assignment by operation of law stock purchase

Spotting issues with assignment clauses in M&A Due Diligence

Written by: Kira Systems

January 19, 2016

6 minute read

Although not nearly as complex as change of control provisions , assignment provisions may still present a challenge in due diligence projects. We hope this blog post will help you navigate the ambiguities of assignment clauses with greater ease by explaining some of the common variations. (And, if you like it, please check out our full guide on Reviewing Change of Control and Assignment Provisions in Due Diligence. )

What is an Assignment Clause?

First, the basics:

Anti-assignment clauses are common because without them, generally, contracts are freely assignable. (The exceptions are (i) contracts that are subject to statutes or public policies prohibiting their assignment, such as intellectual property contracts, or (ii) contracts where an assignment without consent would cause material and adverse consequences to non-assigning counterparties, such as employment agreements and consulting agreements.) For all other contracts, parties may want an anti-assignment clause that allows them the opportunity to review and understand the impact of an assignment (or change of control) before deciding whether to continue or terminate the relationship.

In the mergers and acquisitions context, an assignment of a contract from a target company entity to the relevant acquirer entity is needed whenever a contract has to be placed in the name of an entity other than the existing target company entity after consummation of a transaction. This is why reviewing contracts for assignment clauses is so critical.

A simple anti-assignment provision provides that a party may not assign the agreement without the consent of the other party. Assignment provisions may also provide specific exclusions or inclusions to a counterparty’s right to consent to the assignment of a contract. Below are five common occurrences in which assignment provisions may provide exclusions or inclusions.

Common Exclusions and Inclusions

Exclusion for change of control transactions.

In negotiating an anti-assignment clause, a company would typically seek the exclusion of assignments undertaken in connection with change of control transactions, including mergers and sales of all or substantially all of the assets of the company. This allows a company to undertake a strategic transaction without worry. If an anti-assignment clause doesn’t exclude change of control transactions, a counterparty might materially affect a strategic transaction through delay and/or refusal of consent. Because there are many types of change of control transactions, there is no standard language for these. An example might be:

In the event of the sale or transfer by [Party B] of all or substantially all of its assets related to this Agreement to an Affiliate or to a third party, whether by sale, merger, or change of control, [Party B] would have the right to assign any or all rights and obligations contained herein and the Agreement to such Affiliate or third party without the consent of [Party A] and the Agreement shall be binding upon such acquirer and would remain in full force and effect, at least until the expiration of the then current Term.

Exclusion for Affiliate Transactions

A typical exclusion is one that allows a target company to assign a contract to an affiliate without needing the consent of the contract counterparty. This is much like an exclusion with respect to change of control, since in affiliate transfers or assignments, the ultimate actors and responsible parties under the contract remain essentially the same even though the nominal parties may change. For example:

Either party may assign its rights under this Agreement, including its right to receive payments hereunder, to a subsidiary, affiliate or any financial institution, but in such case the assigning party shall remain liable to the other party for the assigning party’s obligations hereunder. All or any portion of the rights and obligations of [Party A] under this Agreement may be transferred by [Party A] to any of its Affiliates without the consent of [Party B].

Assignment by Operation of Law

Assignments by operation of law typically occur in the context of transfers of rights and obligations in accordance with merger statutes and can be specifically included in or excluded from assignment provisions. An inclusion could be negotiated by the parties to broaden the anti-assignment clause and to ensure that an assignment occurring by operation of law requires counterparty approval:

[Party A] agrees that it will not assign, sublet or otherwise transfer its rights hereunder, either voluntarily or by operations of law, without the prior written consent of [Party B].

while an exclusion could be negotiated by a target company to make it clear that it has the right to assign the contract even though it might otherwise have that right as a matter of law:

This Guaranty shall be binding upon the successors and assigns of [Party A]; provided, that no transfer, assignment or delegation by [Party A], other than a transfer, assignment or delegation by operation of law, without the consent of [Party B], shall release [Party A] from its liabilities hereunder.

This helps settle any ambiguity regarding assignments and their effects under mergers statutes (particularly in forward triangular mergers and forward mergers since the target company ceases to exist upon consummation of the merger).

Direct or Indirect Assignment

More ambiguity can arise regarding which actions or transactions require a counterparty’s consent when assignment clauses prohibit both direct and indirect assignments without the consent of a counterparty. Transaction parties will typically choose to err on the side of over-inclusiveness in determining which contracts will require consent when dealing with material contracts. An example clause prohibiting direct or indirect assignment might be:

Except as provided hereunder or under the Merger Agreement, such Shareholder shall not, directly or indirectly, (i) transfer (which term shall include any sale, assignment, gift, pledge, hypothecation or other disposition), or consent to or permit any such transfer of, any or all of its Subject Shares, or any interest therein.

“Transfer” of Agreement vs. “Assignment” of Agreement

In some instances, assignment provisions prohibit “transfers” of agreements in addition to, or instead of, explicitly prohibiting “assignments”. Often, the word “transfer” is not defined in the agreement, in which case the governing law of the contract will determine the meaning of the term and whether prohibition on transfers are meant to prohibit a broader or narrower range of transactions than prohibitions on assignments. Note that the current jurisprudence on the meaning of an assignment is broader and deeper than it is on the meaning of a transfer. In the rarer case where “transfer” is defined, it might look like this:

As used in this Agreement, the term “transfer” includes the Franchisee’s voluntary, involuntary, direct or indirect assignment, sale, gift or other disposition of any interest in…

The examples listed above are only of five common occurrences in which an assignment provision may provide exclusions or inclusions. As you continue with due diligence review, you may find that assignment provisions offer greater variety beyond the factors discussed in this blog post. However, you now have a basic understand of the possible variations of assignment clauses. For a more in-depth discussion of reviewing change of control and assignment provisions in due diligence, please download our full guide on Reviewing Change of Control and Assignment Provisions in Due Diligence.

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Courts Consider Anti-Assignment Clauses And Reverse Triangular Mergers

In a reverse triangular merger, the acquiring company forms a subsidiary that merges with and into the target with the outstanding shares of the target being converted into securities of the acquiring corporation or some other consideration. Does a reverse triangular merger constitute an assignment of a target corporation's contracts? Because the reverse triangular merger is an exceedingly common acquisition technique, one would expect that this question was answered long ago. Surprisingly, however, this isn't the case.

Earlier this year, Vice Chancellor Donald F. Parsons analyzed whether a reverse triangular merger violated an anti-assignment clause that read as follows: "Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties . . .". He concluded:

In sum, Meso could have negotiated for a "change of control provision." They did not. Instead, they negotiated for a term that prohibits "assignments by operation of law or otherwise." Roche has provided a reasonable interpretation of Section 5.08 that is consistent with the general understanding that a reverse triangular merger is not an assignment by operation of law. On the other hand, I find Meso's arguments as to why language that prohibits "assignments by operation of law or otherwise" should be construed to encompass reverse triangular mergers unpersuasive and its related construction of Section 5.08 to be unreasonable.

Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH , 62 A.3d 62, 88 (Del. Ch. 2013). See I’ve Been Thinking About Conversion, But I Haven’t Decided To Convert .

Here in California, U.S. District Court Judge Samuel Conti recently addressed the issue even more recently as follows:

No California state court has resolved this matter, and the Court is not inclined to guess at possible conclusions. The Court therefore begins from the presumption that a reverse triangular merger, which leaves intact the acquired corporation, does not effect a transfer of rights from the wholly owned subsidiary to its acquirer as a matter of law. What little applicable law there is could be analogized from California cases on stock sales, like Farmland Irrigation Co. v. Dopplmaier , 48 Cal. 2d 208, 223, 308 P.2d 732 (Cal. 1957), which suggested that if a plaintiff had sold all of his stock in a corporation, there could be no contention that the corporation's licenses would be extinguished as a matter of law, since the two contracting parties were still extant and in privity.

Florey Inst. of Neuroscience & Mental Health v. Kleiner Perkins Caufield & Byers, 2013 U.S. Dist. LEXIS 138904 (N.D. Cal. Sept. 26, 2013).

Both jurists confronted, and declined to follow, Judge Marilyn Hall Patel's earlier decision in SQL Solutions v. Oracle Corp. , 1991 U.S. Dist. LEXIS 21097 (N.D. Cal. Dec. 18, 1991) with Vice Chancellor Parsons saying: "I decline to adopt the approach outlined in SQL Solutions , however, because doing so would conflict with Delaware's jurisprudence surrounding stock acquisitions, among other things. Under Delaware law, stock purchase transactions, by themselves, do not result in an assignment by operation of law." Judge Conti said "Plaintiff relies solely on SQL Solutions to argue that assignment occurred as a matter of law when an acquired corporation became another corporation's wholly owned subsidiary. That case did not analyze nonassignment clauses and also found that federal copyright law forbid transfer."

Hollywood, Somali Pirates and Homer

Over the weekend, I saw the recently released film, Captain Phillips . The movie tells the story of the takeover of the MV Maersk by Somali pirates. When the Navy uses a Somali speaker to communicate with the pirates, one of the pirates asks "Who's this?". The translator answers "nemo", the Latin word for "no one". The interchange, of course, is an echo of the famous encounter of Odysseus and the Cyclops, Polyphemus in Homer's Odyssey :

Κύκλωψ, εἰρωτᾷς μ᾽ ὄνομα κλυτόν, αὐτὰρ ἐγώ τοι ἐξερέω: σὺ δέ μοι δὸς ξείνιον, ὥς περ ὑπέστης. Οὖτις ἐμοί γ᾽ ὄνομα: Οὖτιν δέ με κικλήσκουσι μήτηρ ἠδὲ πατὴρ ἠδ᾽ ἄλλοι πάντες ἑταῖροι. Cyclops, you are asking my renowned name, nevertheless I will declare: "Give to me the hospitality, you were promising. My name is no one: no one is what my mother, father and all my comrades call me."

Homer, Odyssey Book 9, lines 364 -367 (my translation). Matters went downhill from there for both Polyphemus and the pirates.

Keith Paul Bishop

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When Deal Making and Government Consent Merge: The Who, What, When, Where, and Why of Novation Agreements

Over the past year, there has been a tremendous amount of merger and acquisition activity, and the government contracting industry has been no exception. Along with the traditional concerns involved in the M&A world, companies holding federal government contracts face unique obstacles. In fact, government contractors seeking to scale their business through a merger or acquisition must take into account both traditional considerations and federal statutes and regulations that require the Government’s consent for such transactions. These federal statutes are known as the Anti-Assignment Acts.

The Anti-Assignment Acts are made up of: (1) the Assignment of Contracts Act, which prohibits the assignment of government contracts, and (2) the Assignment of Claims Act, which prohibits the assignment of claims against the United States. Specifically, the Assignment of Claims Act provides that an assignment of a claim against the Government may be made only after the claim is allowed, the amount of the claim is decided, and a warrant for payment has been issued. 31 U.S.C. § 3727. Conversely, under the Assignment of Contracts Act, a “party to whom the Federal Government gives a contract or order may not transfer the contract or order, or any interest in the contract or order to another party. . . .” 41 U.S.C. § 6305. When deemed to be in its interest, however, the Government may waive the statutory prohibitions in the Anti-Assignment Acts. FAR 42.1204. Ordinarily, the Government waives such a prohibition on assignment, and thus consents to the transfer, by a contracting officer’s execution of a novation agreement. FAR 14.1203(a). If, however, a prohibited transfer occurs without a novation, then “the original contractor remains under contractual obligation to the Government, and the contract may be terminated for reasons of default, should the original contractor not perform.” FAR 42.1204(c).

The Federal Acquisition Regulations (FAR) not only dictate how the Government may waive the Anti-Assignment Acts, but also when the Government may waive the Anti-Assignment Acts. In order to understand when novation is required, it is crucial to first understand why novation is required. In Tuftco Corp. v. United States , the Court of Claims laid out the purpose of the Anti-Assignment Acts:

The statutes serve two purposes. They are primarily intended to prevent persons of influence from buying up claims against the United States, which might then be improperly urged upon officers of the Government. Second, it is inferred Congress sought to enable the United States to deal exclusively with the original claimant instead of several parties, thereby eliminating the confusion of conflicting demands for payment and the chances of multiple liability.

614 F.2d 740, 744 (Ct. Cl. 1980) (quotations omitted). In addition, in United Int'l Investigative Servs. v. United States , the Court of Claims noted that the Anti-Assignment Acts “ensures that the government continues to receive the benefit of the management and financial responsibility for which it bargained for.” Put simply, the purpose of the Anti-Assignment Acts is to prevent fraud against the Government, to avoid the threat of multiple claimants against the Government, and to ensure that the Government knows who it is contracting with when it awards a contract. With the purposes of the Anti-Assignment Acts in mind, we will consider the transaction structures that a government contractor may consider, and the ramifications of such structures.

Asset Purchase

One way of structuring a transaction that includes the transfer of valuable government contracts is through an asset purchase. FAR 42.1204 provides that the Government may recognize a third party as a successor-in-interest to a government contract when the third party’s interest in the contract arises out of the transfer of all of the contractor’s assets or the entire portion of the assets involved in performing the contract. Examples of such transactions include: (i) sale of assets with a provision for assuming liabilities; (ii) transfer of assets incident to a merger or corporate consolidation; and (iii) incorporation of a proprietorship or partnership, or formation of a partnership. It is important to note that the regulations expressly contemplate transactions involving a transfer of all of a contractor’s assets, or all of the assets necessary to perform the contract. As such, the regulations seem to foreclose the possibility of simply transferring the contracts alone. See Am. Gov't Properties v. United States , 118 Fed. Cl. 61 (2014).

Given the purposes of the Anti-Assignment Acts, requiring a novation for certain asset sales is fitting. For instance, when government contracts are included in asset deals, the acquirer is not the original party to the agreement, and it may not have the assets or experience required to adequately perform, which is contrary to what the Government originally bargained for. See , e.g. , Wyle Labs., Inc. , B-408112.2, Dec. 27, 2013, 2014 CPD ¶ 16. Moreover, the possibility of fraud and multiple claims may exist as both the seller and the acquirer may later demand payment from the Government, without the Government fully knowing who owns the rights under the contract.

Stock Purchase

Another common way to structure a transaction is through the purchase of stock, partnership interest, or membership interest. As to these transactions, a novation will generally be unnecessary. In fact, the FAR expressly states that novation is not required “when there is a change in the ownership of a contractor as a result of a stock purchase, with no legal change in the contracting party, and when that contracting party remains in control of the assets and is the party performing the contract.” FAR 42.1204(b). Considering the purposes of the Anti-Assignment Acts, the exception from the novation requirement for stock deals is also fitting. For instance, when one acquires an interest in an entity holding government contracts, the contracts themselves are not being assigned to a different party. In fact, those contracts continue to be held by the same entity to whom the government awarded the original contract. Thus, a stock purchase is a viable transaction structure for those looking to buy or sell an interest in an entity holding federal government contracts, and is unlikely to require a novation.

Mergers, Consolidations and Reorganizations

For other corporate transactions, such as mergers, consolidations, and reorganizations, the issue is much more complicated. In fact, case law has developed that excludes the need for government consent for assignments that occur by operation of law. [1] For instance, in Seaboard Air Line Ry. v. United States , the Supreme Court recognized that mergers and consolidations functioned like other assignments by operation of law:

We cannot believe that Congress intended to discourage, hinder or obstruct the orderly merger or consolidation of corporations as the various states might authorize for the public interest. There is no probability that the United States could suffer injury in respect of outstanding claims from such union of interests and certainly the result would not be more deleterious than would follow their passing to heirs, devisees, assignees in bankruptcy, or receivers, all of which changes of ownership have been declared without the ambit of the statute.

256 U.S. 655, 657, 41 S. Ct. 611, 612 (1921). Although the Supreme Court and courts and administrative tribunals across the country have recognized this exception, the FAR requires consent for a transfer of assets “incident to a merger or corporate consolidation.” FAR 42.1204(a)(2)(ii). Further, even when courts do recognize the assignment by operation of law exception to the Anti-Assignment Acts, they have not always applied the exception with a reliable degree of consistency. Compare NGC Inv. & Dev., Inc. v. United States , 33 Fed. Cl. 459 (1995) with United Int'l Investigative Servs. v. United States , 26 Cl. Ct. 892 (1992). In addition, even the slightest change in a transaction structure may warrant opposing results. For example, reverse triangle mergers have been treated as stock purchases, rather than assignments by operation of law, whereas forward triangle mergers are assignments by operation of law. See Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH , 62 A.3d 62, 83 (Del. Ch. 2013). Considering the complex case law concerning assignments by operation of law and the express requirements of the FAR, the possible need for novation should be given consideration in the planning of a deal structure that involves a merger or consolidation.

Given the inconsistent treatment of mergers and consolidations by courts and contracting officers alike, parties involved in deal-making with entities holding federal government contracts are well advised to consider early engagement with the Government regarding the possible obligation to seek novation. Although a contracting officer cannot execute a novation agreement until after the transaction has closed, early engagement with the contracting officer about such a possibility will allow the parties to set reasonable expectations and possibly help identify and address any Government concerns. Ultimately, the contracting officer is given a wide range of discretion in consenting to transactions in which he or she deems that Government consent is required. FAR 42.1203(b). Some contractors deal with the risk that the contracting officer may reject the novation request by subcontracting all of the work to the potential acquirer or to hold certain funds in escrow pending execution of the novation agreement. As such, it is best for the parties to be proactive in contacting the relevant contracting officers and always address in the transaction the possibility of a delayed or adverse action.

[1] “By operation of law” is simply “[t]he means by which a right or a liability is created for a party regardless of the party's actual intent.” OPERATION OF LAW, Black's Law Dictionary (10th ed. 2014).

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Anti-Assignment Provisions and Assignments by ‘Operation of Law’: What Do I Have to Do? What Should I Do?

Introduction.

One of the key roles of legal due diligence in mergers and acquisitions (M&A) is to assist in the efficient and successful completion of any proposed M&A transaction. Due diligence is not merely a procedural formality but can serve as a proactive shield against unforeseen challenges and risks. One essential aspect of the legal due diligence process is reviewing third-party contracts to which the target entity is party, in order to better understand the scope of its commercial relationships and to anticipate any issues that may arise via the underlying contractual relationships as a result of completing the proposed M&A transaction.

A frequent reality in many M&A transactions is the requirement to obtain consents from third parties upon the “change of control” of the target entity and/or the transfer or assignment of a third-party contract to which the target is party. Notwithstanding the wording of such contracts, in many instances, the business team from the purchaser will often ask the question: “When is consent actually required?” While anti-assignment and change of control provisions are fairly ubiquitous in commercial contracts, the same cannot be said for when the requirement to obtain consent is actually triggered. The specifics of the proposed transaction’s structure will often dictate the purchaser’s next steps when deciding whether the sometimes-cumbersome process of obtaining consents with one or multiple third parties is actually needed.

This article examines what anti-assignment provisions are and how to approach them, depending on the situation at hand, including in the context of transactions where a change of control event may be triggered. This article also discusses how to interpret whether consent is required when faced with an anti-assignment provision which states that an assignment, including an assignment by operation of law , which requires consent from the non-assigning party.

Understanding Anti-Assignment Provisions

Generally, an anti-assignment provision prohibits the transfer or assignment of some or all of the assigning party’s rights and obligations under the contract in question to another person without the non-assigning party’s prior written consent. By way of example, a standard anti-assignment provision in a contract may read as follows:

Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written consent of Company XYZ.

In this case, Company ABC requires Company XYZ’s prior written consent to assign the contract. Seems simple enough. However, not all anti-assignment provisions are cut from the same cloth. For example, some anti-assignment provisions expand on the prohibition against general contractual assignment by including a prohibition against assignment by operation of law or otherwise . As is discussed in greater detail below, the nuanced meaning of this phrase can capture transactions that typically would not trigger a general anti-assignment provision and can also trigger the requirement to get consent from the non-assigning party for practical business reasons.

To explore this further, it is helpful to consider anti-assignment provisions in the two main structures of M&A transactions: (i) asset purchases and (ii) share purchases.

Context of M&A Transactions: Asset Purchases and Share Purchases

There are key differences between what triggers an anti-assignment provision in an asset purchase transaction versus a share purchase transaction.

i) Asset Purchases

An anti-assignment provision in a contract that forms part of the “purchased assets” in an asset deal will normally be triggered in an asset purchase transaction pursuant to which the purchaser acquires some or all of the assets of the target entity, including some or all of its contracts. Because the target entity is no longer the contracting party once the transaction ultimately closes (since it is assigning its rights and obligations under the contract to the purchaser), consent from the non-assigning party will be required to avoid any potential liability, recourse or termination of said contract as a result of the completion of the transaction.

ii) Share Purchases

Provisions which prohibit the assignment or transfer of a contract without the prior approval of the non-assigning party will not normally, under Canadian law, be captured in a share purchase transaction pursuant to which the purchaser acquires a portion or all of the shares of the target entity. In other words, no new entity is becoming party to that same contract. General anti-assignment provisions are not typically triggered by a share purchase because the contracts are not assigned or transferred to another entity and instead there is usually a “change of control” of the target entity. In such cases, the target entity remains the contracting party under the contract and the consent analysis will be premised on whether the contract requires consent of the third party for a “direct” or “indirect” change of control of the target entity and not the assignment of the contract.

Importantly, some anti-assignment provisions include prohibitions against change of control without prior written consent. For example, the provision might state the following:

Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written approval of Company XYZ. For the purposes of this agreement, any change of control of Company ABC resulting from an amalgamation, corporate reorganization, arrangement, business sale or asset shall be deemed an assignment or transfer.

In that case, a change of control as a result of a share purchase will be deemed an assignment or transfer, and prior written consent will be required.

A step in many share purchase transactions where the target is a Canadian corporation that often occurs on or soon after closing is the amalgamation of the purchasing entity and the target entity. So, what about anti-assignment provisions containing by operation of law language – do amalgamations trigger an assignment by operation of law? The short answer: It depends on the jurisdiction in which the anti-assignment provision is being scrutinized (typically, the governing law of the contract in question).

Assignments by Operation of Law

In Canada, the assignment of a contract as part of an asset sale, or the change of control of a party to a contract pursuant to a share sale – situations not normally effected via legal statute or court-ordered proceeding in M&A transactions – will not in and of itself effect an assignment of that contract by operation of law . [1]

Still, one must consider the implications of amalgamations, especially in the context of a proposed transaction when interpreting whether consent is required when an anti-assignment provision contains by operation of law language. Under Canadian law, where nuances often blur the lines within the jurisprudence, an amalgamation will not normally effect the assignment of a contract by operation of law . The same does not necessarily hold true for a Canadian amalgamation scrutinized under U.S. legal doctrines or interpreted by U.S. courts. [2]

Difference Between Mergers and Amalgamations

As noted above, after the closing of a share purchase transaction, the purchasing entity will often amalgamate with the target entity ( click here to read more about amalgamations generally). When two companies “merge” in the U.S., we understand that one corporation survives the merger and one ceases to exist which is why, under U.S. law, a merger can result in an assignment by operation of law . While the “merger” concept is commonly used in the U.S., Canadian corporations combine through a process called “amalgamation,” a situation where two corporations amalgamate and combine with neither corporation ceasing to exist. For all of our Canadian lawyer readers, you will remember the Supreme Court of Canada’s description of an amalgamation as “a river formed by the confluence of two streams, or the creation of a single rope through the intertwining of strands.” [3] Generally, each entity survives and shares the pre-existing rights and liabilities of the other, including contractual relationships, as one corporation. [4]

MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V.

As a practical note and for the reasons below, particularly in cross-border M&A transactions, it would be wise to consider seeking consent where a contract prohibits assignment by operation of law without the prior consent of the other contracting party when your proposed transaction contemplates an amalgamation.

In MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V. (a Superior Court of Delaware decision), the court interpreted a Canadian (British Columbia) amalgamation as an assignment by operation of law , irrespective of the fact that the amalgamation was effected via Canadian governing legislation. In essence, the Delaware court applied U.S. merger jurisprudence to a contract involving a Canadian amalgamation because the contract in question was governed by Delaware law. This is despite the fact that, generally, an amalgamation effected under Canadian common law jurisdictions would not constitute an assignment by operation of law if considered by a Canadian court. As previously mentioned, under Canadian law, unlike in Delaware, neither of the amalgamating entities cease to exist and, technically, there is no “surviving” entity as there would be with a U.S.-style merger. That being said, we bring this to your attention to show that it is possible that a U.S. court (if the applicable third-party contract is governed by U.S. law or other foreign laws) or other U.S. counterparties could interpret a Canadian amalgamation to effect an assignment by operation of law . In this case, as prior consent was not obtained as required by the anti-assignment provision of the contract in question, the Delaware court held that the parties to that agreement were bound by the anti-assignment provision’s express prohibition against all assignments without the other side’s consent. [5]

To avoid the same circumstances that resulted from the decision in MTA Canada Royalty Corp. , seeking consent where an anti-assignment provision includes a prohibition against assignment by operation of law without prior consent can be a practical and strategic option when considering transactions involving amalgamations. It is generally further recommended to do so in order to avoid any confusion for all contracting parties post-closing.

Practical Considerations

The consequences of violating anti-assignment provisions can vary. In some cases, the party attempting to complete the assignment is simply required to continue its obligations under the contract but, in others, assignment without prior consent constitutes default under the contract resulting in significant liability for the defaulting party, including potential termination of the contract. This is especially noteworthy for contracts with third parties that are essential to the target entity’s revenue and general business functions, as the purchaser would run the risk of losing key contractual relationships that contributed to the success of the target business. As such, identifying assignment provisions and considering whether they are triggered by a change of control and require consent is an important element when reviewing the contracts of a target entity and completing legal due diligence as part of an M&A transaction.

There can be a strategic and/or legal imperative to seek consent in many situations when confronted with contractual clauses that prohibit an assignment, either by operation of law or through other means, absent the explicit approval of the non-assigning party. However, the structure of the proposed transaction will often dictate whether consent is even required in the first place. Without considering this nuanced area of M&A transactions, purchasers not only potentially expose themselves to liability but also risk losing key contractual relationships that significantly drive the value of the transaction.

The Capital Markets Group at Aird & Berlis will continue to monitor developments in cross-border and domestic Canadian M&A transactions, including developments related to anti-assignment provisions and commercial contracts generally. Please contact a member of the group if you have questions or require assistance with any matter related to anti-assignment provisions and commercial contracts generally, or any of your cross-border or domestic M&A needs.

[1] An assignment by operation of law can be interpreted as an involuntary assignment required by legal statute or certain court-ordered proceedings. For instance, an assignment of a contract by operation of law may occur in, among other situations: (i) testamentary dispositions; (ii) court-ordered asset transfers in bankruptcy proceedings; or (iii) court-ordered asset transfers in divorce proceedings.

[2] MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V ., C. A. No. N19C-11-228 AML, 2020 WL 5554161 (Del. Super. Sept. 16, 2020) [ MTA Canada Royalty Corp. ].

[3] R. v. Black & Decker Manufacturing Co. , [1975] 1 S.C.R. 411.

[4] Certain Canadian jurisdictions, such as the Business Corporations Act (British Columbia), explicitly state that an amalgamation does not constitute an assignment by operation of law (subsection 282(2)).

[5] MTA Canada Royalty Corp .

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Jun 8, 2020

Assignment clauses in contracts

The general rule is that a contract is freely assignable unless it is (1) for a personal service or (2) against public policy. Parties incorporate assignment clauses because they want to be notified about a change in the relationship and they want an opportunity to decide whether to continue the relationship.

Mergers and acquisitions can be structured as: (a) direct merger, (b) reverse triangular merger (the acquiring company creates a subsidiary to purchase the target, which, in turn, absorbs the acquirer’s subsidiary), (c) forward-triangular merger (the acquiring company purchases the target company through a subsidiary of the acquirer), (d) stock purchase, or (e) asset purchase.

Does the assignment clause in your agreement do what you think it does in a merger and acquisition context?

A simple assignment clause would be " This agreement shall not be assigned or transferred by Party A without first obtaining the consent of Party B ." The issue with this simple assignment clause is that certain merger and acquisition deal structures would not trigger the consent requirement of this clause. Consent would be triggered during an asset purchase. It is not triggered in a stock purchase because the acquiring company buys all the stock of the target from the shareholders, and the assets are not conveyed to a different entity. It is not triggered in a reverse triangular merger because the target company survives the merger as a subsidiary of the acquiring company. It is not triggered in a forward triangular merger because the subsidiary obtains the target company's assets and liability by operation of law.

If you revise the clause to add operation of law -- " This agreement shall not be assigned or transferred by operation of law or otherwise by Party A without first obtaining the consent of Party B ." This revised clause should now additionally be triggered in direct mergers and forward triangular mergers. But consent would still not be triggered by a reverse triangular merger or a stock purchase.

If you further revise the clause to add change of control language -- " This agreement shall not be assigned or transferred by operation of law or otherwise by Party A without first obtaining the consent of Party B . Any change in control of Party A resulting from a merger, consolidation, stock transfer or asset sale shall be deemed an assignment or transfer for purposes of this Agreement that requires Party B’s prior written consent ." This revised assignment clause should now additionally be triggered in deal structures where the Party A is the target of the merger or acquisition.

Image by Andreas Breitling from Pixabay .

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Canada: Anti-Assignment Provisions And Assignments By 'Operation Of Law': What Do I Have To Do? What Should I Do?

Introduction

A frequent reality in many M&A transactions is the requirement to obtain consents from third parties upon the "change of control" of the target entity and/or the transfer or assignment of a third-party contract to which the target is party. Notwithstanding the wording of such contracts, in many instances, the business team from the purchaser will often ask the question: "When is consent actually required?" While anti-assignment and change of control provisions are fairly ubiquitous in commercial contracts, the same cannot be said for when the requirement to obtain consent is actually triggered. The specifics of the proposed transaction's structure will often dictate the purchaser's next steps when deciding whether the sometimes-cumbersome process of obtaining consents with one or multiple third parties is actually needed.

This article examines what anti-assignment provisionsare and how to approach them, depending on the situation at hand, including in the context of transactions where a change of control event may be triggered. This article also discusses how to interpret whether consent is required when faced with an anti-assignment provision which states that an assignment, including an assignment by operation of law , requires consent from the non-assigning party.

Understanding Anti-Assignment Provisions

Generally, an anti-assignment provision prohibits the transfer or assignment of some or all of the assigning party's rights and obligations under the contract in question to another person without the non-assigning party's prior written consent. By way of example, a standard anti-assignment provision in a contract may read as follows:

Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written consent of Company XYZ.

In this case, Company ABC requires Company XYZ's prior written consent to assign the contract. Seems simple enough. However, not all anti-assignment provisions are cut from the same cloth. For example, some anti-assignment provisions expand on the prohibition against general contractual assignment by including a prohibition against assignment by operation of law or otherwise . As is discussed in greater detail below, the nuanced meaning of this phrase can capture transactions that typically would not trigger a general anti-assignment provision and can also trigger the requirement to get consent from the non-assigning party for practical business reasons.

To explore this further, it is helpful to consider anti-assignment provisions in the two main structures of M&A transactions: (i) asset purchases and (ii) share purchases.

Context of M&A Transactions: Asset Purchases and Share Purchases

There are key differences between what triggers an anti-assignment provision in an asset purchase transaction versus a share purchase transaction.

i) Asset Purchases

An anti-assignment provision in a contract that forms part of the "purchased assets" in an asset deal will normally be triggered in an asset purchase transaction pursuant to which the purchaser acquires some or all of the assets of the target entity, including some or all of its contracts. Because the target entity is no longer the contracting party once the transaction ultimately closes (since it is assigning its rights and obligations under the contract to the purchaser), consent from the non-assigning party will be required to avoid any potential liability, recourse or termination of said contract as a result of the completion of the transaction.

ii) Share Purchases

Provisions which prohibit the assignment or transfer of a contract without the prior approval of the non-assigning party will not normally, under Canadian law, be captured in a share purchase transaction pursuant to which the purchaser acquires a portion or all of the shares of the target entity. In other words, no new entity is becoming party to that same contract. General anti-assignment provisions are not typically triggered by a share purchase because the contracts are not assigned or transferred to another entity and instead there is usually a "change of control" of the target entity. In such cases, the target entity remains the contracting party under the contract and the consent analysis will be premised on whether the contract requires consent of the third party for a "direct" or "indirect" change of control of the target entity and not the assignment of the contract.

Importantly, some anti-assignment provisions include prohibitions against change of control without prior written consent. For example, the provision might state the following:

In that case, a change of control as a result of a share purchase will be deemed an assignment or transfer, and prior written consent will be required.

Assignments by Operation of Law

Difference Between Mergers and Amalgamations

As noted above, after the closing of a share purchase transaction, the purchasing entity will often amalgamate with the target entity ( click here to read more about amalgamations generally). When two companies "merge" in the U.S., we understand that one corporation survives the merger and one ceases to exist which is why, under U.S. law, a merger can result in an assignment by operation of law . While the "merger" concept is commonly used in the U.S., Canadian corporations combine through a process called "amalgamation," a situation where two corporations amalgamate and combine with neither corporation ceasing to exist. For all of our Canadian lawyer readers, you will remember the Supreme Court of Canada's description of an amalgamation as "a river formed by the confluence of two streams, or the creation of a single rope through the intertwining of strands." 3 Generally, each entity survives and shares the pre-existing rights and liabilities of the other, including contractual relationships, as one corporation. 4

MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V.

In MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V. (a Superior Court of Delaware decision), the court interpreted a Canadian (British Columbia) amalgamation as an assignment by operation of law , irrespective of the fact that the amalgamation was effected via Canadian governing legislation. In essence, the Delaware court applied U.S. merger jurisprudence to a contract involving a Canadian amalgamation because the contract in question was governed by Delaware law. This is despite the fact that, generally, an amalgamation effected under Canadian common law jurisdictions would not constitute an assignment by operation of law if considered by a Canadian court. As previously mentioned, under Canadian law, unlike in Delaware, neither of the amalgamating entities cease to exist and, technically, there is no "surviving" entity as there would be with a U.S.-style merger. That being said, we bring this to your attention to show that it is possible that a U.S. court (if the applicable third-party contract is governed by U.S. law or other foreign laws) or other U.S. counterparties could interpret a Canadian amalgamation to effect an assignment by operation of law . In this case, as prior consent was not obtained as required by the anti-assignment provision of the contract in question, the Delaware court held that the parties to that agreement were bound by the anti-assignment provision's express prohibition against all assignments without the other side's consent. 5

Practical Considerations

The consequences of violating anti-assignment provisions can vary. In some cases, the party attempting to complete the assignment is simply required to continue its obligations under the contract but, in others, assignment without prior consent constitutes default under the contract resulting in significant liability for the defaulting party, including potential termination of the contract. This is especially noteworthy for contracts with third parties that are essential to the target entity's revenue and general business functions, as the purchaser would run the risk of losing key contractual relationships that contributed to the success of the target business. As such, identifying assignment provisions and considering whether they are triggered by a change of control and require consent is an important element when reviewing the contracts of a target entity and completing legal due diligence as part of an M&A transaction.

1. An assignment by operation of law can be interpreted as an involuntary assignment required by legal statute or certain court-ordered proceedings. For instance, an assignment of a contract by operation of law may occur in, among other situations: (i) testamentary dispositions; (ii) court-ordered asset transfers in bankruptcy proceedings; or (iii) court-ordered asset transfers in divorce proceedings.

2. MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V ., C. A. No. N19C-11-228 AML, 2020 WL 5554161 (Del. Super. Sept. 16, 2020) [ MTA Canada Royalty Corp. ].

3. R. v. Black & Decker Manufacturing Co. , [1975] 1 S.C.R. 411.

4. Certain Canadian jurisdictions, such as the Business Corporations Act (British Columbia), explicitly state that an amalgamation does not constitute an assignment by operation of law (subsection 282(2)).

5. MTA Canada Royalty Corp .

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Don’t Confuse Change of Control and Assignment Terms

techcontracts-david
September 11, 2020

An assignment clause governs whether and when a party can transfer the contract to someone else. Often, it covers what happens in a change of control: whether a party can assign the contract to its buyer if it gets merged into a company or completely bought out. But that doesn’t make it a change of control clause. Change of control terms don’t address assignment. They say whether a party can terminate if the other party goes through a merger or other change of control. And they sometimes address other change of control consequences.

Don’t confuse the two. In a contract about software or other IT, you should think through the issues raised by each. (Also, don’t confuse assignment of contracts with assignment of IP .)

Here’s an assignment clause:

Assignment. Neither party may assign this Agreement or any of its rights or obligations hereunder without the other’s express written consent, except that either party may assign this Agreement to the surviving party in a merger of that party into another entity or in an acquisition of all or substantially all its assets. No assignment becomes effective unless and until the assignee agrees in writing to be bound by all the assigning party’s obligations in this Agreement. Except to the extent forbidden in this Section __, this Agreement will be binding upon and inure to the benefit of the parties’ respective successors and assigns.

As you can see, that clause says no assignment is allowed, with one exception:

Assignment to Surviving Entity in M&A: Under the clause above, a party can assign the contract to its buyer — the “surviving entity” — if it gets merged into another company or otherwise bought — in other words, if it ceases to exist through an M&A deal (or becomes an irrelevant shell company).

Consider the following additional issues for assignment clauses:

Assignment to Affiliates: Can a party assign the contract to its sister companies, parents, and/or subs — a.k.a. its “Affiliates”?
Assignment to Divested Entities: If a party spins off its key department or other business unit involved in the contract, can it assign the contract to that spun-off company — a.k.a. the “divested entity”? That’s particularly important in technology outsourcing deals and similar contracts. They often leave a customer department highly dependent on the provider’s services. If the customer can’t assign the contract to the divested entity, the spin-off won’t work; the new/divested company won’t be viable.
Assignment to Competitors: If a party does get any assignment rights, can it assign to the other party’s competitors ? (If so, you’ve got to define “Competitor,” since the word alone can refer to almost any company.)
All Assignments or None: The contract should usually say something about assignments. Otherwise, the law might allow all assignments. (Check your jurisdiction.) If so, your contracting partner could assign your agreement to someone totally unacceptable. (Most likely, though, your contracting partner would remain liable.) If none of the assignments suggested above fits, forbid all assignments.

Change of Control

Here’s a change of control clause:

Change of Control. If a party undergoes a Change of Control, the other party may terminate this Agreement on 30 days’ written notice. (“Change of Control” means a transaction or series of transactions by which more than 50% of the outstanding shares of the target company or beneficial ownership thereof are acquired within a 1-year period, other than by a person or entity that owned or had beneficial ownership of more than 50% of such outstanding shares before the close of such transactions(s).)

Contract terminated, due to change of control.

Termination on Change of Control: A party can terminate if controlling ownership of the other party changes hands.

Change of control and assignment terms actually address opposite ownership changes. If an assignment clause addresses change of control, it says what happens if a party goes through an M&A deal and no longer exists (or becomes a shell company). A change of control clause, on the other hand, matters when the party subject to M&A does still exist . That party just has new owners (shareholders, etc.).

Consider the following additional issues for change of control clauses:

Smaller Change of Ownership: The clause above defines “Change of Control” as any 50%-plus ownership shift. Does that set the bar too high? Should a 25% change authorize termination by the other party, or even less? In public companies and some private ones, new bosses can take control by acquiring far less than half the stock.
No Right to Terminate: Should a change of control give any right to terminate, and if so, why? (Keep in mind, all that’s changed is the party’s owners — possibly irrelevant shareholders.)
Divested Entity Rights: What if, again, a party spins off the department or business until involved in the deal? If that party can’t assign the contract to the divested entity, per the above, can it at least “sublicense” its rights to products or service, if it’s the customer? Or can it subcontract its performance obligations to the divested entity, if it’s the provider? Or maybe the contract should require that the other party sign an identical contract with the divested entity, at least for a short term.

Some of this text comes from the 3rd edition of The Tech Contracts Handbook , available to order (and review) from Amazon here , or purchase directly from its publisher, the American Bar Association, here.

Want to do tech contracts better, faster, and with more confidence? Check out our training offerings here: https://www.techcontracts.com/training/ . Tech Contracts Academy has options to fit every need and schedule: Comprehensive Tech Contracts M aster Classes™ (four on-line classes, two hours each), topical webinars (typically about an hour), customized in-house training (for just your team). David Tollen is the founder of Tech Contracts Academy and our primary trainer. An attorney and also the founder of Sycamore Legal, P.C. , a boutique IT, IP, and privacy law firm in the San Francisco Bay Area, he also serves as an expert witness in litigation about software licenses, cloud computing agreements, and other IT contracts.

Thank you to Pixabay.com for great, free stock images!

David tollen’s live webinars about technology contracting – april 16, may 21.

Join Tech Contracts Academy’s two remaining live webinars this spring: April 16 – The Indeminar: Indemnities in Contracts about Software, the Cloud, and AI May 21 – IP

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Related Practices & Jurisdictions

Mergers & Acquisitions
Litigation / Trial Practice
Administrative & Regulatory

In a reverse triangular merger, the acquiring company forms a subsidiary that merges with and into the target with the outstanding shares of the target being converted into securities of the acquiring corporation or some other consideration. Does a reverse triangular merger constitute an assignment of a target corporation’s contracts? Because the reverse triangular merger is an exceedingly common acquisition technique, one would expect that this question was answered long ago. Surprisingly, however, this isn’t the case.

Earlier this year, Vice Chancellor Donald F. Parsons analyzed whether a reverse triangular merger violated an anti-assignment clause that read as follows: “Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties . . .”. He concluded:

In sum, Meso could have negotiated for a “change of control provision.” They did not. Instead, they negotiated for a term that prohibits “assignments by operation of law or otherwise.” Roche has provided a reasonable interpretation of Section 5.08 that is consistent with the general understanding that a reverse triangular merger is not an assignment by operation of law. On the other hand, I find Meso’s arguments as to why language that prohibits “assignments by operation of law or otherwise” should be construed to encompass reverse triangular mergers unpersuasive and its related construction of Section 5.08 to be unreasonable.

Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH , 62 A.3d 62, 88 (Del. Ch. 2013). See I’ve Been Thinking About Conversion, But I Haven’t Decided To Convert .

Here in California, U.S. District Court Judge Samuel Conti recently addressed the issue even more recently as follows:

No California state court has resolved this matter, and the Court is not inclined to guess at possible conclusions. The Court therefore begins from the presumption that a reverse triangular merger, which leaves intact the acquired corporation, does not effect a transfer of rights from the wholly owned subsidiary to its acquirer as a matter of law. What little applicable law there is could be analogized from California cases on stock sales, like Farmland Irrigation Co. v. Dopplmaier , 48 Cal. 2d 208, 223, 308 P.2d 732 (Cal. 1957), which suggested that if a plaintiff had sold all of his stock in a corporation, there could be no contention that the corporation’s licenses would be extinguished as a matter of law, since the two contracting parties were still extant and in privity.

Florey Inst. of Neuroscience & Mental Health v. Kleiner Perkins Caufield & Byers, 2013 U.S. Dist. LEXIS 138904 (N.D. Cal. Sept. 26, 2013).

Both jurists confronted, and declined to follow, Judge Marilyn Hall Patel’s earlier decision in SQL Solutions v. Oracle Corp. , 1991 U.S. Dist. LEXIS 21097 (N.D. Cal. Dec. 18, 1991) with Vice Chancellor Parsons saying: “I decline to adopt the approach outlined in SQL Solutions , however, because doing so would conflict with Delaware’s jurisprudence surrounding stock acquisitions, among other things. Under Delaware law, stock purchase transactions, by themselves, do not result in an assignment by operation of law.” Judge Conti said “Plaintiff relies solely on SQL Solutions to argue that assignment occurred as a matter of law when an acquired corporation became another corporation’s wholly owned subsidiary. That case did not analyze nonassignment clauses and also found that federal copyright law forbid transfer.”

Hollywood, Somali Pirates and Homer

Over the weekend, I saw the recently released film, Captain Phillips . The movie tells the story of the takeover of the MV Maersk by Somali pirates. When the Navy uses a Somali speaker to communicate with the pirates, one of the pirates asks “Who’s this?”. The translator answers “nemo”, the Latin word for “no one”. The interchange, of course, is an echo of the famous encounter of Odysseus and the Cyclops, Polyphemus in Homer’s Odyssey :

Κύκλωψ, εἰρωτᾷς μ᾽ ὄνομα κλυτόν, αὐτὰρ ἐγώ τοι ἐξερέω: σὺ δέ μοι δὸς ξείνιον, ὥς περ ὑπέστης. Οὖτις ἐμοί γ᾽ ὄνομα: Οὖτιν δέ με κικλήσκουσι μήτηρ ἠδὲ πατὴρ ἠδ᾽ ἄλλοι πάντες ἑταῖροι. Cyclops, you are asking my renowned name, nevertheless I will declare: “Give to me the hospitality, you were promising. My name is no one: no one is what my mother, father and all my comrades call me.”

Home, Odyssey Book 9, lines 364 -367 (my translation). Matters went downhill from there for both Polyphemus and the pirates.

Current Legal Analysis

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assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

Founded in 1939, our law firm combines the ability to represent clients in domestic or international matters with the personal interaction with clients that is traditional to a long established law firm.

General Contract Clauses: Assignment and Delegation (CA) | Practical Law

General Contract Clauses: Assignment and Delegation (CA)

Practical law standard clauses w-000-0894 (approx. 17 pages).

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Direct Stock Purchase. In a direct stock purchase, the acquiror purchases all the outstanding shares of the target directly from its stockholders. ... by operation of law, no assignment would be deemed to occur); (2) whether the contract is "personal" in nature; and (3) how the proposed deal structure impacts the treatment of the target's ...
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[4] And, although Delaware has recognized that a merger in which the contracting party is the survivor (a reverse triangular merger) is not an assignment by operation of law "because the ...
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Assignment by Operation of Law. Assignments by operation of law typically occur in the context of transfers of rights and obligations in accordance with merger statutes and can be specifically included in or excluded from assignment provisions. An inclusion could be negotiated by the parties to broaden the anti-assignment clause and to ensure ...
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A recent federal court decision applying Delaware law, Partner Reinsurance Co. Ltd. v. RPM Mortgage, Inc., 2021 WL 2716307 (S.D.N.Y. July 1, 2021), explores some rare contractual territory—i.e., the question whether, in the absence of consent, a valid assignment may be made by a party of its rights to pursue a claim for damages for breach of a merger agreement, notwithstanding an anti ...
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acquisitions, and that this stands for the premise that where an acquirer purchases the stock of a corporation, that purchase does not, in and of itself, constitute an assignment to the acquirer of any contractual rights or obligations of the ... ruling, that the phrase "by operation of law" in an anti-assignment provision could be commonly ...
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A step in many share purchase transactions where the target is a Canadian corporation that often occurs on or soon after closing is the amalgamation of the purchasing entity and the target entity. So, what about anti-assignment provisions containing by operation of law language - do amalgamations trigger an assignment by operation of law?
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on the assignment of contractual rights under Delaware law: RTMs and stock purchases will not result in the assignment by operation of law of a target corporation's contracts. Thus, the case reaffirmsthat, in Delaware, RTMs may be employed by contracting parties to avoid triggering anti-assignment provisions in targets' contracts .
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operation of law, contracts are not technically assigned from one corpora-tion to the other, and so approval for assignment is not required from vendors having contracts with the merging corporations. Reprinted from Association Law & Policy, a publication of the Legal Section of ASAE & the Center for Association Leadership March, 2008
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If you further revise the clause to add change of control language -- "This agreement shall not be assigned or transferred by operation of law or otherwise by Party A without first obtaining the consent of Party B.Any change in control of Party A resulting from a merger, consolidation, stock transfer or asset sale shall be deemed an assignment or transfer for purposes of this Agreement that ...
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in a transfer by operation of law, reasoning that "[b]oth stock acquisitions and reverse triangular mergers involve changes in legal ownership and the law should reflect parallel results."21 If Meso is followed by courts in other juris-dictions, the uncertainty as to whether RTM'S violate restrictions on assignment may be signifi -
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What little applicable law there is could be analogized from California cases on stock sales, like Farmland Irrigation Co. v. Dopplmaier, 48 Cal. 2d 208, 223, 308 P.2d 732 (Cal. 1957), which ...
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Maintained • California. A Standard Clause, also known as an anti-assignment and anti-delegation clause, that provides for a contractual limitation on the assignability of contractual rights and the delegation of contractual duties under California law. This Standard Clause has integrated notes with important explanations and drafting tips.

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