Contract law / Avtalsrätt
Thursday Terminology - Change of Control
A key term in many long-term agreements is a so called change of control - and with it comes significant consequenses. So make sure to know what it is and to look out for it when signing agreements or buying a company.
What is it? Basically, a change of control is a clause in an agreement that states that, if either or one of the parties to the agreement has a shift in its ownership that leads to the control of that party being transferred - i.e. somebody else is in control of it - then this will trigger certain stipulated rights, obligations or have other types of effects.
What do they entail?
A typical - and very important - version of a change of control is when a contract states that if one party gets a new owner then the other party may terminate the agreement and walk away. In a case where you buy a company, such key agreements with customers and suppliers may be a central asset or a crucial parts of a functioning operation. So a loss of it might impair the business to the extent that it would not be an attractive buy anymore, or at least not to the offered price.
Another example of a change of control could be a right to re-negotiate the price, to have other payment terms (i.e. from 60 days payment to up-front payment) etc.
What approach should you take?
What to do? Well if you can, avoid entering into change of control obligations yourself, and if your counterparty is a less solid player backed by a more solid player? Ensure to have a change of control on them.
If you are looking to buy a company with important contract make sure to do a proper due diligence so you find out before singing the share purchase agreement (typically the event that triggers the change of control). Make sure to negotiate with any party before you sign the share purchase contract as to handle the risk of the change of control being triggered.
How to design a change of control?
Also, think the definition of a change of control clause through. A straightforward defintion would be if;
a new shareholder acquires more than 50% of the shares (focusing on voting rights in case there are more than one share class),
a new party getting the right to appoint more than 50 % of the board of directors, or
a new party getting the right to appoint 50 % of the board and its chairman.
Stockholm, 2023-11-30 Author: Katarina Strandberg
What is it? Basically, a change of control is a clause in an agreement that states that, if either or one of the parties to the agreement has a shift in its ownership that leads to the control of that party being transferred - i.e. somebody else is in control of it - then this will trigger certain stipulated rights, obligations or have other types of effects.
What do they entail?
A typical - and very important - version of a change of control is when a contract states that if one party gets a new owner then the other party may terminate the agreement and walk away. In a case where you buy a company, such key agreements with customers and suppliers may be a central asset or a crucial parts of a functioning operation. So a loss of it might impair the business to the extent that it would not be an attractive buy anymore, or at least not to the offered price.
Another example of a change of control could be a right to re-negotiate the price, to have other payment terms (i.e. from 60 days payment to up-front payment) etc.
What approach should you take?
What to do? Well if you can, avoid entering into change of control obligations yourself, and if your counterparty is a less solid player backed by a more solid player? Ensure to have a change of control on them.
If you are looking to buy a company with important contract make sure to do a proper due diligence so you find out before singing the share purchase agreement (typically the event that triggers the change of control). Make sure to negotiate with any party before you sign the share purchase contract as to handle the risk of the change of control being triggered.
How to design a change of control?
Also, think the definition of a change of control clause through. A straightforward defintion would be if;
a new shareholder acquires more than 50% of the shares (focusing on voting rights in case there are more than one share class),
a new party getting the right to appoint more than 50 % of the board of directors, or
a new party getting the right to appoint 50 % of the board and its chairman.
Stockholm, 2023-11-30 Author: Katarina Strandberg