Lawyers must check whether key actors in the supply chain such as employees, suppliers, distributors and customers have change of control clauses in their contracts. If such actors are able to terminate their contract with the company in the event of a takeover, this may reduce the buyer’s ability to operate effectively post-acquisition. If such clauses exist, purchasers must assess whether these actors are key to the success of the business and consider whether these actors may attempt to leverage a new owner’s dependency on their offerings to secure more favourable contractual terms or simply refuse to uphold existing contracts in any form.
If this is likely to be the case, purchasers (or their lawyers) could consider whether viable alternatives exist that may reduce the bargaining power of existing actors, or whether negotiations with these actors should take place before a purchaser commits to an acquisition.
- Change Of Control Clause / Break Clause: such clauses can enable parties that are contracted to work with a company to terminate the contract without incurring any liability for breach of contract if control of the company changes hands.
Lawyers may consider devising ways in which to incentivise those involved with the company to remain so, for instance through offering existing actors in the supply chain long-term contracts, or providing key employees with share options, pay rises, or guarantees relating to the security of their employment. This is advice typically given by lawyers in the Employment (or Benefits) departments of law firms.
Buyers may also require sellers to sign non-solicit clauses to mitigate the risk of sellers luring certain key contributors (e.g. employees or suppliers) away from the company post-acquisition.
- Non-Solicit Clause: A contractual promise from a seller to a buyer not to approach and attempt to poach, for instance, certain key employees, suppliers, distributors or customers of the newly purchased company for a given time period or in a particular jurisdiction.
By Jake Schogger - City Career Series