Change of ownership: Overview, definition, and example
What is change of ownership?
Change of ownership refers to the transfer of control or majority interest in a business, asset, or property from one party to another. This can occur through a sale, merger, acquisition, inheritance, or restructuring. Contracts often include change of ownership clauses to define what happens when control of an entity or asset shifts.
For example, in a franchise agreement, a franchise owner may need the franchisor’s approval before selling the business to a new owner. Similarly, in a business loan agreement, a lender may require the borrower to notify them of any ownership changes that could impact financial stability.
Why is change of ownership important?
Change of ownership provisions help protect stakeholders, maintain business continuity, and ensure compliance with contractual obligations. Without such clauses, ownership transfers could create legal disputes, financial instability, or operational disruptions.
For businesses, defining change of ownership in contracts ensures that key approvals, financial requirements, or operational safeguards are in place before a transfer occurs. This is especially crucial in regulated industries, joint ventures, and investment agreements.
Understanding change of ownership through an example
Imagine a small business owner sells their company to a new buyer. The company’s supplier contracts include a change of ownership clause, requiring the supplier’s approval before transferring agreements to the new owner. This ensures the supplier maintains a relationship with a financially stable business.
In another scenario, a tech startup secures venture capital funding. The investment agreement includes a clause stating that if majority ownership of the startup changes, the investor has the right to approve the new owner or withdraw funding. This protects investors from unexpected control shifts.
Example of a change of ownership clause
Here's an example of a change of ownership clause:
“In the event of any change in ownership or control of the Company, including but not limited to a sale, merger, or transfer of a majority interest, the affected Party shall provide written notice to the other Party within [X] days. The non-transferring Party reserves the right to terminate this Agreement or require additional approvals prior to the transfer.”
Conclusion
Change of ownership clauses provide legal and financial stability by ensuring that ownership transfers follow agreed terms. These provisions help protect business relationships, prevent disputes, and maintain compliance with contractual obligations.
By including a change of ownership clause in agreements, businesses can ensure proper approvals, safeguard financial interests, and establish a clear process for ownership transitions.
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.