Sample of Continuation Clause in the Event of Assignment or Sale
This article is written by Amritha Priya, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com.
Introduction
A contract is ideally beyond promise; contract generally means 'agreement which is enforceable by law'. Now what is an agreement? An agreement is 'a promise or a set of promises which forms consideration to each other'. In simpler words, a contract is a legal document which is enforceable by law, whereas a mere agreement shall not be enforceable. Under contract law, for a valid contract:
- There must be an agreement between two or more parties.
- Such an agreement must be made between parties who are competent to contract (sound mind, majority, not disqualified by law).
- There should be a lawful consideration and a lawful consent.
- Free consent of the parties.
- The agreement must not be the one, which has been expressly declared to be void.
Keeping that in mind, a contract is entered into because it regulates relationships between the parties by outlining their duties, responsibilities both during the continuance of contract and after the expiration of such contract. The contract is required because spoken words cannot be proved in case of further dispute, but if the same has been reduced to writing then it shall stand good in the eyes of law. It should be registered and a notarized one, thus every contract when registered shall have effect in the eyes of law.
In this paper I would discuss what is a boilerplate clause; what is change of control clause; why is it important and its benefits; disadvantages of not having such clause; sample of change of control clause; does change of control amount to assignment?; what all contracts can have such clause.
Boilerplate Clause
A boilerplate clause means standard, magical, miscellaneous or general clauses like: dispute resolution, entire agreement, change of control, counterpart, non-compete, non-disclosure, no representation, jurisdiction, waiver, severability, force majeure, indemnification, notice etc. They are also known as miscellaneous provisions of the contract. In Kapiilaben V Ashok Kumar Jayanthilal, the Supreme Court held that a development agreement for a housing scheme is not assignable even if there is no prohibition against assignment as it is based upon the certain personal understanding between the parties.
In All India Power Engineers Federations V Sasan Power ltd, the main issue was whether there was an amendment and waiver in the Power Purchase Agreement. As per the contract the requirement was 95% of the contracted capacity, but it was submitted that 17% of the contracted capacity was accepted and hence there was a waiver. This contention was approved by the lower court, however, the Supreme Court dismissed this view.
These clauses are important in a contract to decide the relationship between the parties. This is essential because such a relationship is not discussed elsewhere or in any other clause of the contract or any operative parts of the contract. They can normally be seen at the end of the contract. While drafting such clauses one must keep in mind if in case the same is avoided what would be the consequences and the room for discretion must be avoided, so such clauses become important.
Change of Control/ Assignment Clause
Change of control means, in a contract if the existing party wishes to retire and a new party wishes to acquire the position of the existing party; then the existing parties' power in such contract would be transferred to the acquiring party. Let's understand this with an example: Mr. A has contracted with Mr. B the landowner of plot X. Plot X is used for commercial purposes, Mr. A has agreed to set up the business. Thereafter Mr. A assign's his right of business to Mr. C, this assignment is valid if there is no assignment clause; in case there was an assignment clause then this transaction would become valid.
This clause defines to what extent the parties can exercise their power with regard to the assignment. Whether the party has the right to assign, sublet, subcontract, transfer, lease, mortgage etc. Few aspects are negotiated between the parties; certain flexibility can be seen in such clauses. Where the party shall or may have right to sublet or subcontract but with prior permission of the owner/ corporate body etc. This clause also sets out that, in the event of disobedience an Anti-circumvention clause is available, if the party does not comply with the required measures, then the entire contract shall be terminated.
How does Change of Control Clause Operate
1) Transfer of company stock percentage. This often involves a specific percentage being issued and any outstanding shares being transferred from the main company to the new acquirer. This often goes over 50% but can be higher or lower.
2) Sale of majority of, or all, assets. Change of control can also include the sale of all, or most of the target company assets. Generally, a sale transaction becomes at risk of going under a change of control when the asset sales are at least 50% of the company total assets.
3) In the event of Mergers, the change of control clause is important. When a company merges with another company, it doesn't matter if the target company ends up buying surviving the merger or not.
4) This clause is also looked into mostly during consolidation, reorganisation, or other transactions where more than half of the board members change. If there is any change in shareholders who are allowed to elect more than half of the board, or events and standards are drawn from certain security regulations or tax code provisions.
5) Sometimes there are transactions which occur where the new acquirer of rights, stocks or assets is an affiliate of the company and they might be excluded from the change of control. This exclusion can be given so that the target companies who have complex ownership cam move their assets or rights.
Advantages of having such Clause
- The advantage of having such a clause is that it would avoid future mishaps.
- As the relationship of the parties is pre-decided and there is no room for discretion.
- The parties shall be bound by all clauses of the agreement
- This clause specifically puts a check over other party power. The disadvantage of not having such a clause is that the agreement would be vague and not clear as to the power of the parties and lead to confusion.
- Any action of the party towards the contract will be legal as the agreement waived off, so this clause is important.
When will Change of Control Clause become Important
When either party decides to retire and transfer their rights to a third party or when the existing party decides to enter into partnership with the third party or when the existing party decides to sub contract with the third party, such decisions would affect the management of the contract then this clause becomes important. In case of mergers, trade sale, joint ventures, acquisitions, employment agreement, change of partnership etc.
Contracts must have Change of Control Clause
It is advisable that every commercial contract must have a change of control clause to avoid future commercial mishaps. Yet another reason to have this clause is that it limits the power of the contracting party. Few examples where such a clause can be used is: employment agreement; M&A agreement; partnership agreement; lease (commercial property); lease license agreement; event management; all other commercial contracts can have this clause.
Sample Drafts
I will share few samples of the clause here below:
- That the Lessee shall not sub-let or under-let the schedule property or any part thereof to any third parties without the written consent of the Lessors.
- Licensee shall not assign, transfer, sub-contract, the right's and obligations incurred to him under this agreement, without prior written consent of the licensor. A change in control shall be deemed to be an assignment for the purpose of law. In event thereof, the licensor shall be bound to terminate the assignment and the contract with the licensee.
- Change of control clause can also be drafted where the company wishes to sell 50% of its assets to a third party, and then there is change of management of the company. Here the approval of the members becomes important. So, drafting one will be important.
- Also defining what is change of control in the definition clause is necessary.
Conclusion
While drafting any agreement it is to be kept in mind that such clause/ boilerplate clauses must not be waived of. They may not be the primary clauses but shall define the relationship between the parties.
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Source: https://blog.ipleaders.in/change-control-clause-contracts-agreements/
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