Change of control triggering event: Overview, definition, and example
What is a change of control triggering event?
A change of control triggering event refers to a situation in which there is a significant shift in the ownership or control of a company, such as a merger, acquisition, or sale of a majority of the company’s assets or shares. In the context of business agreements, such as contracts, loans, or securities, a "change of control" provision may be included, which outlines specific events or circumstances under which the control of the company is considered to have changed. When such an event occurs, it can trigger certain rights, obligations, or consequences, such as the acceleration of debt repayment, the ability for parties to terminate agreements, or the renegotiation of terms.
This provision is commonly included in financial contracts (such as loans or bonds), executive employment agreements, or merger and acquisition deals to protect parties from unwanted or unexpected changes in ownership that may impact their interests.
Why is a change of control triggering event important?
A change of control triggering event is important because it provides a mechanism to protect parties in business agreements from the risks associated with a shift in the company’s ownership or control. For creditors, investors, or key stakeholders, the ability to trigger certain actions, such as demanding early repayment or terminating contracts, helps mitigate potential risks from a new owner who may not be as financially stable or reliable.
For the company undergoing the change, understanding when a triggering event might occur helps ensure that management and shareholders are aware of the potential impacts on agreements or contractual obligations. It also provides clarity on how ownership transitions will affect ongoing business operations and obligations.
Understanding change of control triggering event through an example
Imagine a company, ABC Corp., that has issued bonds as part of its capital-raising efforts. The bond agreement includes a change of control provision stating that if a party acquires more than 50% of the company's shares, it will trigger an event that requires ABC Corp. to repay the bonds early. This provision helps protect bondholders from the risk of their investment being affected by a new controlling shareholder, who may change the company’s strategy or financial standing.
In another example, an employee, Jane, has a clause in her executive employment contract that states she will receive a significant bonus if the company is sold or undergoes a change of control. If the company is acquired by a competitor, Jane’s contract is triggered, and she is entitled to a payout based on the terms set in her agreement.
An example of a change of control triggering event clause
Here’s how a change of control triggering event clause might appear in a loan agreement:
"In the event of a Change of Control of the Borrower, as defined herein, the Lender may, at its sole discretion, accelerate the repayment of all outstanding loans and demand immediate repayment. A 'Change of Control' is defined as the acquisition by a single entity or group of entities of more than 50% of the voting shares of the Borrower, or the sale of all or substantially all of the Borrower’s assets."
Conclusion
A change of control triggering event is a critical provision in business contracts, designed to protect stakeholders from the risks associated with significant shifts in company ownership. It provides a framework for taking action—such as accelerating debt repayment, renegotiating terms, or triggering certain rights—when control of the company changes hands. For businesses, understanding when such events occur and the implications they have on contracts and agreements is essential for managing risk and ensuring smooth transitions during mergers, acquisitions, or other ownership changes.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.