Beyond regulatory approvals and consents, one of the most intricate and potentially disruptive aspects of an M&A transaction lies within the target company’s existing commercial contracts. These agreements, often buried in the day-to-day operations of a business, can contain legal landmines that materially affect deal value, continuity of operations, and even the ability to close the transaction. Careful due diligence is essential to uncover and address these contractual and commercial pitfalls before they escalate into deal-breakers.
Among the most significant concerns are change of control clauses. These provisions, commonly found in strategic customer or supplier contracts, joint ventures, and partnership agreements, allow the counterparty to terminate, modify, or renegotiate the contract if the company experiences a change in ownership. If not properly managed, these clauses can destabilize critical relationships and reduce the predictability of future revenue or supply.
Closely related are anti-assignment provisions, which prohibit the transfer of a contract or its obligations to another party without prior consent. While these provisions may not explicitly reference M&A transactions, courts in many jurisdictions interpret them as triggered by asset sales or mergers. This is particularly problematic in sectors where intellectual property (IP) licenses, vendor agreements, or data rights are central to the target’s value. If the buyer cannot assume these rights post-closing, it may be forced to renegotiate terms or, worse, lose access altogether.
Additionally, certain contracts include automatic termination rights upon a change of ownership. These provisions require no action from the counterparty, once the triggering event occurs the contract is void. This can lead to the sudden loss of critical agreements at the most vulnerable time: immediately after closing, when operational continuity is paramount.
In the equity context, preemptive rights, rights of first refusal (ROFRs), and rights of first offer (ROFOs) often arise in shareholder or investor agreements. These provisions typically require that existing investors be given the opportunity to purchase shares before they can be sold to a third party. While intended to protect minority interests, they can severely restrict the seller’s ability to transfer equity and delay or complicate the transaction timeline. These rights must be reviewed carefully and, where necessary, waived prior to signing the definitive agreement.
Ultimately, these contractual and commercial restrictions can significantly impact deal structure, timing, and value. Buyers and sellers alike should invest early in thorough contract audits to map out these risks, seek necessary waivers or amendments, and reflect any unresolved issues in the purchase agreement—often through indemnities, closing conditions, or purchase price adjustments. Proactive management of these pitfalls can help ensure a smoother closing and a more stable post-deal integration.
Explore common challenges that may arise during the closing of an M&A transaction:
Consents and Approvals: The First Gate to Closing an M&A Transaction
For guidance, contact Vincent Costa at vcosta@cmmllp.com or 631-738-9100.