What is the impact of an acquisition on my existing contract?
Often once the deal is done you can’t see the lawyers for dust, so if you receive notice from a supplier or customer that they have been acquired, or if you have been acquired yourself, what do you need to do to keep your current contracts in order?
Well it does depend upon the exact nature of the deal that was done, but thankfully there are really only 2 choices. The purchase was either of the company shares or the company assets. The easiest way to understand the difference is to imagine a tin of biscuits…
The tin represents the company (e.g.: John Smith Limited) and the biscuits represent the assets (e.g.: property, employees, customer contracts, debtors etc.) An acquisition of company shares is like buying the whole tin of biscuits – the buyer gets the tin and all of the biscuits that are inside, whether he likes them or not. An acquisition of shares is often described as an “acquisition of the entire issued share capital of the company”. Contrast that with a purchase of assets, where the buyer can pick and choose which of the biscuits inside the tin are bought – he will get the specific biscuits that have been bought but not the other biscuits and not the tin. A purchase of assets is often described as “an asset purchase” or the “purchase of a business as a going concern”.
Where the transaction that you are concerned with was a share purchase then, whether you are the target that was acquired or the supplier or customer of the target you don’t really have to do anything with your contract in order for business to continue as usual. Your contract is effectively one of the biscuits in the tin, and nothing that has happened outside the tin will impact your contract. Of course you might not want to continue with the contract, and whether you have the option not to is the subject of another post.
Where the transaction that you are concerned with was an asset purchase then you will have to take action if you want the contract to continue as usual. In essence, your contract is one of the biscuits in the tin, and you will need to know whether or not it has been bought. If you are a customer (and to a more limited extent a supplier), if your contract has been bought then it will effectively have been “assigned” by the seller to the buyer pending a formal transfer that will require your consent.
That transfer will usually take the form of a “Novation” – effectively a contract signed by the seller, the buyer and the third party customer or supplier agreeing that the buyer will take the place of the seller under the contract. Until such time as the transfer or novation is signed the buyer and seller will usually have agreed to act as between themselves as if the transfer had happened; the buyer will perform the obligations under the contract and the seller will forward any payments or other benefits received to the buyer.
For my next blog I will be discussing – The only exception to this is if the contract itself has clauses that allow some changes on a “change of control”. So as a customer you might have a clause that allows you to terminate on change of control of the supplier. This right would be triggered by a share purchase.