Aimee B. Davis Law P.C.

What to Do if Consent Can't be Obtained

{4 minutes to read} 

If we learned something from the #Metoo movement, I hope it includes that what constitutes informed consent is complicated.

There is a different (yet also complicated) consent right that is governed by corporate law, which is:

Consent to assign a contract to a third party.

Generally, contracts are freely assignable, unless they contain express restrictions. For good reasons, some types of contracts cannot be assigned, even without written restrictions.

There are also various legal restrictions to understand and to be on the “look-out” for, including:

Image of business people hands working with papers at meeting
  • Prohibitions and other limitations on an assignment of, and subletting a contract;
  • Termination and other restrictions upon a sale or “change of control” (which is often undefined) of one or both of the parties; and
  • Notice provisions: Some contracts require notice to be delivered before the closing, creating strategic, and/or operational issues for the parties to M&A transactions.

Determining whether a contract contains restrictions on transfer, and understanding the nature of such restrictions, is paramount in conducting legal due diligence in M&A transactions. It involves:

  • A thorough, efficient and skilled review of the material agreements relating to the target’s business;
  • A precise understanding of where to look for — and the meaning of — all relevant provisions (FYI — in commercial leases, assignment and subletting clauses typically go on for three to five pages); and
  • The ability to accurately summarize the terms in a written due diligence memorandum.

When I began conducting these reviews, I didn’t naturally think to take note of words related to WHEN notice must be given. Lesson learned after some late nights taking a second look at the same contracts to determine what the notice requirements were all about.

The importance of a high degree of accuracy, organization, and consistency in the presentation of this information cannot be overstated.

In transactions with a sizable number of contracts, I recommend detailed legal due diligence reviews be conducted by both the Seller and Buyer sides. For Sellers, it’s useful for preparing disclosure schedules that will be required by the Buyer to be attached to the purchase agreement. For Buyers, it helps clients understand what legal contractual obligations are being undertaken after the closing.

But, what to do if consent from a third party to a material contract cannot (or is unlikely to) be obtained?

If an important contract cannot be assigned (and the parties know that in advance), the deal can be structured as a stock purchase, instead of an asset sale. This option is limited if any change of control provisions exist.

There is another legal contractual “fix” that may enable parties to close before consent has been obtained.

Seller and Buyer may enter into a “services arrangement,” whereby Seller agrees to provide the “benefit of its bargain” under the unassignable contract(s), so long as Buyer continues to provide services and/or products to Seller’s client(s) in accordance with the terms of such contract(s) until consent from Seller’s client(s) to the assignment to Buyer is obtained.

These service agreements won’t work for every deal because they tie Seller to Buyer indefinitely. Also, understanding the “pass-through” nature of obligations under these arrangements is complex, but this may be a viable option to consider in certain cases.

Aimee B. Davis Law P.C. is committed to advising its clients and resolving issues relating to the legal and business matters that are important to them. If you have any questions, please feel free to contact us at (917) 617-2243 or email aimee@aimeebdavis.com.

Aimee B. Davis Law P.C.

917-617-2243
122 Ashland Place
Brooklyn, NY 11201

78 comments

    1. Shelley, thank you for being a constant source of inspiration for me this past year, and thank you for taking the time to read and comment. Providing solutions is what I am here to do!

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