A change of control provision gives a party certain rights under a contract, such as the right to receive payment, require consent, or terminate the contract, in the event of a specified trigger. Triggers can relate to a change in ownership or control of a counterparty, changes in policies or key personnel, etc. Change of control provisions help to ensure that an agreement does not devolve into a disadvantageous relationship between parties. Because of the significant impact a change of control provision can have on both parties, it is important that these provisions be strategically negotiated and that appropriate diligence is taken to understand any existing provisions before they are triggered.
Identifying Change of Control Triggers
Change of control provisions are not one size fit all. They vary from agreement to agreement based on the needs of the parties. Most relate to events that impact a change in ownership or control, such as the following:
- A merger or sale of all or a substantial portion of the assets of a company
- A transfer of a percentage of a company’s stock (typically 50%)
- Consolidations, reorganizations, or other structural transactions that result in more than half of the board members changing, or a change in shareholders who are able to elect more than half of the board
Drafters are encouraged to be creative in using change of control provisions to ensure they have a say in how they will be impacted by various changes under an agreement. For example, a party may include a provision requiring consent or the option to terminate where there is a change in established suppliers or subcontractors under the agreement. Similarly, a party may use a change of control provision to help protect its rights in the event of the resignation or termination of key executives essential to the company’s operations. Change of control provisions can also be used in negotiating deals with grants to exclusive IP licenses or technology, to address insolvency, receivership, or bankruptcy of a party, or to encourage retention of specific policies.
In identifying triggering events for a change of control provision, a party must seek to serve both the short- and long-term goals of the agreement. Drafters should ask themselves what their key interests are under an agreement, how those interests would be impacted by various changes, and what they can do to protect themselves from foreseeable risks.
Defining Change of Control Provisions
Once a party has identified their key interests, drafters should take careful consideration to tailor the language of the provisions to the corresponding triggering events. There can be significant consequences to poorly defined provisions that are so broad that they are ambiguous, or so narrow that they exclude foreseeable scenarios. A poorly defined provision can result in a transaction falling outside the scope of the definition.
For instance, in Laredo Ridge Wind v. Nebraska Public Power District, the court ruled against a non-changing party where the change of control provision lacked adequate definition. A utility company entered into power purchase agreements (PPAs) with three energy companies (Project Entities) that were built, owned, and operated by Edison Mission Energy Corporation (Edison). Each of the PPAs contained an identical change-of-control provision that required the utility company’s written consent for any Project Entity to transfer a majority of its “direct ownership interests” to a non-Edison entity.
Edison filed for bankruptcy and was purchased by NRG Energy Inc., making the Project Entities subsidiaries of NRG. NRG subsequently sold a parent company of the Project Entities to another corporation. The utility company sought termination of the PPAs under the change of control clause because the NRG transactions took place without its consent. The court found that because the term “direct ownership interests” was not defined in the PPAs, the term’s common meaning would be used. Because the term’s common meaning referred to ownership interest in the Project Entities themselves and did not include ownership in any of the Project Entities’ parent companies, the court ruled that the transfer of ownership interests at the parent-company level did not trigger the change of control provision and the utility company’s consent was not required.
Conversely in Del Glob. Techs. Corp. v. Park the court ruled in favor of a non-changing party where the change of control provision clearly defined and included the issue in dispute. Del Global entered an employment agreement with Samuel Park as the chief executive officer. Under the agreement, Del Global agreed to make an additional payment to Park in the event of a change in control, which was defined in part as “a ‘person’ . . . becoming the ‘beneficial owner’, . . . of securities of the Corporation which permit such person to elect a majority of directors of the Corporation or . . .other technique or device employed to accomplish a change in the control of the Corporation or all or a substantial part of its assets.”
Park's employment at Del Global was terminated by a new board of directors, installed as a result of a proxy contest. Park demanded payment pursuant to the change of control clause. The court found that the proxy contest was a “technique or device employed to accomplish a change in the control of the Corporation.” Where the proxy contest was “exactly” the scenario described under the change of control provision, the court ruled in favor of Park and granted summary judgement.
Ultimately, change of control provisions are a mechanism for parties to protect themselves from unwanted but foreseeable future changes to a counterparty. To be most effective, parties should think beyond boilerplate and consider how to define change of control provisions based on individual needs.
Authored by litigators from our energy team, the Not Just Boilerplate series on Power & Pipes provides real-world examples of the impact that certain contract clauses can have on energy companies. Whether in repeat form agreements, employment agreements, or heavily negotiated one-off deals or mergers, there can sometimes be a tendency to just “grab” clauses from prior agreements, with the thinking that “it has always worked before . . .”
Our energy lawyers have experience with a wide array of litigation matters that have turned on various common contract clauses, some of which may have not received much attention at the time they were included in the agreement. We thought it might be useful to pass on some real-world “lessons learned” from the litigators who have actually fought the battles. Such perspectives might help to inform your next contract—or dispute.