Change of control clause

Definition

A change of control clause entitles a party to act (commonly to terminate, renegotiate, or require consent) when the other party undergoes a defined shift in ownership or control, such as a takeover or merger. It protects against being bound to a counterparty now controlled by a competitor or a less creditworthy owner. The trigger and consequences must be precisely defined, as such clauses can significantly affect M&A transactions.

Example

When the supplier is acquired by a competitor, the customer invokes the change of control clause to terminate the framework agreement.

Why this is a business risk

A change of control clause can kill an M&A deal if it is not identified and addressed in due diligence: if enough key contracts contain exit rights triggered by acquisition, the deal may unravel at closing. Equally, a business without these clauses in its own supplier contracts may find itself locked into agreements with new counterparties whose priorities directly conflict with its own after an acquisition.

How to manage it

• Identify all change-of-control clauses in your supplier and customer contracts as part of any M&A due diligence.
• Define the trigger threshold precisely (e.g. acquisition of more than 50% of shares) to avoid disputes about application.
• Negotiate a notice and cure window so the affected party has time to seek consent rather than facing immediate termination.
• Keep the contract repository up to date so that, in a deal process, every relevant clause can be located quickly.