What exactly is a change of control clause?

In commercial contracts, a change of control clause is one that allows one of the parties to an agreement to terminate or modify its terms if a third party acquires a controlling stake in the other.  A change of control clause grants a party certain rights, such a right to accelerate an obligation to pay or the right to terminate the contract for example.  This is often sought due to a concern that a competitor may acquire a controlling stake in the company that a business is contracting with.

What transactions can trigger a change of control?

While there is no standard definition for a change of control clause, common events which can trigger a change of control clause include:

• the sale of all or a substantial amount of a contracting company’s assets;
• any “merger” of the contracting company with another company; or
• the transfer of a certain percentage of the contracting companies’ securities.

However, the class of commercial contract that can include change of control clauses is by no means closed.  The case law cites joint venture agreements, executive employment agreements and what are change of control clauses to protect the interests of at least one of the parties.

Case law providing examples of a change of control clause

For example, in the case of Plzen Pty Ltd v P&O Wharf Management Pty Ltd [2007] VSC 318 the following was the change of control clause at issue:

“Clause 13.8 of the joint venture agreement stated:

(a) In the event of a Change of Control in respect of any party the following provisions shall apply:

(b) Change of Control for the purposes of this clause means any transfers or allotments of shares in the capital of any party (or that party’s holding companies) which have the effect of altering the identity of the person or group of persons who held directly or indirectly more than one half of the capital of that party (or that party’s holding companies) immediately prior to such transfer or allotment.

(c) The party affected by a Change of Control must immediately notify the other parties in writing of that fact and supply all relevant material particulars of the Change of Control to the other parties.

(d) Upon a Change of Control (whether or not notified under clause 13.8(c)) the party affected by the Change of Control will be deemed to have served a Transfer Notice under clause 13.2, with the Offer Price of Fair Market Value, and the provisions of clauses 13.2, 13.5 and 13.6 will apply with any necessary changes.”

The case of Kay v KRM (Vic) Pty Ltd; Classic Bet (NSW) Pty Ltd v Kay & Ors [2020] NSWCA 92 provides an example of a change of control clause as follows:

“Change of Control” was defined as follows:

“Change of Control occurs, in respect of an entity when:

(a)  a person who did not have Control of the entity at the date of this Agreement acquires Control of the entity; or

(b)  a person who did have Control of the entity at the date of this Agreement ceases to have Control of the entity but does not include a change due to an amalgamation or reconstruction of the shareholding of the entity as at the date of this Agreement involving an Associated Entity of the shareholder as at that date.”

 “Control” was defined as having:

“the meaning given in the Corporations Act 2001 (Cth).”

 Section 50AA of the Corporations Act 2001 (Cth) defines “Control” as:

“(1) For the purposes of this Act, an entity controls a second entity if the first entity has the capacity to determine the outcome of decisions about the second entity’s financial and operating policies.

(2) In determining whether the first entity has this capacity:

(a)  the practical influence the first entity can exert (rather than the rights it can enforce) is the issue to be considered; and

(b)  any practice or pattern of behaviour affecting the second entity’s financial or operating policies is to be taken into account (even if it involves a breach of an agreement or a breach of trust).

(3) The first entity does not control the second entity merely because the first entity and a third entity jointly have the capacity to determine the outcome of decisions about the second entity’s financial and operating policies.

(4) If the first entity:

(a)  has the capacity to influence decisions about the second entity’s financial and operating policies; and

(b)  is under a legal obligation to exercise that capacity for the benefit of someone other than the first entity’s members;

the first entity is taken not to control the second entity.”

In short there is no precise or prescribed form of a change of control clause.

Why include a change of control clause in a commercial contract?

Businesses may find including a change of control clause in a contract to be useful if they are wanting to ensure that the party that they contracted with does not change without their consent.  It is particularly relevant where favourable commercial terms have been negotiated and any new owner may not want to continue on the same terms and conditions.  A change of control clause can act to protect one or both party’s interests.

Links and further references

Legislation

Corporations Act 2001 (Cth)

Cases

Chameleon Mining NL v International Litigation Partners Pte Limited [2010] NSWSC 972; 79 ACSR 462

Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640

Fardell v Coates Hire Operations Pty Ltd [2010] NSWSC 346

Goldus Pty Ltd v Australian Mining Pty Ltd [2015] SASCFC 193

Hancock v Rinehart [2015] NSWSC 646

Hutchison 3G Australia Pty Ltd v Telstra Corporation Limited [2009] VSC 203

Kay v KRM (Vic) Pty Ltd; Classic Bet (NSW) Pty Ltd v Kay & Ors [2020] NSWCA 92

Landream Melbourne Pty Ltd v Aust & NZ International Investment Group Pty Ltd [2021] NSWCA 318

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37

Multicon Engineering Pty Ltd v Federal Airports Corporation (1997) 47 NSWLR 631

Perpetual Custodians Ltd (as custodian for Tamoran Pty Ltd as trustee for Michael Crivelli) v IOOF Investment Management Ltd; Murray v Perennial Investment Partners Ltd [2012] NSWSC 1318

Plzen Pty Ltd v P&O Wharf Management Pty Ltd [2007] VSC 318

Water Board v Moustakas (1988) 180 CLR 491

Further information about commercial contracts

If your business needs a change of control clause included in a commercial contract, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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