Mark Pestronk
Q: A prospective buyer of my agency wants to buy my corporation's assets and not its corporate stock. I understand that most acquisitions are asset purchases, but I have a few questions about my agency's contracts with third parties. Would our contracts with corporate accounts, independent contractors, GDS vendors, cruise lines and landlords automatically go to the buyer, and if not, what should we do about them? Do we need to do anything before closing? If so, what could happen if we don't do it?
A: Unless a contract expressly provides that you have the right to transfer it to a buyer without the other contracting party's consent, the contract will not automatically transfer. In many cases, such contracts state that if you try to transfer it anyway, you breach the contract, entitling the other party to terminate it.
In legal jargon, a seller's transfer of a contract is called an "assignment," and the buyer's takeover of the contract is called an "assumption." Lawyers say that that seller "assigns the contract" and the buyer "assumes it."
When it comes to assignments, there are four kinds of contracts: (1) those that do not mention anything about assignments; (2) those that flatly prohibit them; (3) those that prohibit them unless the other party agrees to the assignment; and (4) those that permit assignment. Your agency may have all four kinds, so you need to figure out what to do about each one.
How and when you deal with each contract really depends on its importance to your agency, the other party's bargaining power, your buyer's wishes and the time left before closing on the acquisition. Let's take a few examples:
Your agency's corporate account contracts probably fall into one of the first three categories above. Whether you should ask the account for permission to assign the contract (as opposed to merely informing the account after the acquisition has occurred) is really a judgment call depending on its importance, the likely reaction to a request for permission and how long you think approval will take. However, in my experience, sellers do not usually bother asking for permission before closing.
In contrast, your agency's office lease undoubtedly prohibits assignment of the lease or subletting without the landlord's consent, and landlords sometimes invoke the clause in order to get a rent raise or longer lease, especially if the landlord can claim that you breached the lease by closing without its permission. If that might occur, it would be prudent to get the landlord's consent before closing, especially in a tight real estate market.
For the future, it is probably a good idea to try to add a no-approval-required clause to all contracts that your agency drafts or reviews, such as independent contractor, employment or corporate account contracts. Such a clause might start out with a general prohibition, and then add an exception for acquisitions, as follows:
"This Agreement may not be assigned or transferred by either party without the prior written consent of the other party. Notwithstanding the foregoing, Agency may assign its rights and obligations under this Agreement in connection with any merger or sale of all or substantially all of its assets or equity; provided, that the assignee agrees to be bound by the terms and conditions of this Agreement."