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 contracts to be assigned are often the same whether you are doing a stock purchase or an asset purchase. Among the many contracts to be reviewed are:
- Employee Agreements, particularly officer, director, and executive employee agreements;
- Vendor and supplier contracts;
- Financing, mortgage, UCC collateral, and related documents;
- Bank and financial deposit account documents;
- Insurance policies;
- Real estate/office leases;
- Equipment rental agreements;
- General service agreements (e.g., coffee, vending, janitorial, etc.); and
- Professional service relationships, if desired (e.g., accountants, lawyers, etc.).
Essential-to-the-business contracts must be assignable or the buyer will not be able to obtain the benefit of the bargain. For example, if you are buying a retail sales business with that “sweet spot” location, failure to obtain assignment of the real estate lease will likely kill the deal. Each business has its own unique “essential” contract. Maybe it is a material supply agreement because some particular ingredient or raw material is essential to the product and maintaining market share. Maybe what is essential is some form of intellectual property. Or maybe what is essential is the contract with a key employee like the renowned chef of the restaurant you are buying.
Start With the Contract
Almost always, the contract itself makes some provision regarding assignment. So, you must start with the contracts to be assigned. Most commercial agreements are readily assignable, but many also require notice to be sent when the agreement is assigned.
Sometimes consent is required by the other contracting party. Such is often the case with leases, insurance, and financing documents.
If the contract is silent on notice or consent, then the seller/assignor need not consult the third-party signatory as long as there is no adverse effect on the duties or benefits to the third-party signatory. Even if no notice is required, prudence suggests a quick call to let the other party know.
You will need an experienced corporate lawyer to help with the contract review and assignment process.
Seller Must Affirmatively Assign the Contracts
As we discussed here, to make any assignment of a contract effective, there must be some step taken by the assignor — the seller — that gives over to the assignee — the buyer — the assignor’s title or ownership of the rights set forth in the various contracts. Practically speaking, two things are commonly done. First, there are generally provisions in the original sales contract providing that the seller will assign all necessary contracts. Then, as part of the closing or leading up to the closing, documents are signed by the seller assigning all the contacts that are being assigned as part of the sale/merger.
When Notice is Required, Done at Closing
When notice to a third-party signatory is required, generally, such is done at the closing of the sale or merger. Tenant notice letters are a good example. If you are buying a leasing business, generally residential and commercial real estate leases require notices to be sent to tenants. Even if no notice is required, as the buyer, you would want to send notices so the tenants know where to send rent payments. In any event, such notice letters are prepared before the closing and signed by the seller as part of the closing.
In general, it is best to give some forewarning to essential third-party contracting parties so that the written notice is a formality.
When Consent is Required, Done Prior to Closing
On the other hand, when consent of a third-party signatory is required, such must be done prior to the closing. As noted, failure to obtain consent often means the sale/merger will not consummate.
Contact San Diego Corporate Law
Whether you are doing a stock purchase or an asset purchase, you are going to need the help of an experienced and talented business lawyer like Michael J. Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has the experience to provide all the legal services needed for the sale/purchase of a business and for mergers and acquisitions. Due diligence is complex and requires dedicated legal assistance. Contact Mr. Leonard by email or by calling (858) 483-9200.