Rajah Lehal

Legal Tips and Tricks: Prepping Your Contracts for Acquisition

October 28, 2015

A critical part of a company acquisition is ensuring that the transaction is not missing any of the consents required of the contractual counterparties. Deficiencies in some or all of these points can lead to the loss of key assets or to an uncomfortable transition for all concerned.

All counterparties should make sure they consider the four scenarios that are set out below.

  1. Employment: earn out/”golden handshake”

Acquirers should consider the effect of a change of control transaction on employment agreements. Upper management will sometimes build in a “golden handshake” or “golden parachute” clause into their employment contract that requires that, if the contract is terminated shortly after a change of control, salary and benefits will continue for an additional 1 or 2 years. Contracts containing this clause should be considered by the acquirer as it could affect the acquisition value of a transaction.

  1. Employee stock options: accelerated vesting/terminated vesting

Employees whose shares are vesting should read the terms of their option agreement carefully to determine the effect of a change of control transaction. The shares could accelerate into immediate vesting in a generous agreement. Some option agreements will provide for immediate vesting should the employee be terminated within a few months of a change of control, to provide the option-holder with some comfort that their position will not be made redundant and to keep the share capitalization clean. Conversely, in other cases, where such protections do not exist, the existence of potential vesting can be a consideration on which employees are to be made “redundant” – if it means a cleaner acquisition with fewer shareholders or potential shareholders. Employees who are vested should consider exercising options if they believe that the company is appreciating in value and if they are facing the possibility of losing their options upon termination of their employment agreement.

  1. Leases

Lessors of equipment or office space will almost always require that the vendor in an acquisition seek written consent from the lessor prior to assignment of the lease to the acquiring party. Failure to receive consent can be dealt with by an automatic acceleration of the payments required (for example under office equipment). An office lessor can “deem” that a change of control is to be treated as a request for sub-letter, which, in an especially onerous agreement, could give the lessor the right to repossess the unit for its own purposes. A lessor should agree that a lease can be assigned with written consent, “such consent not to be unreasonably withheld”.

  1. Ownership/transfer of personal information

All counterparties should carefully review the company privacy policy to ensure that site visitor/subscriber/customer names and accounts are assignable to the acquiring entity, upon change of control. A savvy company will ensure that this right of transfer has been included in the Privacy Policy, website terms of use or customer terms of service. It is prudent to ask for all past and present versions of any existing privacy policy/user agreements, as the agreement that customers/users/subscribers are subject to is presumably the agreement that was current at the time of (in the case of a customer) initial sign-up.

Long Form
Privacy Policy
Mergers and Acquisition
Option Agreement

Written by Rajah. Rajah Lehal is Founder and CEO of Clausehound.com. Rajah is a legal technologist and technology lawyer who is, together with the Clausehound team, capturing and sharing lawyer expertise, building deal negotiation libraries, teaching negotiation in classrooms, and automating negotiation with software.