There are three basic structures that private equity buyers utilize in acquiring a target business, each of which has several possible variations of its own: (1) a buyer’s acquisition vehicle can purchase the equity of the entity housing the business from the owners of that entity, (2) a buyer’s acquisition vehicle can purchase all or some specific portion of the assets comprising the business from the entity that owns those assets, or (3) a buyer’s acquisition vehicle can merge with the entity that owns and operates the business. The decision as to which one of those basic structures is employed (and any possible variations that may be needed to any of these structures) is the consequence of a variety of practical and legal inputs, including the tax treatment accorded each structure, the assumption of ongoing liabilities that is occasioned by each structure, and the impact of each structure on contracts that are important to continue in effect post acquisition. And that last input can sometimes be a determining factor in choosing a stock purchase or merger over an asset acquisition. Indeed, one of the most fundamental aspects of the legal diligence undertaken by a private equity buyer respecting a target business is whether the acquisition will trigger any anti-assignment or change-of-control provisions set forth in the target’s business contracts. Thus, identifying any “required consents” respecting truly material contracts with anti-assignment or change-of-control provisions that are determined to be triggered by the proposed acquisition’s structure is a critical part of any purchase of a target business.
Anti-Assignment and Change-of-Control Clauses Generally
Anti-assignment and change-of-control clauses come in a variety of forms.1 Some only restrict the actual assignment of the applicable contract by a party to that contract (and some contracts that contain no anti-assignment clause at all are deemed by statute to have such a clause2). Frequently, structuring the transaction as a stock purchase or reverse triangular merger will avoid applicability of such provisions in most states,3 as the contracting party has not changed as a result of that transaction. Some provisions, however, purport to prohibit the transfer of control by the direct or indirect equity holders of a party to the contract. And sometimes the stock purchase or merger alternative to an asset acquisition is not available (because of tax or ongoing liability concerns) despite the fact that the asset acquisition structure will trigger a common variety anti-assignment clause that does not include a change-of-control provision.
These provisions can be the subject of intense analysis during the diligence process depending on the nature and importance of the contracts in question. But it is inevitable that not all contracts containing anti-assignment or change-of-control clauses that may be triggered as a result of proposed transaction, will make the list of “required consents” that must be obtained as a condition to the buyer’s obligation to close the transaction. While the seller may be obligated to use an appropriate level of “efforts”4 to obtain all consents noted on the schedules, only a subset, if any, of those listed contracts will require the actual delivery of a consent as a condition to closing. So, what is the workaround to address contracts where a consent may be required as a result of the purchase transaction but it is not in fact obtained?
Workaround Provisions Generally
If the clause triggering a required consent is a change-of-control and the transaction is structured as a stock purchase or reverse triangular merger, there is no particular workaround that is widely utilized to avoid a default under or termination of the contract so triggered, although one could envision some theoretical possibilities. In most cases, the buyer simply proceeds on the basis that the contract, which was not deemed material enough to make the list of “required consents,” will work itself out post-closing. But where the clause triggering a required consent is a standard anti-assignment provision and the transaction is structured as an asset purchase, there is a well-recognized and frequently used workaround: a specific provision provides that regardless of anything to the contrary in the agreement, no contract shall be assigned to the buyer if such an assignment, without the consent of the counterparty, would be ineffective or constitute a breach of the contract, and such consent is not obtained prior to the closing; however, the seller nonetheless agrees that the buyer will be entitled to the benefits of such contract and that the seller will hold in trust and act as buyer’s agent in respect of any payments or other benefits of that contract until such consent is obtained (and the buyer agrees to correspondingly bear the economic burdens of the non-assigned contract). While this is an imperfect solution, it is widely believed to accomplish the objective of duplicating as much as possible the effect of an assignment, without an assignment having in fact been made. But does it?
A Recent English Case Addresses Anti-Assignment Workarounds
A recent decision of the English Court of Appeal, First Abu Dhabi Bank PJSC v. BP Oil International Ltd,  EWHC 2892 (Comm), provides a rare judicial determination regarding the effectiveness of this common workaround to an anti-assignment clause. While the BP Oil decision did not involve a private equity acquisition transaction, the case is nevertheless instructive of how a common law court (including potentially one in the U.S.) may view these anti-assignment workarounds.
The BP Oil case involved a purchase by First Abu Dhabi Bank PJSC, formerly National Bank of Abu Dhabi PJSC (“NBAD”) of 95% of the invoiced amount of certain sales of oil made by BP Oil International Limited (“BPOI”) to Société Anonyme Marocaine de L’Industrie de Raffinage (“SAMIR”), pursuant to a contract entered into between BPOI and SAMIR, the general terms and conditions for which included the following anti-assignment clause:
Neither of the parties to the Agreement shall without the previous consent in writing of the other party (which shall not be unreasonably withheld or delayed) assign the Agreement or any rights or obligations hereunder. In the event of an assignment in accordance with the terms of this Section, the assignor shall nevertheless remain responsible for the proper performance of the Agreement. Any assignment not made in accordance with the terms of this Section shall be void.
According to the court, the purchase letter agreement entered into between NBAD and BPOI (the “Purchase Letter”) represented a form of non-recourse receivables financing under which BPOI transferred almost all the risk of non-payment by SAMIR to NBAD and received a cash advance in respect of the receivable well in advance of the date the payment from SAMIR was due. Despite being styled as a purchase of BPOI’s rights under the contract with SAMIR, neither BPOI nor NBAD sought SAMIR’s consent to the assignment of BPOI’s rights under the contract. And sometime after NBAD “purchased” BPOI’s rights to receive payment from SAMIR, SAMIR took steps to file for insolvency protection in Morocco, without having paid the invoiced amount owed to BPOI and purchased by NBAD. NBAD then sought to recover the amount it had paid to BPOI by claiming that BPOI had breached the following representation set forth in the Purchase Letter:
BPOI is not prohibited by any security, loan or other agreement, to which it is a party, from disposing of the Receivable evidenced by the Invoice as contemplated herein and such sale does not conflict with any agreement binding on [BPOI].
And BPOI had in fact agreed in the Purchase Letter that if BPOI breached any of its representations under the Purchase Letter, then NBAD would have the right to receive from BPOI 95% of any unpaid amounts of the Invoice together with interest thereon (equal to NBAD’s cost of funds plus 4.6%) from the date SAMIR was required to pay until the date that NBAD received all amounts due to it under the Purchase Letter. In other words, a breach of any representation turned the nonrecourse financing into a recourse financing. But the Purchase Letter specifically included anti-assignment workaround language that provided that if an assignment of BPOI’s rights under its contract with SAMIR was not permitted, NBAD would be subrogated to BPOI’s rights, title, interest and claims against SAMIR under the contract, that BPOI would take all legal actions against SAMIR for the benefit of NBAD, and that BPOI would hold in trust and turn over to NBAD any sums received by BPOI from SAMIR.
BPOI claimed that the anti-assignment workaround language was effective such that no assignment that would have been prohibited by the BPOI contract with SAMIR actually took place. Indeed, the representation made by BPOI specifically referred to any prohibition on “disposing of the Receivable evidenced by the Invoice as contemplated herein.” The anti-assignment workaround alternatives that were designed to kick in if an actual assignment was not permitted were indeed not only contemplated by but specifically provided for in the Purchase Letter. Accordingly, the court determined that BPOI had not breached its representation, because what had occurred was not an assignment of the contract or any rights thereunder, but rather a transfer of the fruits of the contract, i.e., the payments that BPOI was entitled to receive from SAMIR. NBAD can require BPOI to take legal action against SAMIR to collect the invoiced amounts owing to BPOI for the benefit of NBAD, but it cannot require BPOI to repay the money advanced to BPOI by NBAD to “purchase” those invoiced amounts in accordance with the terms of the Purchase Letter. Of course, BPOI is apparently unlikely to collect any such payments from SAMIR due to SAMIR’s insolvency proceedings. But such was the deal that the court found that NBAD had made with BPOI.
Some Suggestions for Renewed Focus on Workaround Provisions
While the BP Oil case provides some rare guidance on how one common law court views anti-assignment workaround provisions, it is hardly a general endorsement. Indeed, anti-assignment workarounds may be important backstops in situations where consents cannot be obtained and a risk assessment as to the likelihood of counterparty blowback is deemed low, but they are hardly a panacea. After all, the key to ensure that the workaround language actually works is to negate any actual assignment having been made to the extent an assignment would violate or be ineffective in the face of a specific anti-assignment clause. And the workaround language then requires the seller to actually continue to be involved with and assist in delivering the benefits of the contract, with the buyer performing on behalf and as the agent of the seller, any required obligations. Awkward at best and, in some cases, truly problematic if the buyer actually requires any specific action by the seller and the seller is then out of business or has instituted bankruptcy proceedings and is still deemed to be the actual party to the contract.5 In other words, anti-assignment workaround provisions only work because they prevent an assignment of the affected contract from occurring; thus, the effect of the workaround does not even come close to truly duplicating the effect of an actual assignment.
At a minimum, this recent English case may suggest the need for some modifications or adjustments to the standard asset purchase anti-assignment workaround provision. But it may also suggest the need for some renewed focus on which contracts containing anti-assignment clauses truly can come off the required consent list, and what risks the buyer is assuming as a result of these contracts that continue to burden and benefit the business, but which may require the continued involvement of a seller that may have lost interest, or whose involvement may be difficult if not impossible to obtain.