Accessed Jan. 2, 2021.

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Anti-assignment provisions and their effect on transaction structures.

If you look at the last page or so of most commercial contracts, buried among the boilerplate clauses one will often find a provision that looks something like this:

"Neither this Agreement nor any of the rights, interests or obligations under the Agreement shall be assigned, in whole or in part, by operation of law or otherwise by either party without the prior written consent of the other party."

Lawyers refer to this as an "anti-assignment" provision, and its goal is to ensure that the two contracting parties will not be able to transfer their obligations under the agreement to someone else without first getting permission from the other party. For example, if you have contracted with an organization because of its reputation and expertise in a given area, you may not want that organization to be able to outsource that responsibility to another party.

Contract assignment issues can play a significant role in mergers and acquisitions, as buyers will want to be sure they acquire all of the seller’s key customer and vendor contracts. If these contracts require consent from the counterparties, it can add significant cost and time to a transaction. The default position under most contracts is that the contracts are assignable unless the parties have expressed an intent to the contrary. As such, anti-assignment provisions are added to contracts for just that purpose.

In one of the most common transaction structures, an asset sale, contracts have to be assigned to the acquiring party, so if contracts have anti-assignment provisions, the buyer will need to obtain the consent of the contracting parties before the contract can be transferred. If many consents are required, or if the counterparties use the opportunity to try to break contracts or otherwise extract concessions, it can add delay and uncertainty to a transaction.

To avoid this issue, acquisitions are sometimes structured as "reverse triangular mergers" where the buyer forms a subsidiary (typically called a "merger sub") which merges with and into the target company. The merger sub becomes a part of the target company, and the target company becomes a subsidiary of the buyer. In this structure, the party to the contract never changes; it is just the owners of that party that have changed. As such, transaction attorneys have long held the belief that reverse merger transactions should not be considered assignments. A recent Delaware Chancery Court case, Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH , has affirmed this position under Delaware law, which provides even further certainty on this issue.

On the flip side, when drafting contracts, if parties do want to prevent the counterparty from being able to transfer the contact in a merger, or other change of control transaction, they will need to state this very explicitly in their contracts. Anti-assignment provisions need to explicitly address merger situations and state whether the parties intend consent to be required.

It is also worth noting that the Meso Scale decision is applicable for Delaware law, and although Delaware courts are persuasive in many other states, other courts could come to a different conclusion. For example, a U.S. District Court for the Northern District of California, in SQL Solutions v. Oracle , held that a reverse triangular merger did result in an assignment by operation of law of a license agreement of the target company.

In either case, this illustrates the importance of clear drafting in contracts, and the need for experienced transaction counsel to be involved early in the deal structuring process so that issues like anti-assignment provisions can be identified early and appropriately addressed, if needed. Please call us if you have any questions or would like to discuss further.

by Bart D. Dillashaw

This content is made available for educational purposes only and to give you general information and a general understanding of the law, not to provide specific legal advice. By using this content, you understand there is no attorney-client relationship between you and the publisher. The content should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.

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Delaware Court holds anti-assignment clause prevents enforcement of contract after merger

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On September 16, 2020, the Superior Court of Delaware issued an order with potential implications for companies contemplating acquisitions of businesses or assets. In MTA Can. Royalty Corp. v. Compania Minera Pangea , S.A. De C.V. , No. N19C-11-228 AML CCLD, 2020 Del. Super. LEXIS 2780 (Sept. 16, 2020), Judge Abigail M. LeGrow held that, following a merger,[1] the surviving company lacked standing to enforce a contract entered into by its predecessor (the non-surviving company in the merger) because the contract’s anti-assignment clause prohibited assignment “by operation of law”.

Companies considering acquisitions should carefully review their target’s contracts for anti-assignment clauses that prohibit assignment “by operation of law”, which Delaware courts interpret to include certain mergers. In addition, where a target’s key contracts contain anti-assignment clauses with such language, companies should carefully consider the preferred transaction structure. In a reverse triangular merger, the acquirer’s newly formed subsidiary is merged into the target, with the result being that the target survives and becomes the acquirer’s subsidiary. By contrast, in a forward triangular merger, the target does not “survive” and its rights are transferred to the existing subsidiary, which may implicate anti-assignment clauses. Reverse triangular mergers do not face the same issue because the target continues its corporate existence as a subsidiary of the acquirer.

Background of the contract and subsequent merger

In 2016, Compania Minera Pangea, S.A. de C.V. (“CMP”) purchased mineral rights in the El Gallo Mine from 1570926 Alberta Ltd. (“Alberta”). In exchange, CMP paid Alberta $5.25m in cash at closing and agreed to pay Alberta an additional $1m in 2018 subject to certain conditions. Of note, the agreement contained the following anti-assignment clause (the “Anti-Assignment Clause”):

Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned or delegated, in whole or in part, by operation of law or otherwise, by [Alberta] without the prior written consent of each other party, and any such assignment without such prior written consent shall be null and void. . . . [T]his Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns.

In July 2017, Alberta merged with Global Royalty Corp. (“Global”), a subsidiary of Metalla Royalty & Streaming Ltd., and Global was the surviving entity. Following that transaction, Global changed its name to MTA Canada Royalty Corp. (“MTA”). In November 2019, MTA brought a breach of contract claim against CMP based on CMP’s alleged failure to pay the $1m in consideration due in 2018.

Superior Court holds that anti-assignment clause extends to certain mergers

CMP argued that MTA lacked standing to enforce Alberta’s contract with CMP because, per the Anti-Assignment Clause, Alberta was required to obtain CMP’s written consent before assigning its rights to MTA. MTA argued that the Anti-Assignment Clause was meant to prevent third-party assignments, not “successor assignments” like Alberta’s merger. Id. at *11-12. To make this argument, it relied on a 1993 Chancery decision, in which then-Vice Chancellor Jacobs had held that, subject to certain conditions, anti-assignment clauses do not apply to mergers unless mergers are explicitly prohibited. Star Cellular Tel. Co. v. Baton Rouge CGSA ., 1993 Del. Ch. LEXIS 158, at *25 (July 30, 1993). According to MTA, because the last sentence of the Anti-Assignment Clause referred to “successors”, it was clearly not intended to extend to mergers.

The Superior Court disagreed. It explained that, as a result of the merger, Alberta had ceased to exist, so MTA could only enforce the contract if it showed that the Anti-Assignment Clause did not apply. MTA , at *6. It then held that the Anti-Assignment Clause clearly barred Alberta’s transfer of rights through a merger because the clause prevented assignment “by operation of law”, which Delaware case law had interpreted as referring to forward triangular mergers. Id. at *7-14. In light of what it regarded as a straightforward application of the Anti-Assignment Clause, the Superior Court did not engage in the Star Cellular analysis. The Superior Court found that the reference to “successors” in the Anti-Assignment Clause meant only that “valid successors” had the right to enforce the contract. Id. at *13.

Potentially at odds with Chancery precedent?

Of special relevance is the Superior Court’s treatment of existing Delaware case law on anti-assignment clauses and forward triangular mergers. Existing precedent from the Court of Chancery held that anti-assignment clauses containing both a prohibition on assignment “by operation of law” and a reference to “successors” were ambiguous. Under the Star Cellular test, this ambiguity was construed against the application of the anti-assignment clause.

Specifically, MTA appears at odds with the Chancery ruling in Tenneco Auto. Inc. v. El Paso Corp. , which also involved the impact of an anti-assignment clause following a forward triangular merger. C.A. No. 18810-NC, 2002 Del. Ch. LEXIS 26 (Mar. 20, 2002). The language of the anti-assignment clause in Tenneco was similar to that in MTA : both clauses prohibited assignment “by operation of law” while also referencing “successors”. In Tenneco , Vice Chancellor Noble found that those conflicting references made the anti-assignment clause ambiguous, meaning that, under the Star Cellular test, the successor company could enforce the contract. Id. at *7-10. The MTA Court did not explain why it reached the opposite result.

Similarly, in ClubCorp, Inc. v. Pinehurst, LLC , Vice Chancellor Parsons held that, following a forward triangular merger, an anti-assignment clause with language like that in Tenneco was ambiguous because the agreement both referenced “successors” and prohibited assignment “by operation of law”. No. 5120-VCP, 2011 Del. Ch. LEXIS 176, at *26-29 (Nov. 15, 2011). Again, the ambiguity militated in favor of finding that the anti-assignment clauses did not apply to the merger. MTA did not address Pinehurst.

Insights from MTA

MTA has several significant implications for practitioners. The first is a reminder to carefully review a target’s contracts for anti-assignment clauses. Such clauses in important contracts should be flagged and thoughtfully evaluated.

In addition, practitioners should remain aware that Delaware courts interpret the phrase “by operation of law” in assignment clauses to refer to mergers in which the target company does not survive. The presence of this language in anti-assignment clauses in a target’s important contracts (if those contracts are governed by Delaware law) should prompt a discussion about the appropriate transaction structure. For example, in MTA , the Court suggested that MTA would have had standing to enforce the contract with CMP if it had been merged through a reverse triangular merger rather than a forward triangular merger. The Superior Court cited a 2013 Chancery decision, Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH , in which Vice Chancellor Parsons found that “a reverse triangular merger does not constitute an assignment by operation of law”. 62 A.3d 62, 83 (Del. Ch. 2013).

If dealing with similar language in anti-assignment clauses in important agreements, practitioners should consider alternative transaction structures that would allow the target to retain its corporate existence. According to MTA , such alternatives should allow successor companies to enforce agreements without running afoul of anti-assignment clauses prohibiting “assignment by operation of law”.[2]

[1] The transaction was an amalgamation under Canadian law, which the parties and the Court agreed was the equivalent of a merger under Delaware law. The transaction structure was equivalent to a forward triangular merger.

[2] This may not be true in other jurisdictions. For example, under California law, a reverse triangular merger has been found to be a transfer of rights by operation of law . See SQL Sols. v. Oracle Corp. , 1991 U.S. Dist. LEXIS 21097, at *8-12 (N.D. Cal. Dec. 18, 1991).

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Stuff You Might Need to Know: What Assignments Do Broad Anti-Assignment Clauses Not Prohibit? Blog Global Private Equity Watch

A recent federal court decision applying Delaware law, Partner Reinsurance Co. Ltd. v. RPM Mortgage, Inc. , 2021 WL 2716307 (S.D.N.Y. July 1, 2021), explores some rare contractual territory— i.e. , the question whether, in the absence of consent, a valid assignment may be made by a party of its rights to pursue a claim for damages for breach of a merger agreement, notwithstanding an anti-assignment clause that declared “void” any assignment of “any or all of” such party’s “rights under” that merger agreement. Surely, some might say, the right to claim damages for a breach of a contact is a “right[] under” that contract and would accordingly be prohibited by such a broad anti-assignment clause. Not so says the United States District Court for the Southern District of New York; and, in case you were wondering, this holding is consistent with long standing law concerning the scope of even the broadest anti-assignment provisions.

An important component of buy-side diligence is identifying the target’s material contracts that contain anti-assignment or change-of-control clauses, evaluating whether the proposed acquisition will trigger any of the identified clauses, and determining the consequences of proceeding with the proposed acquisition in the absence of consent if the clause is in fact triggered. Many times, there are structuring alternatives to avoid triggering the identified clause — i.e. , in the absence of a change-of-control clause, a stock purchase or reverse merger may be a means of structuring the transaction so there is no actual assignment of the contract at all. [1] And sometimes, the consequence of triggering the clause is not a void assignment or a terminable contract, but simply a breach of contract with limited or no real damages. But when there is an unquestionable assignment occurring, and the anti-assignment clause declares any assignment triggered by the clause to be void, are certain assignments of rights related to a contract nonetheless outside the scope of that anti-assignment clause?

Partner Reinsurance did not involve an anti-assignment clause in a target contract. Instead, Partner Reinsurance involved an anti-assignment clause in a merger agreement between a potential buyer, RPM Mortgage, Inc. (“RPM”), and the target, Entitle Direct Group, Inc. (“Entitle”). But the legal principles involved in resolving this case have potential applicability in both diligence and deal structuring generally.

In Partner Reinsurance , the merger between Entitle and RPM failed for reasons that were disputed, but Entitle terminated the agreement while apparently preserving its right to sue for damages based on alleged breaches by RPM. Thereafter, Entitle entered into and closed an alternative merger with a third party in which Entitle was the surviving company. But as part of making that alternative merger deal, one of the shareholders of Entitle, Partner Reinsurance Company Ltd. (“Partner Re”), bargained to retain any claim Entitle had against RPM for the original failed merger agreement. Because that claim belonged to Entitle, as the party actually harmed by the failed merger (as opposed to its individual shareholders), Partner Re obtained an assignment from Entitle when the merger with the third party closed that “assign[ed] to Partner Re the exclusive right to pursue any claims [Entitle] may have in respect of [the failed merger agreement].” [2]

When Partner Re sued RPM for damages arising from the failed merger agreement between Entitle and RPM, RPM sought to dismiss the case because “Partner Re lack[ed] contractual standing to pursue [the] action.” In other words, RPM argued that the purported assignment by Entitle of its rights to pursue damages for RPM’s alleged breach of the failed merger agreement was ineffective because of the anti-assignment clause set forth in the Entitle/RPM merger agreement. Note that RPM did not challenge the merger between Entitle and the third party because Entitle survived that merger— i.e. , the merger was a reverse merger.

The anti-assignment clause in the Entitle/RPM merger agreement read as follows:

Successors and Assigns . No Party to this Agreement may directly or indirectly assign any or all of its rights or delegate any or all of its obligations under this Agreement without the express prior written consent of each other Party to this Agreement. This Agreement shall be binding upon and inure to the benefit of the Parties to this Agreement and their respective successors and permitted assigns. Any attempted assignment in violation of this Section 11.6 shall be void.

Had the court sided with RPM, the assignment agreement between Partner Re and Entitle provided that Entitle had no obligation to pursue the claim on behalf of Partner Re—so this was not just a question of who was going to sue, but whether there was going to be any suit at all. But the court sided with Partner Re.

The Entitle/RPM merger agreement was governed by Delaware law; thus the scope of its anti-assignment clause was determined by applying Delaware law. While “Delaware courts recognize the validity of clauses limiting a party’s ability to subsequently assign its rights,” they “generally follow the approach of the Restatement (Second) of Contracts § 322(2)[a] (1981).” And, “[t]hat section provides that ‘[a] contract term prohibiting assignment of rights under that contract, unless a different intention is manifest, … does not forbid assignment of a right to damages for breach of the whole contract or a right arising out of the assignor’s due performance of his entire obligation[.]’” As noted by the court, this rule has been applied by “[c]ourts across the country … to permit assignments of claim[s] for damages even where the relevant parties’ contract includes a clear prohibition on the assignment of rights or duties.”

Thus, because Entitle had assigned to Partner Re only its claims for damages arising from the alleged breach of the failed merger agreement by RPM, the assignment “was unaffected by the Merger Agreement’s anti-assignment clause.” Interestingly, the court noted that there is a distinction between claims for breach of contract, which are not considered “rights under” a contract, and claims for payments to be made under a contract prior to a breach, which are considered “rights under” a contract. The bottom line: if you wish to restrict assignment of claims for damages arising from breach of contract (and even other rights that arise following full performance by a party under a contract), you have to be explicit in your anti-assignment clause regarding such rights; and a mere restriction on the assignment of “any or all rights under the contract” lacks the required explicitness. [3]

And while we are on the subject of anti-assignment clauses and explicitness requirements, there are two additional explicitness rules in Restatement (Second) of Contracts § 322 that merit attention. The first is that a clause only prohibiting an assignment of “the contract,” without more, does not prohibit the assignment of rights arising from that contract; instead it only prohibits the delegation or assignment of a party’s obligations. [4] Thus, depending on the continued performance required by a target under a contract and recognition of this rule by the jurisdiction governing the contract, a mere prohibition on the assignment of “the contract” may not prevent a transaction involving the assignment of the target’s rights under that contract.

The second rule is one that is frequently overlooked. But, when this rule is recognized by the applicable jurisdiction, it can provide potential structuring flexibility. The second rule states that a contractual provision that prohibits the assignment of rights under the contract, without more, does not render an assignment made in violation of that clause ineffective; instead, such a clause only permits the other party to sue for damages for a breach of that clause. [5] The second rule thus distinguishes between the power to assign and the contractual right to assign; if the power to assign is restricted, then no assignment in violation of that provision can occur, but if only the right to assign is restricted, then an assignment in violation of that provision gives rise to a breach of contract. [6]

An anti-assignment clause declaring void an assignment made in violation of that clause is categorized as a clause restricting the power to assign, while those that do not are typically viewed as only limiting the right to assign. [7] Of course, if the contract permits the non-breaching party to terminate upon breach of the contract by the other party (like many leases do when the tenant breaches an anti-assignment clause), that distinction may be of little value. But in other cases where there are no appreciable compensatory damages arising from an assignment in breach of a right-to-assign anti-assignment clause, this rule could permit an assignment made in violation of such a clause to otherwise remain valid. Being aware of the caselaw of the specific jurisdiction that governs the contract, however, remains paramount.

When faced with drafting an anti-assignment clause, it is obviously important to draft clearly to cover what the parties intend to cover; and when faced with interpreting an anti-assignment clause drafted by others it is likewise important to read carefully the words the parties chose to express their intent in the contract. But reading or drafting clarity is not enough. It is also important know how the courts have interpreted similar clauses and what additional words are sometimes required to accomplish your objectives, as well as what the absence of those words may mean as you are considering structuring alternatives in the face of an anti-assignment clause lacking those words.

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Assigning Contracts in the Context of M&A Transactions
One of the key considerations in structuring merger and acquisition (M&A) transactions is determining which contracts of the target company, if any, will remain in effect for the acquiror following closing. This post will briefly outline: (1) the general rules of contract assignment; (2) the effect of anti-assignment clauses and other ...
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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 ...
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Change of control terms don't address assignment. They say whether a party can terminate if the other party goes through a merger or other change of control. And they sometimes address other change of control consequences. Don't confuse the two. In a contract about software or other IT, you should think through the issues raised by each.
What Happens to Existing Contracts After a Business is Sold?
The merger agreement will already assign the rights and obligations under existing contracts to the buyer without a new, specific process for each existing agreement. In general, the principle of assignment makes business transactions more efficient and saves the parties from a complex legal process.
Assignment Clause: Meaning & Samples (2022)
Assignment Clause Examples. Examples of assignment clauses include: Example 1. A business closing or a change of control occurs. Example 2. New services providers taking over existing customer contracts. Example 3. Unique real estate obligations transferring to a new property owner as a condition of sale. Example 4.
Spotting issues with assignment clauses in M&A Due Diligence
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 ...
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Also, an assignment of a contract cannot result in an increase of the burden on the remaining third party to the contract. Finally, contracts may expressly prohibit assignment of the contract or provide that an assignment can only occur under certain conditions. In the context of most M&A transactions, the relevant exception will be anti ...
Do existing contracts get automatically transferred to the acquiring
Assignment may be specifically barred by the contract, or it may have certain terms (prior written consent, etc.) attached, but if not, a contract is likely freely assignable. Though a contract is not necessarily "automatically transferred" the reason Company C buys Company A is for its ability to earn Company C over time, which includes the ...
Mergers and Acquisitions: Assignment of Contracts
Mergers and Acquisitions: Assignment of Contracts If you and your company are planning to acquire or merge with another company, one of your main due diligence tasks will be to review all the various company and business contracts to ensure that they are assignable to the new business entity. The
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.
Mergers and Restrictions on Assignments by "Operation of Law"
And that determination is significantly influenced by the specific language set forth in the contract's anti-assignment/change of control provision, as well as the form the proposed acquisition ...
PDF Corporate Law & Accountability Report
MERGERS AND ACQUISITIONS Contract Assignment in M&A Transactions BY RYAN M. MURPHY G iven the pace of M&A transactions and the abun-dance of issues to be negotiated, there is a danger that transferability of third-party contracts (i.e., the need for consent and obtaining the same) can be lost in the shuffle. The deal complications associated
PDF Summary of Legal Aspects of Mergers, Consolidations, and Transfers of
the new. For example, because the merger or consolidation occurs by operation of law, contracts are not technically assigned from one corpora-tion to the other, and so approval for assignment is not required from vendors having contracts with the merging corporations. Reprinted from Association Law & Policy, a publication
PDF Practical guidance at Lexis Practice Advisor
the contract's express anti-assignment provision. Applicable state law, including statutes regarding mergers and acquisitions and relevant case law, generally governs these provisions. Certain deal structures, such as reverse triangular mergers and indirect stock acquisitions, are more likely to avoid anti-assignment
Assignment provisions in contracts
The Delaware Chancery Court refused to rule out the possibility that a reverse triangular merger could act as an assignment of a contract, which under the contract terms would have required consent. See also the discussion of this opinion by Katherine Jones of the Sheppard Mullin law firm. Assignment with transfer of business assets. Model language
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Assignment of contract allows one person to assign, or transfer, their rights, obligations, or property to another. ... acquisition, or merger. Let's suppose Ken owns a lawn mowing service and he has a contract with a real estate firm to mow at each of their offices every week in the summer. The contract includes an assignment clause, so when ...
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Sample 1. Assignment; Merger. Company may not assign this Agreement or any of its rights or delegate any of its duties under this Agreement without the prior written consent of T-Mobile. For purposes of this Section 11 (b), an "assignment" shall include a corporate reorganization or spin-off of business units or related assets, to any ...
Publications
Contract assignment issues can play a significant role in mergers and acquisitions, as buyers will want to be sure they acquire all of the seller's key customer and vendor contracts. If these contracts require consent from the counterparties, it can add significant cost and time to a transaction. The default position under most contracts is ...
Delaware Court holds anti-assignment clause prevents ...
LEXIS 2780 (Sept. 16, 2020), Judge Abigail M. LeGrow held that, following a merger,[1] the surviving company lacked standing to enforce a contract entered into by its predecessor (the non-surviving company in the merger) because the contract's anti-assignment clause prohibited assignment "by operation of law".
3 Things to Consider in a Merger or Acquisition
Here are the 3 main aspects of your contract to consider prior to and during a merger. Contract Assignment. Physician employment contracts usually include terms regarding "assignment," or how the contract can be transferred by either you or your employer to a new party. Generally, assignment terms heavily favor the employer, allowing them ...
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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 ...
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Instead, Partner Reinsurance involved an anti-assignment clause in a merger agreement between a potential buyer, RPM Mortgage, Inc. ("RPM"), and the target, Entitle Direct Group, Inc ...