Why you need a separate clause

Where a company's shares are sold, the contracting entity remains the same legal person. An anti-assignment clause is not triggered, no novation occurs, and the contract continues unchanged - even though the economic ownership and strategic direction may have shifted entirely. Without an explicit change of control clause, a competitor could acquire 100% of your counterparty with no contractual consequence whatsoever.

This is why private-equity buyers prefer share deals: they avoid triggering anti-assignment clauses that an asset deal would. If you care who ultimately controls your counterparty, the change of control clause is the only provision that protects you - and it has to be drafted in.

Defining 'control'

There is no standard definition of control under English law; each contract must define it. The statutory definitions are useful reference points: section 1124 of the Corporation Tax Act 2010 is the broadest - the power to secure that the company's affairs are conducted according to a person's wishes, by any means (shares, voting power, or powers in the articles) - capturing both de jure and de facto control; and section 1159 of the Companies Act 2006 defines a subsidiary by majority voting rights or board control.

Best practice is a bespoke definition, informed by these concepts, that expressly covers beneficial as well as legal ownership (to catch nominees), direct and indirect control (to catch holding-company changes), de facto as well as de jure control, and persons acting in concert (to stop circumvention through fragmented holdings).

Direct versus indirect: the most common gap

The failure to capture indirect changes of control is the most common drafting deficiency. Where Company A contracts with Company B (owned by Company C), and a buyer acquires Company C, Company B's immediate shareholder has not changed - it is still owned by Company C. A clause that only covers a change in the ownership of Company B's shares is not triggered at all.

So the clause must expressly reference direct or indirect changes, and define the ultimate parent or ultimate beneficial owner, to catch a change anywhere up the corporate chain. This is acute in private-equity structures, where the chain runs from the fund's general partner down through holding companies to the portfolio company - a clause that examines only direct shareholding will miss changes higher up.

PE and VC structures

Fund structures need careful calibration. A change in a fund's limited partners (the passive investors) is generally not intended to trigger change of control at the portfolio-company level; a change in, or replacement of, the general partner (which exercises management control) is the significant trigger. So the clause should distinguish a change of economic interest (LP transfers, usually carved out) from a change of management control (GP replacement, which should be captured).

Define permitted controlling investors carefully so routine fund events - GP-led secondaries, LP transfers - do not inadvertently trigger termination, while genuine changes of management control do. Getting this wrong either fetters ordinary fund activity or misses the change you cared about.

Consequences and mechanics

Decide what a change of control does. The usual mechanic is a notification obligation plus a right for the other party to terminate within a window - but it could instead require consent, trigger a price change, or accelerate repayment (as leveraged-finance facilities almost always do). Include an intra-group reorganisation carve-out so routine restructurings where the ultimate parent is unchanged do not trigger the clause.

And remember the clause cuts both ways in M&A: a buyer doing due diligence must map every material contract for change of control triggers, because each one is a required consent or a termination risk on the deal. The drafting and the diligence are two sides of the same provision.

Use at the desk

Practical checklist

  • Add a change of control clause - an anti-assignment clause does not catch a share sale.
  • Define 'control' bespoke, informed by CTA 2010 s.1124 and CA 2006 s.1159, covering beneficial and de facto control and acting in concert.
  • Capture 'direct or indirect' changes and define the ultimate parent or beneficial owner.
  • For fund structures, carve out LP transfers but capture GP replacement (management control).
  • Add an intra-group reorganisation carve-out so the ultimate parent staying the same does not trigger it.
  • In M&A, map every material contract for change of control triggers as required consents.

This guide is informational only and is not legal advice. It does not replace advice from licensed counsel on the facts of a specific transaction.

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