Legal risks when transferring contracts and current obligations
Every company enters into multiple agreements with different parties. Think of agreements with suppliers or customers, for example. When acquiring a company, not only the shares or fixed assets are involved, but also the existing contracts and current obligations. Correctly transferring these agreements is essential to avoid unpleasant surprises and legal disputes. This article discusses the most important risks and considerations, with practical examples from the merger and acquisition process.
Transfer of contracts: what does it entail?
In a company acquisition, existing contracts—such as lease agreements, supplier contracts, and employment agreements—can be transferred to the buyer. This is done through an asset/liability transaction or a share transfer. In an asset/liability transaction, contract transfer is not automatic. With a share transfer, the contracts generally remain with the company, and only the shareholder changes. Transfer of the contracts generally does not occur because the company remains a contracting party. Only the entity with control over the company changes.
Legal Risks and Pitfalls
Transferring contracts and obligations entails various legal risks. Some important considerations include:
• Many agreements contain a provision that allows transfer or contract takeover only with the consent of the other party. Without this consent, the buyer of the company cannot derive any rights from the contract.
• Current obligations may extend beyond what was initially anticipated, for example, due to hidden debts, long-term obligations, or penalty clauses.
• A “change of control” provision is also common. This allows a customer or supplier to terminate the agreement if control of a company changes (significantly).
If contracts are not transferred correctly, the buyer may be held liable for damages, depending on the type of agreement. This underscores the importance of due care in the acquisition process.
Practical and Legal Considerations
To mitigate the aforementioned risks, it is advisable to conduct thorough due diligence on all current contracts and review them for transferability, consent requirements, and change of control clauses.
Furthermore, it is wise to make clear agreements in the purchase agreement regarding who is responsible for obtaining the necessary permissions and to include guarantees and indemnities regarding the completeness and accuracy of the assumed obligations.
In an asset/liability transaction, it is especially important to consider Articles 6:155 through 6:159 of the Dutch Civil Code. When someone else takes over an existing debt of the company, this is called debt assumption. This assumption does not automatically apply to the creditor (the person to whom payment is due). In principle, the new party is formally responsible for the debt once the creditor has been informed of the acquisition and has expressly agreed to it. It is therefore important not only to make agreements among yourselves but also to communicate clearly and promptly with the creditor. This prevents misunderstandings and ensures that everyone knows where they stand.
Practical Example
Suppose a company is acquired through an asset/liability transaction and the buyer assumes that all supplier contracts are automatically transferred. However, one of the suppliers points out a contractual consent requirement and refuses to cooperate. As a result, the buyer loses a key supplier and suffers losses. This could have been prevented by explicitly requesting consent before the acquisition and carefully reviewing the contracts.
Conclusion
Taking over contracts and current obligations requires legal precision and care. Both buyer and seller are wise to identify the risks in a timely manner and cover them contractually. Thorough due diligence, clear agreements, and a well-drafted purchase agreement are essential. Fruytier Lawyers in Business is happy to advise you on the legal aspects of contract transfers within your acquisition process.
