Change of control: Overview, definition and example
What is change of control?
Change of control refers to a situation where ownership or decision-making authority in a company shifts significantly. This could happen through a merger, acquisition, sale of a majority stake, or other events that transfer control to a new party. In contracts, a change of control clause sets out the rules and consequences if such a change occurs during the agreement's term.
Why is change of control important?
A change of control clause protects both parties in a contract. For the party receiving services, it ensures continuity and accountability if the provider’s ownership changes. For the company undergoing a change, it provides clarity on how existing contracts will be handled during transitions. Without this clause, a major change in ownership could disrupt business operations or lead to disputes.
Understanding change of control through an example
Suppose your company has a long-term supply contract with a manufacturing firm. The contract includes a change of control clause requiring the supplier to notify you if they are acquired by another company. If this happens, you have the option to review the new owner's capabilities and either continue the agreement or terminate the contract if you believe the new ownership affects the supplier’s ability to deliver as agreed.
An example of a change of control clause
Here’s how a change of control clause might appear in a contract:
“In the event of a change of control of either party, the affected party shall notify the other party in writing within 30 days. The non-affected party reserves the right to terminate this Agreement upon 60 days’ notice if the change of control materially affects the performance of this Agreement.”
Conclusion
A change of control clause helps safeguard the stability of a contract by addressing the potential risks of ownership changes. It ensures both parties are informed and can make adjustments if needed, maintaining trust and continuity in the business relationship. Including such a clause in your agreements can prevent surprises and protect your interests in times of transition.
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.