A company’s key contracts represent a valuable business asset. Thus, it’s crucial that the contracts remain in force as a business changes hands from the seller to the buyer when the business is sold.
Asset sales and equity sales
Although deal lawyers generally describe their practice as involving “mergers and acquisitions,” the sale of a small or medium-sized business is usually structured as either an equity sale or an asset sale. In an equity sale, the buyer buys the equity from the owner(s) of the target company — stock in the case of a corporation and membership interests in the case of a limited liability company. The business is transferred to the new owners, corporate or limited liability company entity and all, and the target becomes a wholly-owned subsidiary of the buyer. There is no change in the status of the target entity itself, and its contracts, assets, and liabilities remain with the entity.
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In a fun little experiment recently, I set up a question on Quora, “What’s the best anti-assignment provision in a contract ever?”, and invited people to submit clauses for the crowd to vote on.
Of course, asking what’s the best provision ever is a bit of a trick question, because the answer depends on the contract in which it’s to be used. For example, in a short and sweet agreement, you might want to go for minimum viable legal protection instead of a more full provision. Two of the players submitted answers along those lines. Here’s an example, which was submitted by Dana Shultz: “Neither Party may assign any of its rights or obligations under this Agreement without the prior written consent of the other Party.” [click to continue…]
I’ve written on occasion about the effectiveness of electronic communications to create binding contracts. For example, in Contracts Quiz: Is This Email Settlement Binding? I discuss a recent case in which a court found that an exchange of emails created a binding settlement agreement, and “NO LIMIT” + “Awesome!” = Contract Modification considers a pithy instant message conversation that modified a written contract. Not all electronic communications that purport to have legal consequences are effective, however.
Venkat Balalsubramani wrote about a recent case where an email exchange was held not to create a contract in Email That Says “Done … thanks!” Doesn’t Transfer Copyrights — MVP Entertainment v. Frost. Here’s an excerpt from Venkat’s description of the facts:
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