When a purchaser acquires a business, assuming the contracts of that business is a major component of the transaction. A wide variety of contracts are utilized in a business to govern relationships and business transactions, including employment, contractor, service provider, customer, licensing and real estate contracts. Below is a review of key legal and practical considerations in assigning contracts in an acquisition.
In general, the rights in any contract are freely transferable from one entity to another. However, there are a few notable exceptions to this rule. Where the assignment substantially alters the performance due or risks to the party under the contract, the courts may not enforce an assignment. In other cases legislation, such as laws barring assignment of certain claims against the government, and public policy violations, such as prohibitions against assigning personal injury claims, limit the assignability of a contract. In addition, contracts that are tailored to a specific individual or personal in nature cannot be freely assigned.
The most common exception to the general rule of assignability is the existence of an anti-assignment provision in a contract. Contracts that embody an express interest to maintain an agreement with a specific counterparty will contain a standard anti-assignment clause. Buyers of a business should be diligent in identifying such clauses, as the buyer’s ability to acquire a specific contract or obtain consent may be highly relevant to the completion of the transaction.
An asset acquisition requires a detailed review of each individual contract and a specific assignment of each contract. In cases where the contract forbids assignment, the specific language of the anti-assignment provision is critical in determining whether contract assignment can occur. A standard clause provides that prior consent of the counterparty is required to assign the contract. A contract that specifies that the agreement may not be assigned “without the written consent of X, which cannot be unreasonably withheld” may suggest that the parties intended for the contract to be assigned with minimal obstacles and may be instrumental in obtaining consent. Alternatively, an anti-assignment provision may state that consent is not required in conjunction with an asset transfer of all or substantially all the assets of the business.
Purchasing an existing business can be a complex undertaking that requires professional expertise. DeAnn Flores Chase and her team of experienced attorneys have extensive familiarity with advising business purchasers with every aspect of such transactions. Call the Chase Law Group, P.C. at (310) 545-7700 or visit www.chaselawmb.com to schedule a consultation.