Mr. Jones’ company is bound by an agreement that is vital to the operation of his business. It could be a space or equipment lease, or some sort of financing, supplier or service agreement. The agreement says that its transfer or assignment is prohibited or permitted only with the other party’s approval. Consider these situations: (i) his business is doing very well and he wants to sell it or its assets while they are most valuable, (ii) his business is doing poorly and he wants to get out by selling it or its assets, (iii) for accounting, management or other purposes he wants to transfer the agreement to another company he owns, a subsidiary or parent company, or to merge his company with another, or (iv) he wants to bring in a few other investors or take his company public.
In all these cases Mr. Jones’ ability to transfer the agreement can be a critical factor in whether he succeeds. A buyer might not be interested in the company or its assets if it cannot take advantage of the agreement. The other transfers might not be possible if the agreement labels them as prohibited assignments or as ones requiring the consent of the other party, either of which occurs frequently in agreements proposed by the other party. Unless these issues are properly dealt with during negotiation of the agreement Mr. Jones could have a big problem. What could he have done?
One solution would have been to define some of some of the activities as not included in the definition of “assignment.” This can sometimes be achieved for transfers to a parent or subsidiary of Mr. Jones’ company, transfers that do not result in a change in the control of his company, or for transfers to or a merger with a company owned or controlled by Mr. Jones.
Another solution would have been to set criteria which if met by the intended transferee would permit the transfer without first having to obtain the other party’s consent. An example would be where the transferee has a specified net worth or at least a net worth greater than Mr. Jones company’s at the time of the transfer, and also has a specified number years of experience in Mr. Jones’ company’s business. Satisfying these criteria could provide comfort to the party on the other side of the agreement that it will be doing business with a responsible and qualified replacement for Mr. Jones.
Even if the desired transfer is allowed Mr. Jones could still be concerned about whether his company will remain liable for his replacement’s compliance with the agreement. That will be the subject of one of my future Legal Briefs.
With over 35 years experience Stu Heller helps his clients understand and improve their business and real estate transactions. His website is at http://www.theleasinglawyer.com. He can be reached at 206-623-0579 and firstname.lastname@example.org. Contact him for a free initial consultation. Be sure to consult your lawyer before applying any of the above to a particular situation.