You may have seen the headlines about Jingye, a Chinese conglomerate, recently acquiring long-suffering British Steel with promises of a huge £1.2 billion investment over the next decade. When a takeover occurs, whether with a major conglomeration or a small start-up, standard corporate transactions and due diligence are matters we typically handle. But, we also frequently advise on how to deal with the company’s commercial contracts during a change of control. Generally, there will be either an assignment or a novation.
The assignment (or the assignation, if you’re in Scotland) of a contract will not transfer the entire contract to a third party. Under an assignment, you can only transfer the benefit of a contract, and not the burden. Essentially, it would operate like a three-party contract, with the original party still being obliged to perform duties to its counterpart, and a new third party reaping the benefits (such as payments).
An assignment is useful when a parent company establishes a subsidiary, and the parent wants their subsidiary to receive the benefit of fees from the contract in order to help increase that company’s cash flow. The party receiving the benefit will also have the ability to enforce its rights against the other contracting party, so they could sue the other party for late payments. But assignments do not create any new rights.
Although an assignment can be done unilaterally without the other contracting party’s consent, in practice, most contracts will have limitations on how and when another party can assign the benefits of a contract. Usually, the agreement will require the other party to give notice and give consent prior to an assignment being finalised. If you are considering assigning a contract, you should seek out expert advice to determine first, if you can, and second, if it’s the right option for your business.
Unlike assignments, a novation is not a transfer. Instead, it terminates one contract and simultaneously replaces it with another. A new third party takes up the duties and benefits of one of the parties under the original agreement. The old party is then free from any liabilities or obligations under the contract.
These agreements arise most frequently when a company sells all its interest and assets to a third party. There are some risks associated with novation because, in general, all parties will need to sign off before it is valid and the party who remains may take this as an opportunity to renegotiate the terms. Or, they may refuse to sign because the outgoing party is a more attractive prospect to recover from in case of a lawsuit. But in some cases, a novation may still be deemed effective even if all parties haven’t signed. Several courts have determined that companies can consent to a novation by conduct. So, if a business has made payment to the new company, or provided them with services instead of to the outgoing party, they may be held to have consented to the novation, even without signing it.
Both contracts have their own benefits and drawbacks. Ultimately, the type of agreement you will use will depend on your company’s specific circumstances. The team at MBM Commercial would be happy to speak to you about any questions you have on your commercial contracting issues with your business. For more information please contact Danielle Prado, Associate in our IP, Data and Contracts team, firstname.lastname@example.org.