A contract review early can prevent expensive surprises later
One little contract clause can kill your deal, lease, or credit line, overnight.
Most business owners know they can’t assign a major contract without consent. But sophisticated operators routinely overlook that many contracts go further: they state that a "Change of Control" is deemed an assignment.
If you close a financing round, merge, or sell your company without prior consent, failure is a breach that can’t be fixed. This gives the counterparty the right to terminate immediately.
What does "Change of Control" mean?
The classic trigger is acquiring >50% shares or voting power. However, many agreements—including commercial leases, lines of credit, or asset-based loans—use broader language.
A common formulation says a Change of Control occurs when a third party “acquires the ability to control the management, policies, or affairs” of the business.
Consequently, an investor’s purchase of only 25% could be a “Change of Control” if they gain the right to appoint a majority of the board or veto rights over key decisions.
The counterparty gains leverage to terminate a favorable agreement. This leads to a brutal choice:
1️⃣ Forfeit a valuable location and incur revenue loss or massive replacement costs, or
2️⃣Agree to "market rate" hikes in rent or other costs, or, for client agreements, major discounts or other very customer-friendly demands.
Worse, a lender may simply require all monies to be paid back immediately. When a counterparty has a termination right, you are a target for renegotiation. Or worse.
Who should care?
• Owners: Know what is in your contracts before financing or sale. Small differences in words can mean big differences in outcomes depending on state laws.
• Investors: Even if your investment doesn't trigger an issue today, these clauses can block a future exit.
• Acquirers: Acquisitions almost always trigger Change of Control provisions.
Do not wait for a term sheet to audit your contracts. Work with a lawyer to review high-value agreements early.
For investors and acquirers: a contract review is the highest-ROI diligence step you can take. The cost of finding issues is a fraction of a termination notice once the deal has closed.
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Disclaimer: This article constitutes attorney advertising. Prior results do not guarantee a similar outcome. MGLS publishes this article for information purposes only. Nothing within is intended as legal advice.