Contractual Obligations During Business Mergers
Business mergers often lead to significant operational shifts that require a close review of existing contractual obligations. These agreements—whether related to vendors, employees, leases, intellectual property, or service providers—often influence the structure and terms of the merger itself. Reviewing which contracts will transfer, be renegotiated, or terminated is a key part of due diligence. Attorneys like those at Eric Lindh Foster Law, LLC discuss how prior agreements may affect decision-making and post-merger operations.
Identifying Binding Agreements
Before a merger moves forward, both parties typically conduct a review of active contracts. This includes not only written agreements but also verbal arrangements and implied obligations. Contracts with automatic renewal clauses, exclusivity terms, or change of control provisions can create legal consequences if not reviewed in advance. Buyers and sellers often want to avoid acquiring liabilities they didn’t anticipate. These obligations can involve long-term payment structures, performance requirements, or indemnity clauses that may carry over after the transaction closes.
Transferability And Assignability
Not every contract automatically transfers during a merger or acquisition. Many agreements include clauses that prohibit assignment without the other party’s written consent. This can create challenges if a company is merging into a new legal entity or being absorbed under a different corporate structure. If consent isn’t obtained and the contract is assigned anyway, the result can be a breach of contract or a termination by the original party. Businesses must assess whether each contract is assignable and confirm that any necessary permissions are secured before finalizing the deal.
Change Of Control Clauses
Certain contracts contain change of control provisions that allow the other party to end or revise the agreement if there is a change in ownership. These clauses are often found in contracts involving confidential information, licensing, and financing. In the merger context, a change of control clause can be triggered even when the original parties remain operational. Businesses need to evaluate these provisions early, since they can give the other party leverage or cause delays in the transaction process. In certain industries, regulatory requirements may also mandate disclosure of such changes.
Addressing Disputes During Due Diligence
Contract disputes sometimes emerge during the due diligence phase. A pending legal claim, unresolved disagreement, or contract breach can affect valuation and bargaining power. For example, if a supplier alleges a long-term agreement was violated, that dispute may reduce the perceived value of the business. A contract dispute lawyer can assess the legal position of the company and help determine whether the dispute presents a significant liability or can be resolved without litigation. Legal counsel may also assist in structuring indemnity provisions to allocate risk between the parties.
Renegotiating Terms As Part Of The Deal
In some cases, the merger or acquisition becomes an opportunity to renegotiate the terms of key agreements. For example, if a company has a long-term lease at an unfavorable rate, the buyer may attempt to modify or terminate that contract as part of the closing. Renegotiation may also occur with vendors, partners, or licensing parties who are concerned about how the merger could affect performance or continuity. These discussions should be documented carefully and may require amendments, new contracts, or waivers depending on the goals of the parties involved.
Post-Merger Contract Management
After the merger is complete, contract management becomes a critical part of integrating business operations. The combined company must track which contracts are still in effect, who is responsible for performance, and what obligations carry over under new management. Failing to monitor key deadlines, payment terms, or service obligations can lead to breach claims or financial penalties. Creating a clear internal process for reviewing, tracking, and managing existing contracts is essential for a smooth transition.
Legal Considerations For Future Agreements
Once a merger is complete, the company often reevaluates how it approaches new contractual arrangements. Lessons learned during the merger—such as challenges with assignability or change of control—can inform better drafting practices going forward. Businesses may work with legal counsel to include clearer definitions, notice provisions, or dispute resolution clauses in future agreements. Adjusting contract terms proactively helps reduce the likelihood of misunderstandings or legal conflicts in future transactions.
Careful Review Protects Long-Term Stability
Mergers often reveal contract risks that may have gone overlooked during regular business operations. From nontransferable agreements to surprise termination clauses, existing contracts can present both hurdles and opportunities. Taking a methodical approach to reviewing, negotiating, and managing these obligations supports a more stable post-merger structure. Attorneys can attest that addressing contractual matters early can help reduce friction and promote business continuity during a major transition.