In Mergers and Acquisitions (M&A), one contractual term plays a particularly important role in protecting the interests of stakeholders: the Change of Control Clause. This clause is commonly found in commercial contracts, loan agreements, employment contracts, and supply agreements. It outlines specific rights or obligations that are triggered if a company undergoes a significant change in ownership or control—typically through a merger, acquisition, or sale of a controlling interest.
What Is a Change of Control Clause?
At its core, a Change of Control Clause provides a mechanism for counterparties to react if the entity they originally contracted with is no longer the same due to a shift in control. The clause often allows parties to terminate, renegotiate, or demand accelerated performance of a contract if control changes hands.
For example, a supplier might include a Change of Control Clause in its contract with a retailer. If the retailer is later acquired by a competitor, the supplier may not want to continue the relationship under new ownership. The clause would give them a legal pathway to exit the agreement.
Why It Matters in M&A
In M&A transactions, identifying Change of Control Clauses is a critical part of due diligence. Buyers need to know which contracts might be at risk of termination or modification post-acquisition. A deal that appears profitable on the surface could be undermined if major customers or partners have the ability to walk away due to a change in ownership.
This is especially important in industries like telecommunications, defense, or software, where long-term contracts with governments or key clients are central to business value.
Notable Examples
Several high-profile transactions have highlighted the impact of these clauses:
- Time Warner and AT&T (2018): When AT&T sought to acquire Time Warner for $85 billion, several of Time Warner’s contracts with media providers and distributors contained Change of Control Clauses. These contracts had to be carefully reviewed and in some cases, renegotiated to ensure continuity of business post-acquisition.
- Sprint and T-Mobile Merger (2020): This telecom merger triggered numerous Change of Control Clauses in existing customer and vendor contracts. The companies had to manage these risks through strategic communication and by offering incentives to key partners.
- Oracle’s Acquisition of PeopleSoft (2005): During this hostile takeover, PeopleSoft had embedded a “poison pill” strategy in the form of a Change of Control Clause in employee contracts, which allowed generous severance payouts. This added complexity and increased the cost of the acquisition.
Conclusion
The Change of Control Clause is a small piece of legal language with a big impact. It functions as a safeguard for counterparties, ensuring they aren’t forced into relationships with new owners they didn’t agree to work with. For students and future practitioners in business, law, or finance, understanding this clause is essential. In M&A, it can be a deal-breaker—or a deal-saver.