Assignment Provision

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Introduction

With the increasing trend of globalization in the business world, Israeli companies and investors are commonly entering into agreements with U.S.-based entities. One of the most frequently found clauses in U.S. commercial agreements is an anti-assignment provision that prevents either or both of the parties from assigning the agreement to a third party prior to receiving the consent of the non-assigning party. Many transactions will also require the due diligence review of a large number of U.S. commercial agreements that the target has entered into. The following post will provide an overview and general guidance on the proper analysis of anti-assignment clauses.

Silent Provision and Change of Control Provision

In the event that an agreement does not contain an anti-assignment provision, a contract is generally assignable without the consent of the non-assigning party. See Peterson v. District of Columbia Lottery and Charitable Games Control Board, 673 A.2d 664 (D.C. 1996) (“The right to assign is presumed, based upon principles of unhampered transferability of property rights and of business convenience.”) Exceptions include where the assignment affects the duties of the other party to the contract, where the contract is considered to be a personal contract and when the assignment violates public policy (i.e. tort liability).

On the other hand, many contracts contain provisions that not only prevent the assignment of the contract, but also state that a change of control of the target is deemed an assignment or the contract contains a separate clause requiring consent in the event of a change of control. This type of provision will often be triggered in transactions in which a buyer is acquiring the target company. A careful review of change of control clauses is thus especially imperative and often very fact specific to the deal at hand.

Deal Structures

One of the commonly used anti-assignment provisions reads as follows: “No party may assign any of its rights under this Agreement, by operation of law or otherwise, to a third party without the prior written consent of the non-assigning party.” In the situation where the target has entered into agreements that contain this clause, whether or not an assignment is considered to have taken place in the event of the acquisition of the target will largely depend on the specific deal structure of the transaction.

The commonly used deal structures are an asset acquisition, a stock acquisition and a merger.

  • Asset Acquisition: In an asset acquisition the buyer only acquires those assets and liabilities of a target that are specifically listed in the Asset Purchase Agreement. Any agreement that has an anti-assignment clause will be triggered in the event of an asset acquisition. Indeed, one of the disadvantages of structuring a corporate acquisition as an asset acquisition is that contracts that will be transferred must be assigned
  • Stock Acquisition: In a stock acquisition, a buyer acquires a target’s stock directly from the selling shareholders. After the closing of the Stock Purchase Agreement, the target will continue as it existed prior to the acquisition with respect to its ownership of asset and liabilities. Thus, in essence, the anti-assignment clause was never triggered in the first place. See Baxter Pharm. v. ESI Lederle, 1999 WL 160148 (Del. Ch. 1999).
  • Mergers: Mergers differ from both asset acquisitions and stock acquisitions in that a merger is considered a creature of law, and the specific type of merger that is used will have a direct impact on whether the anti-assignment clause is triggered
    1. A direct merger occurs when the target merges with and into the buyer, and the buyer continues as the surviving entity. In a similar fashion to an asset acquisition, this type of merger will trigger the anti-assignment clause
    2. A forward triangular merger occurs when the target merges with and into the buyer’s merger subsidiary, with the merger subsidiary surviving the merger. This type of merger will trigger the anti-assignment clause. See Tenneco Automotive Inc. v. El Paso Corporation, 2002 WL 45930 (Del. Ch. 2002) and Star Cellular Telephone Company, Inc. v. Baton Rouge CGSA, Inc., 19 Del.  J.  Corp. L. 875 (Del. Ch. 1993).
    3. A reverse triangular merger occurs when the buyer’s subsidiary merges with and into the target, with the target surviving as a wholly owned subsidiary of the buyer. In effect, the target continues to exist after the closing. The Delaware Chancery Court in Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, 2013 WL 655021 (Del. Ch. Feb. 22, 2013) held that the acquisition of a target in a reverse triangular merger did not violate an existing agreement of the target that prohibited assignments by operation of law. The court noted that generally, mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger. Thus there is a significant difference between a reverse triangular merger and both a direct merger and forward triangular merger, as in those cases the target was not the surviving company of the merger. Note, however, that the matter is not uniformly resolved. In SQL Solutions, Inc. v. Oracle Corp. (N.D. Cal. 1991), a United States District Court in the Northern District of California applied California law and federal IP principles to hold that a reverse triangular merger constitutes an assignment by operation of law.

Additional Considerations

Damages and Termination: Some courts have held that a contractual provision prohibiting assignment operates only to limit the parties’ right to assign the contract (for which the remedy would be damages for breach of a covenant not to assign) but the provision does not limit the power to actually assign the contract (which would invalidate the assignment), unless the contract explicitly states that a non-conforming assignment shall be “void” or “invalid.” See, e.g., Bel-Ray Co v. Chemrite (Pty.) Ltd., 181 F. 3d 435 (3d Cir. 1999).  It is also imperative to review the termination section of an agreement, as certain agreements contain a provision by which the non-assigning party has the right to terminate the agreement in the event of an assignment.

Conclusion

As described above, any review of U.S. commercial agreements is highly dependent on the structure of the deal and at times, the specific jurisdiction governing the agreement. With offices across the United States, and specifically in Delaware, New York, and California, all states with highly sophisticated and oft-invoked commercial laws, Greenberg Traurig is uniquely situated in a position to offer high value legal services to Israeli clients.

Some contracts feature what is called an ‘assignment’ clause, which has the effect of transferring a benefit to another party. In a similar way, Novation clauses transfer the obligations, rights and benefits of a contract to another party (who basically replaces the original party). Both clauses can have the effect of preventing, allowing, or making conditional, a transfer to another party.

It is important to remember that this article only touches on the assignment of a contract itself and not the assignment of intellectual property, which usually warrants its own separate contract. For assistance in drafting one of these clauses, it is advisable that you speak with a contract solicitor.

What does an assignment clause look like?

There are several ways in which an assignment or novation clause can be worded. The following are several examples:

  • The parties to the agreement may only assign this Agreement, wholly or partially, with the prior written consent of the other party; 
  • Neither party may assign its rights under this Agreement; or
  • This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and permitted assigns.

Keep in mind that the third example reflects the old legalese that used to be used to express an assignment clause and most probably won’t be used as often nowadays.

What is the purpose of an assignment or novation clause?

Generally, a contract will only include rights and obligations of two parties. Sometimes a 3rd party might become a beneficiary of the contract, though will be unable to enforce its rights. All other persons are excluded from the contract.

With an assignment, the benefits of the contract are transferred to another party. Along with the transfer of the benefits under the contract, there is also a transfer of the rights to enforce those benefits, such as the right to sue another party in the event that it does not fulfil its obligations under the contract.

Novation allows a new party to step into the shoes of the party transferring their interests and obligations under the contract. In effect, novation equates to an exchange of one party for another party.

An assignment or novation clause will clearly define the parameters of who is allowed to assign and the conditional basis on which this can take place.

When is an assignment or novation used?

When buying a business, it goes without saying that much of the value is in the quality of the existing customer base, as well as the quality of the contracts with suppliers. When selling a business, ideally you want to finalise any existing debts or contractual obligations. By ‘novating’ or transferring the contracts to a new party, the new party usually inherits these debts and obligations.

Sometimes, however, you might wish to deal with just one party, like when you start up a new business, or you hire a contractor for a period of time. In these circumstances, you would only want to restrict assignment.

If you are meeting a new party that might replace the original party to the contract (to build rapport), you will want to be certain that he or she has the skillset that you are looking for. In these situations, where confidential information is being disclosed, it is advisable that your contract lawyer restricts assignment.

It is worth noting that a novation/assignment clause might afford the right to transfer rights and obligations to one party and not to another. For example, suppliers might be granted the right, whereas clients might not.

What are the risks?

The greatest risk of not having your contract lawyer review, and possibly restrict, your novation/assignment clause is ending up in a contract with an unknown party. This party might have different values and abilities, which can negatively affect your business. This can lead to a stressful scenario where everyday business activities are being interrupted.

On the flipside, however, not having the ability to assign your contracts with customers or suppliers might decrease the overall attractiveness (and value) of your business to a prospective buyer.

Conclusion

If you have not spoken with a contract lawyer about novation or assignment clauses, now is the time. These clauses are important for transferring interests and obligations without any doubt as to the boundaries and limitations (if any) of this transfer of interests. Our team of contract lawyers are ready to provide efficient and affordable advice. For a fixed-fee quote, contact LegalVision on 1300 544 755.

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