Change in control of the company: Overview, definition, and example
What is a change in control of the company?
A change in control of the company refers to a situation where the ownership or control of a company is transferred to a new party. This change typically occurs through the acquisition of a majority of the company’s shares, a merger with another entity, or a sale of the company’s assets. A change in control can significantly alter the direction, operations, and management of the company, affecting stakeholders, employees, and business strategy.
For example, a large corporation might acquire a smaller competitor, thereby gaining control over the company and its operations. In such cases, the acquiring company gains the right to make key decisions for the company, including appointing executives or altering business strategies.
Why is a change in control of the company important?
A change in control of the company is important because it can trigger various legal, financial, and operational consequences. For shareholders, it may affect the value of their investment or their ability to influence the company’s direction. For employees, it can lead to changes in management, company culture, and job security. For creditors or investors, a change in control might impact the company’s creditworthiness or its ability to meet existing obligations.
In many cases, contracts and agreements (such as loan agreements, shareholder agreements, or executive employment contracts) include clauses that define what constitutes a change in control and outline the consequences or actions to be taken if such a change occurs, such as triggering a buyout or accelerating the repayment of debts.
Understanding change in control of the company through an example
Let’s say a technology startup has a majority shareholder who controls the company. If another company purchases more than 50% of the shares, taking control of the company, this would be considered a change in control. The new owner might then decide to restructure the company, bring in new leadership, or alter its strategy. In some cases, this might trigger a change in the terms of existing contracts or agreements, such as severance packages for executives or a requirement to repay certain debts.
In another example, a private equity firm could acquire control of a publicly traded company. This acquisition could lead to changes in the company’s corporate governance, strategy, and financial structure, affecting not only the shareholders but also the company’s employees and business operations.
An example of a change in control clause
Here’s how a clause like this might appear in a contract:
“In the event of a change in control of the Company, as defined herein, the Purchaser shall have the right to terminate this Agreement without penalty. For the purposes of this Agreement, a change in control is defined as the acquisition of more than 50% of the Company’s shares by a third party or a merger resulting in a substantial change in the Company’s management or structure.”
Conclusion
A change in control of the company can have significant effects on its operations, governance, and business strategy. For shareholders, employees, and other stakeholders, it’s important to understand what constitutes a change in control and the potential consequences. By including specific provisions in contracts, companies can manage the risks and outcomes associated with such changes, ensuring that all parties are clear on their rights and responsibilities in the event of an acquisition, merger, or other ownership shifts.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.