In the free eBook published earlier today (click here to go to the download page), we discuss ‘assignment’ clauses: a type of miscellaneous clause (or ‘boilerplate’) that prohibits the ‘sale and transfer’ or, more correctly, ‘sale and assignment’ of an agreement. This blog post is a paragraph of the eBook.
Many contracts will provide for a prohibition to assign the rights and obligations under the agreement. Normally, each party should be able to negotiate that the approval of the other party to an assignment will not be unreasonably withheld or delayed:
Assignment. No Party shall assign its rights or obligations under this Agreement in whole or in part, without the prior written approval of the other Party, which approval shall not be unreasonably withheld, conditioned or delayed.
In many cases, the parties would like to make an extra carve-out for intra-group restructurings of activities or the performance under the contract by an affiliate, whether for tax or other geographical reasons. This would be the typical example for the applicability of shall not be unreasonably withheld. However, contracting parties may seek more certainty. Uncertainty becomes particularly problematic when a party prepares a divestment of the business. Obviously, when the new investor in such business is a competitor of the customer, the latter’s refusal to unconditionally approve assignment is reasonable. In other cases, the parties want to be free to assign the agreement (i.e. the rights and related obligations) as part of a sale of the entire business to which such agreement relates. The uncertainty may be covered by a specific exception:
…, except that Seller may assign its rights and obligations under this Agreement in connection with a sale of all or a substantial part of its business to which such rights and obligations pertain.
The more complete version will also require a re-assignment in case of divestment of the Affiliated Company and have an additional provision:
Seller shall procure that an assignee Affiliate assigns back the assigned rights and obligations, immediately prior to such assignee ceasing to be an Affiliate of it.
The exception and related assign-back provision can, of course, accommodate both parties. Note, however, that there is a greater logic that a purchaser does not want to source from its competitors or from suppliers with a questionable background (e.g. suppliers obtaining products manufactured by children or in an environment-polluting way) than vice versa. Child labour or pollution of the environment are matters that a company would typically want to control upwards the product chain and not down.
In case of private equity and other leveraged transactions, the purchaser may need to be able to assign its rights (and obligations) freely under the share purchase agreement, in order to be able to obtain financing more easily. In such case, the seller would keep some control over the financing parts of the transaction by a restrictive assignment clause. The caveat that assignment shall not unreasonably be withheld or conditioned will give the seller at least the opportunity to review the financing obligations and analyse the potential consequences of an assignment of the rights (and obligations) under the share purchase agreement to the banks and other lenders involved. A relaxed assignment clause facilitating the purchaser would be as follows:
Assignment. No Party may assign or transfer any of its rights or obligations under this Agreement without the prior written approval of the other Party, except that:
- each Party may assign any of its rights under this Agreement to its Affiliates; and
- Purchaser may assign any of its rights under this Agreement to any of its lenders or to any person acquiring all or substantially all of the rights or assets of Target after the Completion Date,
provided, however, that no such assignment shall relieve an assigning Party of its obligations under this Agreement. For the avoidance of doubt, Purchaser may grant security interests in its rights under this Agreement to its lenders.
Please note that an assignment clause does not relieve the parties to an assignment from fulfilling the requirements of the applicable law to such assigned rights and obligations. In order to give an assignment of rights its full effect (i.e. enforceability against the debtor and an obligation on the debtor to perform vis-à-vis the assignee only) most jurisdictions require a (written) assignment notice to the debtor. An assignment of obligations would usually be subject to the consent of the debtor although under English law a distinction is drawn between novation and the assignment of a contract; whereby the latter does not require consent although will only be effective so as to assign the ‘benefit’ and not the ‘burden’ of the contract.
 See Common Frame of Reference Section III.5.1 (Art. III. – 5:104 ff.) and compare the U.N. Convention on the Assignment of Receivables in International Trade (12 December 2004).