Do existing contracts get automatically transferred to the acquiring company?

Question

Company A and Company B have a business relationship lasting for years. All kinds of agreements are in place between them. License Agreements, Supply Agreements, Development Agreements and so on.

Company A gets acquired by Company C. After closing, former Company A now operates as Company AC. What happens to all the existing contracts where Company A was a Party? Do they get automatically transferred?

Having to assign all the existing contracts seems to be an "impossible" task, but i do not know the leagl basis for the transfer. Can anyone shed some light both in US and European jurisdictions?

Answer 1

Contracts are generally assignable, meaning that one company can assign their rights, duties and obligations under the contract. Assignment may be specifically barred by the contract, or it may have certain terms (prior written consent, etc.) attached, but if not, a contract is likely freely assignable. Though a contract is not necessarily "automatically transferred" the reason Company C buys Company A is for its ability to earn Company C over time, which includes the contract between A & B. So unless the original contract has a "no assignments clause" or if an assignment is otherwise impossible or illegal, it is likely that A can freely assign the contract to C.

Answer 2

Parties to contracts must be people.

People are people and companies are (legally) people but businesses are not people.

Company A is bound by the provisions of its contracts so long as the contracts have not been terminated. One of the ways that a contract will be terminated is if Company A ceases to exist; this is similar to the fact that the death of a (natural) person will also terminate a contract.

If Company C wants to keep the rights and obligations of Company A's contracts then they must:

• keep Company A operating as a subsidiary and extract the benefits through dividend or share buy-back payments or the operation of another contract,
• transfer the contracts to Company C. Contracts are, in general, transferable unless:
  1. The contract itself says they aren’t
  2. They are personal services contracts. That is, contracts where only the contracted individual can perform the service, for example, employment contracts. Because of this quirk, most jurisdictions have transmission of business laws that allow employment contracts to be transferred if those laws are followed.
• make new contracts on the same or similar terms with the other party.

Contracts are never "automatically transferred", the party transferring from and the one transferring to have to make the transfer happen, usually they make a contract. Because contracts usually contain both rights and obligations, transferring one will be good consideration for both sides.

A company, like a natural person, can change their name while legally remaining the same company and this will not terminate any contracts.

If the company changes owners in whole or in part, it is still the same company and this will not terminate any contracts. If, instead, the company sells its business (which is an asset of the company that it can sell like a car or a building), then the contracts are transferred as part of that sale.

Answer 3

There are several legal concepts going on in your question here, all of which are relevant to the answer:

1. separate legal entities
2. privity of contract
3. novation of contracts

The answer to your question is it depends on the law of governing the contract. Each State in the US (California, New York, Georgia, …) and each country in the EU (England, France, Spain, …) has its own system of contract law.

Each contract that you refer to in your question might be governed by the law of a different country.

So first…

Separate Legal Entities

In HL Bolton Engineering Co Ltd v TJ Graham Sons Ltd 1957 1 QB 159, Denning LJ described companies like this:

A company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre.

Some of the people in the company are mere [employees] and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what it does.

The state of mind of these managers is the state of mind of the company and is treated by the law as such.

The hallmarks of a separate legal entity are that it can:

• buy, sell and own property of any kind in its own name
• agree to legally binding contracts, and
• sue and be sued in its own name.

Privity of Contract

The doctrine of privity of contract consists of two general rules, one of which is:

• a person who is not a party to a contract cannot sue on the contract to obtain the promised performance.

There are exceptions to privity of contract in some countries’ systems of law.

Novation of Contracts

There is no such thing as an assignment of a contract.

It was held in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd 1993 UKHL 4 (22 July 1993):

It is trite law that it is, in any event, impossible to assign "the contract" as a whole, i.e. including both burden and benefit. The burden of a contract can never be assigned without the consent of the other party to the contract in which event such consent will give rise to a novation.

Although it is true that the phrase "assign this contract" is not strictly accurate, lawyers frequently use those words inaccurately to describe an assignment of the benefit of a contract since every lawyer knows that the burden of a contract cannot be assigned.

In short, contracts are not assigned:

• ownership of assets is assigned.
• contractual rights are "transferred": they're novated.

The legal obligations under a contract cannot be "assigned" or transferred to another person, without agreement from the other contracting party(ies).

To transfer (or “assign”, which is a misnomer) contractual obligations the requirements of novation must be satisfied.

In novation, there is no assignment of rights and obligations: a new contract is created with new rights and obligations, with a new contracting party.

Sales of Companies

So, to answer your question, what sometimes happens is the buyer of Company A (ie Company C) puts the contracting parties of Company A on notice that Company A has been acquired and that Company C will now be fulfilling Company A’s contracts.

Is that an “assignment” of the contract?

Well no, but of the contracting parties of Company A then order products or receive products from Company C, and everyone is happy.

The contracting parties to Company A could say to Company A “You’re in breach of contract for not performing my contract. I can sue you for my loss, caused by your non-performance of the contract”.

Company A could then say, “Well that might be the case, but then you need to mitigate your loss for my breach of contract. There’s a company over there called Company C that can perform the contract that we used to have together on the same terms with you.”.

In respect of your reference to Company AC, please see the heading "Separate Legal Entities" above. As I understand it, there is some sort of doctrine of merger of companies in some States of the US (such as Delaware, I believe), but I don't get into that here, because I'm not a US lawyer. That doctrine of merger might be relevant to the answer to your question under the law of some States of the US.

To an English contract lawyer, going by what you say in your question, Company AC is a trading name of Company C (or vice versa) or Company C changed it's name to "Company AC".

It might work differently in the governing law of the share purchase agreement or asset sale agreement.

If you’re thinking of relying on any of the above for an actual acquisition, please seek medical help.

Answer 4

Because the case is equity/stock purchase (as opposed to assets purchase), the answer is "yes".

From here:

All asset and liabilities transfer at carrying value

The only way to eliminate unwanted liabilities is to contractually sell them back to the target

From here:

All liabilities transfer to the buyer by operation of law, wanted or not. However, the buyer can contractually allocate liabilities to the seller by selling them back.

So, what happens is the contracts get transferred automatically from A to C, but then, if the parties agree, the contracts will be transferred back to A/AC.

Because A has changed its name to AC (as opposed to staying unrelated to C), it would be reasonable to assume that this is exactly what happened: AC has got the contracts back.

Answer 5

Agreew with last commenter's view. The contract should have an assignemnt/permitted transfer provision whereby certain parties can assume the contract without consent of the counterparty. Nevertheless, if Company A is purchased and now operates as a JV Company AC and there's no change of control in that company A still operates its own business as if it were independently owned, then the contract effectively woult not have been assigned and and thus the assingment clause would not trigger. This could be the case where even though company A's owners no longer full own company a following the dilution or being taken out by Company C, they still retain manageral control over Company A and as such there's no change of control triggered.