Assigning and Acquiring Contracts in M&A Deals: General Rule and Exceptions to Assignability; Deal Structure Impact

Description

When conducting due diligence as a part of a business acquisition, the buyer's counsel must evaluate the target company's existing commercial contracts and determine which of them are eligible for assignment from the target company to the buyer.

As a general rule, contracts are freely assignable. However, there are exceptions including: some intellectual property licenses are not assignable without the licensor's express consent; agreements for personal services may not be assigned; and contract assignment may be prohibited by statute, public policy, or contractual anti-assignment clauses.

The structure of an M&A deal impacts the ease or difficulty of contract assignment. In an asset purchase, if the contract that the buyer seeks to acquire contains an anti-assignment clause, the counterparty to the target's contract must consent before the assignment can be completed, which can result in an attempt by the counterparty to renegotiate the terms of the contract with the buyer and ultimately delay or harm the deal. A counterparty's consent to contract assignment is not required with a stock purchase or merger. However, the buyer should beware of acquiring contracts with "change of control" provisions as a part of a stock purchase or merger because these contracts may terminate upon a change in ownership of the target company.

Listen as our authoritative panel discusses considerations and best practices for deal counsel when navigating the assignment of contracts in the context of an M&A deal.