assignment by operation of law canada

One of these things is not like the other: A Canadian amalgamation is similar to a Delaware merger, but there are critical differences

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Business combinations are typically referred to in Canada as “mergers;” however, this shorthand obscures the fact that under Canadian corporate law, unlike in Delaware, the concept of a “merger” does not exist. Rather, Canadian corporate statutes provide for several different alternatives for effecting a “merger,” including amalgamations, which are generally regarded as the functional equivalent to Delaware mergers.

A recent decision of the Delaware Superior Court (the Court) serves as a useful reminder that there are important differences between a Canadian amalgamation and a Delaware merger that can impact contractual interpretation and deal structuring.

In MTA Canada Royalty Corp v. Compania Minera Pangea, S.A. de C.V. , the Court’s conclusion that a Canadian amalgamation had the same legal effect as a Delaware merger resulted in a dismissal of the plaintiff’s claim for relief.

The decision centred on the interpretation of an anti-assignment clause in a Delaware law-governed acquisition agreement which prohibited the plaintiff from assigning the agreement or any of its rights, interests or obligations, “by operation of law or otherwise,” without the defendant’s prior written consent. Under Delaware law, in the context of a merger in which one entity is designated as the “surviving entity” and the other is merged out of existence, such a prohibition on assignment generally applies where the contracting party is the non-surviving entity in the merger.

Critically, the plaintiff conceded—and the Court accepted—that a Canadian-law governed amalgamation undertaken by the plaintiff was equivalent to a merger under Delaware law, and more specifically, that the plaintiff’s participation in the amalgamation was analogous to the non-surviving entity’s participation in a merger. As such, the Court accepted that the amalgamation resulted in the entity that was party to the acquisition agreement ceasing to exist. The amalgamation therefore constituted an assignment by operation of law of the acquisition agreement, and was rendered void by the anti-assignment clause. Accordingly, the Court dismissed the plaintiff’s claim.

Canadian amalgamations do not, in fact, extinguish the existence of any of the amalgamating entities or result in the creation of an entirely new entity. Rather, as Dickson J. of the Supreme Court of Canada famously held in R. v. Black & Decker Manufacturing Co. , an amalgamated corporation is akin to “a river formed by the confluence of two streams.” Dickson J. distinguished amalgamations from other acquisition structures and observed that amalgamations are undertaken “usually for the express purpose of ensuring the continued existence of the constituent companies.” Canadian corporate legislation reinforces Justice Dickson’s analysis. In addition, British Columbia’s Business Corporations Act —which was the statute under which the amalgamation at issue proceeded—expressly contemplates that an amalgamation does not constitute an assignment by operation of law.

The decision in MTA Canada Royalty may have been informed by a misunderstanding of the effect of a Canadian amalgamation. Had the Court been presented with a clearer picture of the effect of an amalgamation on the amalgamating entities, it may have reached a different conclusion. More generally, the Court’s decision serves as a reminder that subtle, yet critical, differences between Delaware mergers and Canadian amalgamations may impact parties’ contractual rights and need to be considered when conducting due diligence and structuring cross-border transactions.

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Delaware Court holds anti-assignment clause prevents enforcement of contract after merger

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On September 16, 2020, the Superior Court of Delaware issued an order with potential implications for companies contemplating acquisitions of businesses or assets.  In MTA Can. Royalty Corp. v. Compania Minera Pangea , S.A. De C.V. , No. N19C-11-228 AML CCLD, 2020 Del. Super. LEXIS 2780 (Sept. 16, 2020), Judge Abigail M. LeGrow held that, following a merger,[1] the surviving company lacked standing to enforce a contract entered into by its predecessor (the non-surviving company in the merger) because the contract’s anti-assignment clause prohibited assignment “by operation of law”. 

Companies considering acquisitions should carefully review their target’s contracts for anti-assignment clauses that prohibit assignment “by operation of law”, which Delaware courts interpret to include certain mergers.  In addition, where a target’s key contracts contain anti-assignment clauses with such language, companies should carefully consider the preferred transaction structure.  In a reverse triangular merger, the acquirer’s newly formed subsidiary is merged into the target, with the result being that the target survives and becomes the acquirer’s subsidiary.  By contrast, in a forward triangular merger, the target does not “survive” and its rights are transferred to the existing subsidiary, which may implicate anti-assignment clauses.  Reverse triangular mergers do not face the same issue because the target continues its corporate existence as a subsidiary of the acquirer.

Background of the contract and subsequent merger

In 2016, Compania Minera Pangea, S.A. de C.V. (“CMP”) purchased mineral rights in the El Gallo Mine from 1570926 Alberta Ltd. (“Alberta”).  In exchange, CMP paid Alberta $5.25m in cash at closing and agreed to pay Alberta an additional $1m in 2018 subject to certain conditions.  Of note, the agreement contained the following anti-assignment clause (the “Anti-Assignment Clause”):

Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned or delegated, in whole or in part, by operation of law or otherwise, by [Alberta] without the prior written consent of each other party, and any such assignment without such prior written consent shall be null and void. . . . [T]his Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns.

In July 2017, Alberta merged with Global Royalty Corp. (“Global”), a subsidiary of Metalla Royalty & Streaming Ltd., and Global was the surviving entity.  Following that transaction, Global changed its name to MTA Canada Royalty Corp. (“MTA”).  In November 2019, MTA brought a breach of contract claim against CMP based on CMP’s alleged failure to pay the $1m in consideration due in 2018.

Superior Court holds that anti-assignment clause extends to certain mergers

CMP argued that MTA lacked standing to enforce Alberta’s contract with CMP because, per the Anti-Assignment Clause, Alberta was required to obtain CMP’s written consent before assigning its rights to MTA.  MTA argued that the Anti-Assignment Clause was meant to prevent third-party assignments, not “successor assignments” like Alberta’s merger.   Id. at *11-12.  To make this argument, it relied on a 1993 Chancery decision, in which then-Vice Chancellor Jacobs had held that, subject to certain conditions, anti-assignment clauses do not apply to mergers unless mergers are explicitly prohibited.   Star Cellular Tel. Co. v. Baton Rouge CGSA ., 1993 Del. Ch. LEXIS 158, at *25 (July 30, 1993).  According to MTA, because the last sentence of the Anti-Assignment Clause referred to “successors”, it was clearly not intended to extend to mergers.

The Superior Court disagreed.  It explained that, as a result of the merger, Alberta had ceased to exist, so MTA could only enforce the contract if it showed that the Anti-Assignment Clause did not apply.   MTA , at *6.  It then held that the Anti-Assignment Clause clearly barred Alberta’s transfer of rights through a merger because the clause prevented assignment “by operation of law”, which Delaware case law had interpreted as referring to forward triangular mergers.   Id.  at *7-14.  In light of what it regarded as a straightforward application of the Anti-Assignment Clause, the Superior Court did not engage in the  Star Cellular analysis.  The Superior Court found that the reference to “successors” in the Anti-Assignment Clause meant only that “valid successors” had the right to enforce the contract.   Id. at *13.

Potentially at odds with Chancery precedent?

Of special relevance is the Superior Court’s treatment of existing Delaware case law on anti-assignment clauses and forward triangular mergers.  Existing precedent from the Court of Chancery held that anti-assignment clauses containing both a prohibition on assignment “by operation of law” and a reference to “successors” were ambiguous.  Under the Star Cellular test, this ambiguity was construed against the application of the anti-assignment clause. 

Specifically, MTA  appears at odds with the Chancery ruling in Tenneco Auto. Inc. v. El Paso Corp. , which also involved the impact of an anti-assignment clause following a forward triangular merger.  C.A. No. 18810-NC, 2002 Del. Ch. LEXIS 26 (Mar. 20, 2002).  The language of the anti-assignment clause in Tenneco  was similar to that in MTA :  both clauses prohibited assignment “by operation of law” while also referencing “successors”.  In Tenneco , Vice Chancellor Noble found that those conflicting references made the anti-assignment clause ambiguous, meaning that, under the Star Cellular test, the successor company could enforce the contract.   Id. at *7-10.  The MTA Court did not explain why it reached the opposite result.

Similarly, in ClubCorp, Inc. v. Pinehurst, LLC , Vice Chancellor Parsons held that, following a forward triangular merger, an anti-assignment clause with language like that in Tenneco was ambiguous because the agreement both referenced “successors” and prohibited assignment “by operation of law”.  No. 5120-VCP, 2011 Del. Ch. LEXIS 176, at *26-29 (Nov. 15, 2011).  Again, the ambiguity militated in favor of finding that the anti-assignment clauses did not apply to the merger.   MTA did not address Pinehurst.

Insights from MTA

MTA has several significant implications for practitioners.  The first is a reminder to carefully review a target’s contracts for anti-assignment clauses.  Such clauses in important contracts should be flagged and thoughtfully evaluated. 

In addition, practitioners should remain aware that Delaware courts interpret the phrase “by operation of law” in assignment clauses to refer to mergers in which the target company does not survive.  The presence of this language in anti-assignment clauses in a target’s important contracts (if those contracts are governed by Delaware law) should prompt a discussion about the appropriate transaction structure.  For example, in MTA , the Court suggested that MTA would have had standing to enforce the contract with CMP if it had been merged through a reverse triangular merger rather than a forward triangular merger.  The Superior Court cited a 2013 Chancery decision, Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH , in which Vice Chancellor Parsons found that “a reverse triangular merger does not constitute an assignment by operation of law”.  62 A.3d 62, 83 (Del. Ch. 2013). 

If dealing with similar language in anti-assignment clauses in important agreements, practitioners should consider alternative transaction structures that would allow the target to retain its corporate existence.  According to MTA , such alternatives should allow successor companies to enforce agreements without running afoul of anti-assignment clauses prohibiting “assignment by operation of law”.[2]

[1] The transaction was an amalgamation under Canadian law, which the parties and the Court agreed was the equivalent of a merger under Delaware law.  The transaction structure was equivalent to a forward triangular merger. 

[2] This may not be true in other jurisdictions.  For example, under California law, a reverse triangular merger has been found to be a transfer of rights by operation of law .  See SQL Sols. v. Oracle Corp. , 1991 U.S. Dist. LEXIS 21097, at *8-12 (N.D. Cal. Dec. 18, 1991). 

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Anti-Assignment Clause Prohibiting Assignment by Operation of Law Applies to Subsequent Merger

In MTA Canada Royalty v. Compania Minera Pangea, Judge Abigail LeGrow considered whether an agreement’s anti-assignment clause operated to void an assignment that occurred as a result of a subsequent merger between a contracting party to the agreement and a third party.

October 07, 2020 at 09:03 AM

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In MTA Canada Royalty v. Compania Minera Pangea, S.A. de C.V. , C.A. No. N19C-11-228 AML CCLD (Del. Super. Sept. 16, 2020), Judge Abigail LeGrow considered whether an agreement’s anti-assignment clause operated to void an assignment that occurred as a result of a subsequent merger between a contracting party to the agreement and a third party. She held that the anti-assignment clause prohibiting an assignment “by operation of law” without the other party’s consent applied to a subsequent merger in which the contracting party was not the surviving entity.

In 2016, the defendant, Compania Minera Pangea, S.A. de C.V. (CMP), purchased certain mineral rights in a mine located in Mexico from Alberta Ltd. They executed an assignment and assumption agreement that provided, in addition to a cash payment to Alberta of $5.25 million at closing, an additional $1 million payment to Alberta conditioned on the mine remaining in operation after a specified date. The agreement, which was governed by Delaware law, included an anti-assignment clause prohibiting Alberta from assigning its rights to any other party without CMP’s consent. The clause read, in part:

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Spot the Difference: Mergers and Amalgamations in Corporate Transactions

Corporate transactions take on many different forms, including arm’s length mergers and acquisitions transactions and related party corporate reorganizations. One common element of many corporate transactions is the combination of two or more corporations into a single successor corporation, often referred to by those involved with corporate transactions as a “merger”. The legal concept of “merger” exists in the U.S.; under Canadian law, however, a typical method of combining two or more corporations is referred to under corporate statutes as an “amalgamation”. Although an amalgamation is similar in principle to a U.S. merger, there are some key differences that are relevant considerations when structuring corporate transactions and completing diligence on target corporations.

Under Canadian law, the amalgamating corporations continue as one corporation that shares each pre-amalgamating entity’s rights and liabilities. Neither predecessor is dissolved – each survives in the resulting entity. The Supreme Court of Canada has analogized the legal concept of amalgamation to “a river formed by the confluence of two streams, or the creation of a single rope through the intertwining of strands”[ 1 ], effectively maintaining their shared history while taking on a new form.

In contrast, in the U.S., corporate mergers have the effect of one corporation surviving and the other(s) ceasing to exist as legal entities. The surviving corporation absorbs the liabilities and assets of the other non-surviving entities. Consolidations are also available in the U.S. as illustrated by the corporate statute in Delaware; although similar to Canadian amalgamations, a key distinction is that the resulting corporation is considered a “new corporation” under Delaware law. In neither case does the resulting corporation retain the histories of all its predecessors. As such, contractual obligations from any non-surviving entities legally undergo an assignment and could therefore be subject to anti-assignment provisions contained in contracts to which the non-surviving entities are a party.

If a potential corporate transaction triggers an anti-assignment provision in a contract, a corporation will likely be required to obtain consent from the other parties to the contract if it wishes to ensure the resulting entity can avail itself of that contract’s benefit. In M&A transactions, the contracts that a target company are party to may be a key component in the value the purchaser attributes to the transaction. In corporate reorganizations that are often implemented for tax purposes or to simplify corporate structures, it is likely important to avoid disrupting status quo with respect to contractual rights and obligations of the entities within the corporate group. For these reasons, among others, understanding the distinction between U.S. mergers and Canadian amalgamations, and the interaction such concepts have with anti-assignment provisions, is crucial for determining whether anti-assignment provisions are triggered so that any necessary third party consents can be obtained.

The consequences of failing to obtain third party consent were considered in MTA Can Royalty Corp v Compania Minera Pangea, SA de C.V. (“ MTA Can Royalty ”)[ 2 ], where the Superior Court of Delaware applied the U.S. merger concept to an amalgamation completed under Canadian law. Notably, the amalgamated party conceded that the amalgamation at issue in the case was “equivalent to a merger under Delaware law.” As a result, the surviving entity was unable to benefit from a contract of the Canadian predecessor that included an anti-assignment clause prohibiting assignment “by operation of law or otherwise”. If the amalgamated party seeking to benefit from the contract had not conceded the equivalence of an amalgamation under Canadian law with a merger under Delaware law but rather distinguished between the two legal concepts, the Court’s decision regarding the inability of the “surviving entity” to benefit from its predecessor’s contract may have been different.

Whether a corporate transaction involves an M&A transaction or an internal corporate reorganization, it is critical that parties remain cognizant of jurisdictional nuances, particularly when colloquial terms have the potential of confusing legal concepts from different jurisdictions. In the case of U.S. mergers and Canadian amalgamations, the Delaware Court’s decision in MTA Can Royalty serves as a cautionary tale.

For further advice on structuring domestic or cross-border corporate transactions, please contact the author or another member of McMillan LLP’s Business Law Group.

[1] [1975] 1 SCR 411 [2] MTA Canada Royalty Corp. v. Compania Minera Pangea , S.A. de C.V., C. A. No. N19C-11-228 AML, 2020 WL 5554161 (Del. Super. Sept. 16, 2020)

by Caroline Samara  and William Burke (Articling Student)

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

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Do Change of Control Transactions Constitute an Assignment by Operation of Law?

Commercial landlords often rely on anti-assignment provisions to restrict the ability of tenants to assign their interest in a lease to a third party. Such provisions often restrict assignments by “operation of law,” which are generally considered involuntary assignments mandated via a court order. Commercial landlords may assume that a change of control transaction violates a basic anti–assignment clause. Landlords wishing to restrict change of control of a tenant entity, however, should have clear anti-assignment provisions in their leases that expressly restrict such transactions and characterize such “changes of control” as assignments.  

A change of control is a significant change in the equity, ownership, or management of a business entity. This can occur through a merger, consolidation or acquisition.  

The general rule is that change of control of a corporate entity is not an assignment by operation of law, and therefore does not violate a basic anti-assignment provision. Courts have reasoned that a landlord entering into a lease with a corporate tenant should be aware that a corporation, or limited liability company, is an entity which exists separate and apart from its ownership, and that a change in ownership of the corporate entity does not change the tenant entity under the lease.  

Courts in many states including Florida, New York and Delaware have held that a change of control is not an assignment by operation of law. In  Sears Termite & Pest Control, Inc. v. Arnold , a Florida court held, “[t]he fact that there is a change in the ownership of corporate stock does not affect the corporation’s existence or its contract rights, or liabilities.” Further, in  Meso Scale Diagnostics LLC v. Roche Diagnostics GMBH , a Delaware court ruled, “[g]enerally mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger.” 

Importantly, the rule is different if the tenant entity does not survive the transaction. In  MTA Canada Royalty Corp. v.  Compania  Minera Pangea , a Delaware Superior Court held that a merger in which the contracting entity does not survive may be held to be an assignment by operation of law.  

If a landlord intends for a change of control of a tenant to violate the anti-assignment clause in its lease, the landlord should ensure that its lease expressly states that a change of control constitutes an assignment.

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Spot The Difference: Mergers And Amalgamations In Corporate Transactions

Contributor.

Corporate transactions take on many different forms, including arm's length mergers and acquisitions transactions and related party corporate reorganizations. One common element of many corporate transactions is the combination of two or more corporations into a single successor corporation, often referred to by those involved with corporate transactions as a “merger”. The legal concept of “merger” exists in the U.S.; under Canadian law, however, a typical method of combining two or more corporations is referred to under corporate statutes as an “amalgamation”. Although an amalgamation is similar in principle to a U.S. merger, there are some key differences that are relevant considerations when structuring corporate transactions and completing diligence on target corporations.

Under Canadian law, the amalgamating corporations continue as one corporation that shares each pre-amalgamating entity's rights and liabilities. Neither predecessor is dissolved – each survives in the resulting entity. The Supreme Court of Canada has analogized the legal concept of amalgamation to “a river formed by the confluence of two streams, or the creation of a single rope through the intertwining of strands” 1 , effectively maintaining their shared history while taking on a new form.

In contrast, in the U.S., corporate mergers have the effect of one corporation surviving and the other(s) ceasing to exist as legal entities. The surviving corporation absorbs the liabilities and assets of the other non-surviving entities. Consolidations are also available in the U.S. as illustrated by the corporate statute in Delaware; although similar to Canadian amalgamations, a key distinction is that the resulting corporation is considered a “new corporation” under Delaware law. In neither case does the resulting corporation retain the histories of all its predecessors. As such, contractual obligations from any non-surviving entities legally undergo an assignment and could therefore be subject to anti-assignment provisions contained in contracts to which the non-surviving entities are a party.

If a potential corporate transaction triggers an anti-assignment provision in a contract, a corporation will likely be required to obtain consent from the other parties to the contract if it wishes to ensure the resulting entity can avail itself of that contract's benefit. In M&A transactions, the contracts that a target company are party to may be a key component in the value the purchaser attributes to the transaction. In corporate reorganizations that are often implemented for tax purposes or to simplify corporate structures, it is likely important to avoid disrupting status quo with respect to contractual rights and obligations of the entities within the corporate group. For these reasons, among others, understanding the distinction between U.S. mergers and Canadian amalgamations, and the interaction such concepts have with anti-assignment provisions, is crucial for determining whether anti-assignment provisions are triggered so that any necessary third party consents can be obtained.

The consequences of failing to obtain third party consent were considered in MTA Can Royalty Corp v Compania Minera Pangea, SA de C.V. (“ MTA Can Royalty ”) 2 , where the Superior Court of Delaware applied the U.S. merger concept to an amalgamation completed under Canadian law. Notably, the amalgamated party conceded that the amalgamation at issue in the case was “equivalent to a merger under Delaware law.” As a result, the surviving entity was unable to benefit from a contract of the Canadian predecessor that included an anti-assignment clause prohibiting assignment “by operation of law or otherwise”. If the amalgamated party seeking to benefit from the contract had not conceded the equivalence of an amalgamation under Canadian law with a merger under Delaware law but rather distinguished between the two legal concepts, the Court's decision regarding the inability of the “surviving entity” to benefit from its predecessor's contract may have been different.

Whether a corporate transaction involves an M&A transaction or an internal corporate reorganization, it is critical that parties remain cognizant of jurisdictional nuances, particularly when colloquial terms have the potential of confusing legal concepts from different jurisdictions. In the case of U.S. mergers and Canadian amalgamations, the Delaware Court's decision in MTA Can Royalty serves as a cautionary tale.

For further advice on structuring domestic or cross-border corporate transactions, please contact the author or another member of McMillan LLP's Business Law Group.

1 [1975] 1 SCR 411

2 MTA Canada Royalty Corp.  v.  Compania Minera Pangea ,  S.A. de  C.V., C. A. No. N19C-11-228 AML, 2020 WL 5554161 (Del. Super. Sept. 16, 2020)

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2021

Corporate/Commercial Law

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Do Change of Control Transactions Constitute an Assignment by Operation of Law?

Commercial l andlords  often  rely on  anti-assignment provisions  to  restrict the ability of tenants to assign their interest in  a  lease to a third party .  Such provisions will often explicitly restrict assignments by  “ operation of law, ”  which are generally considered involuntary assignments  mandated via a  court order. Commercial landlords may assume that a change of control transaction violates a basic anti – assignment cla use, but clear drafting is necessary for Landlords to protect their interests .  Landlords  wishing to restrict change of control of a tenant entity ,  should  have clear  anti-assignment provision s in their leases that   expressly restrict such transaction s  and characterize such “changes of control” as assignments .   

A change of control is a significant change in the equity, ownership, or management of a business entity. This can occur through a merger, consolidation or acquisition.   

The general rule is that change of control of a corporate entity  is  not  an assignment by operation of law ,  and therefore  does not violate a basic  anti- assignment provision. Courts have reasoned that a landlord entering into a lease with a corporate tenant should be aware that a corporation, or limited liability company, is an entity which exists separate and apart from its ownership, and that a change in ownership of the corporate entity does not change the tenant entity under the lease.   

Courts in many states including Florida, New York and Delaware have held that a change of control is not an assignment by operation of law. I n  Sears Termite & Pest Control, Inc. v. Arnold ,  a Florida court held ,  “ [t] he fact that there is a change in the ownership of corporate stock does not affect the corporation’s existence or its contract rights, or liabilities. ”  Further,   i n  Meso Scale Diagnostics LLC v. Roche Diagnostics GMBH , a Delaware court ruled, “ [ g ] enerally  mergers do not result in an assignment by operation of law of assets that began as property of the surviving entity and continued to be such after the merger.”  

Importantly,  the rule is different if the tenant entity does not survive the transaction.   In  MTA Canada Royalty Corp. v.  Compania  Minera Pangea , a  Delaware Superior Court held that a  merger in which the contracting entity does not survive may be held to be an assignment by operation of law.   

If  a  l andlord inten d s for a change of control of a tenant to violate the anti-assignment clause  in its lease, the landlord should ensure that its  lease expressly state s   that a change of control constitutes an assignment .

This article is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read here. Please review the full disclaimer for more information. Relying on the information provided in this article or communicating with Lowndes through our website does not create an attorney/client relationship.

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Spotting issues with assignment clauses in M&A Due Diligence

Written by: Kira Systems

January 19, 2016

6 minute read

Although not nearly as complex as change of control provisions , assignment provisions may still present a challenge in due diligence projects. We hope this blog post will help you navigate the ambiguities of assignment clauses with greater ease by explaining some of the common variations. (And, if you like it, please check out our full guide on Reviewing Change of Control and Assignment Provisions in Due Diligence. )

What is an Assignment Clause?

First, the basics:

Anti-assignment clauses are common because without them, generally, contracts are freely assignable. (The exceptions are (i) contracts that are subject to statutes or public policies prohibiting their assignment, such as intellectual property contracts, or (ii) contracts where an assignment without consent would cause material and adverse consequences to non-assigning counterparties, such as employment agreements and consulting agreements.) For all other contracts, parties may want an anti-assignment clause that allows them the opportunity to review and understand the impact of an assignment (or change of control) before deciding whether to continue or terminate the relationship.

In the mergers and acquisitions context, an assignment of a contract from a target company entity to the relevant acquirer entity is needed whenever a contract has to be placed in the name of an entity other than the existing target company entity after consummation of a transaction. This is why reviewing contracts for assignment clauses is so critical.

A simple anti-assignment provision provides that a party may not assign the agreement without the consent of the other party. Assignment provisions may also provide specific exclusions or inclusions to a counterparty’s right to consent to the assignment of a contract. Below are five common occurrences in which assignment provisions may provide exclusions or inclusions.

Common Exclusions and Inclusions

Exclusion for change of control transactions.

In negotiating an anti-assignment clause, a company would typically seek the exclusion of assignments undertaken in connection with change of control transactions, including mergers and sales of all or substantially all of the assets of the company. This allows a company to undertake a strategic transaction without worry. If an anti-assignment clause doesn’t exclude change of control transactions, a counterparty might materially affect a strategic transaction through delay and/or refusal of consent. Because there are many types of change of control transactions, there is no standard language for these. An example might be:

In the event of the sale or transfer by [Party B] of all or substantially all of its assets related to this Agreement to an Affiliate or to a third party, whether by sale, merger, or change of control, [Party B] would have the right to assign any or all rights and obligations contained herein and the Agreement to such Affiliate or third party without the consent of [Party A] and the Agreement shall be binding upon such acquirer and would remain in full force and effect, at least until the expiration of the then current Term.

Exclusion for Affiliate Transactions

A typical exclusion is one that allows a target company to assign a contract to an affiliate without needing the consent of the contract counterparty. This is much like an exclusion with respect to change of control, since in affiliate transfers or assignments, the ultimate actors and responsible parties under the contract remain essentially the same even though the nominal parties may change. For example:

Either party may assign its rights under this Agreement, including its right to receive payments hereunder, to a subsidiary, affiliate or any financial institution, but in such case the assigning party shall remain liable to the other party for the assigning party’s obligations hereunder. All or any portion of the rights and obligations of [Party A] under this Agreement may be transferred by [Party A] to any of its Affiliates without the consent of [Party B].

Assignment by Operation of Law

Assignments by operation of law typically occur in the context of transfers of rights and obligations in accordance with merger statutes and can be specifically included in or excluded from assignment provisions. An inclusion could be negotiated by the parties to broaden the anti-assignment clause and to ensure that an assignment occurring by operation of law requires counterparty approval:

[Party A] agrees that it will not assign, sublet or otherwise transfer its rights hereunder, either voluntarily or by operations of law, without the prior written consent of [Party B].

while an exclusion could be negotiated by a target company to make it clear that it has the right to assign the contract even though it might otherwise have that right as a matter of law:

This Guaranty shall be binding upon the successors and assigns of [Party A]; provided, that no transfer, assignment or delegation by [Party A], other than a transfer, assignment or delegation by operation of law, without the consent of [Party B], shall release [Party A] from its liabilities hereunder.

This helps settle any ambiguity regarding assignments and their effects under mergers statutes (particularly in forward triangular mergers and forward mergers since the target company ceases to exist upon consummation of the merger).

Direct or Indirect Assignment

More ambiguity can arise regarding which actions or transactions require a counterparty’s consent when assignment clauses prohibit both direct and indirect assignments without the consent of a counterparty. Transaction parties will typically choose to err on the side of over-inclusiveness in determining which contracts will require consent when dealing with material contracts. An example clause prohibiting direct or indirect assignment might be:

Except as provided hereunder or under the Merger Agreement, such Shareholder shall not, directly or indirectly, (i) transfer (which term shall include any sale, assignment, gift, pledge, hypothecation or other disposition), or consent to or permit any such transfer of, any or all of its Subject Shares, or any interest therein.

“Transfer” of Agreement vs. “Assignment” of Agreement

In some instances, assignment provisions prohibit “transfers” of agreements in addition to, or instead of, explicitly prohibiting “assignments”. Often, the word “transfer” is not defined in the agreement, in which case the governing law of the contract will determine the meaning of the term and whether prohibition on transfers are meant to prohibit a broader or narrower range of transactions than prohibitions on assignments. Note that the current jurisprudence on the meaning of an assignment is broader and deeper than it is on the meaning of a transfer. In the rarer case where “transfer” is defined, it might look like this:

As used in this Agreement, the term “transfer” includes the Franchisee’s voluntary, involuntary, direct or indirect assignment, sale, gift or other disposition of any interest in…

The examples listed above are only of five common occurrences in which an assignment provision may provide exclusions or inclusions. As you continue with due diligence review, you may find that assignment provisions offer greater variety beyond the factors discussed in this blog post. However, you now have a basic understand of the possible variations of assignment clauses. For a more in-depth discussion of reviewing change of control and assignment provisions in due diligence, please download our full guide on Reviewing Change of Control and Assignment Provisions in Due Diligence.

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Anti-Assignment Provisions and Assignments by ‘Operation of Law’: What Do I Have to Do? What Should I Do?

Introduction

One of the key roles of legal due diligence in mergers and acquisitions (M&A) is to assist in the efficient and successful completion of any proposed M&A transaction. Due diligence is not merely a procedural formality but can serve as a proactive shield against unforeseen challenges and risks. One essential aspect of the legal due diligence process is reviewing third-party contracts to which the target entity is party, in order to better understand the scope of its commercial relationships and to anticipate any issues that may arise via the underlying contractual relationships as a result of completing the proposed M&A transaction.

A frequent reality in many M&A transactions is the requirement to obtain consents from third parties upon the “change of control” of the target entity and/or the transfer or assignment of a third-party contract to which the target is party. Notwithstanding the wording of such contracts, in many instances, the business team from the purchaser will often ask the question: “When is consent actually required?” While anti-assignment and change of control provisions are fairly ubiquitous in commercial contracts, the same cannot be said for when the requirement to obtain consent is actually triggered. The specifics of the proposed transaction’s structure will often dictate the purchaser’s next steps when deciding whether the sometimes-cumbersome process of obtaining consents with one or multiple third parties is actually needed.

This article examines what anti-assignment provisions are and how to approach them, depending on the situation at hand, including in the context of transactions where a change of control event may be triggered. This article also discusses how to interpret whether consent is required when faced with an anti-assignment provision which states that an assignment, including an assignment by operation of law , requires consent from the non-assigning party.

Understanding Anti-Assignment Provisions

Generally, an anti-assignment provision prohibits the transfer or assignment of some or all of the assigning party’s rights and obligations under the contract in question to another person without the non-assigning party’s prior written consent. By way of example, a standard anti-assignment provision in a contract may read as follows:

Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written consent of Company XYZ.

In this case, Company ABC requires Company XYZ’s prior written consent to assign the contract. Seems simple enough. However, not all anti-assignment provisions are cut from the same cloth. For example, some anti-assignment provisions expand on the prohibition against general contractual assignment by including a prohibition against assignment by operation of law or otherwise . As is discussed in greater detail below, the nuanced meaning of this phrase can capture transactions that typically would not trigger a general anti-assignment provision and can also trigger the requirement to get consent from the non-assigning party for practical business reasons.

To explore this further, it is helpful to consider anti-assignment provisions in the two main structures of M&A transactions: (i) asset purchases and (ii) share purchases.

Context of M&A Transactions: Asset Purchases and Share Purchases

There are key differences between what triggers an anti-assignment provision in an asset purchase transaction versus a share purchase transaction.

i) Asset Purchases

An anti-assignment provision in a contract that forms part of the “purchased assets” in an asset deal will normally be triggered in an asset purchase transaction pursuant to which the purchaser acquires some or all of the assets of the target entity, including some or all of its contracts. Because the target entity is no longer the contracting party once the transaction ultimately closes (since it is assigning its rights and obligations under the contract to the purchaser), consent from the non-assigning party will be required to avoid any potential liability, recourse or termination of said contract as a result of the completion of the transaction.

ii) Share Purchases

Provisions which prohibit the assignment or transfer of a contract without the prior approval of the non-assigning party will not normally, under Canadian law, be captured in a share purchase transaction pursuant to which the purchaser acquires a portion or all of the shares of the target entity. In other words, no new entity is becoming party to that same contract. General anti-assignment provisions are not typically triggered by a share purchase because the contracts are not assigned or transferred to another entity and instead there is usually a “change of control” of the target entity. In such cases, the target entity remains the contracting party under the contract and the consent analysis will be premised on whether the contract requires consent of the third party for a “direct” or “indirect” change of control of the target entity and not the assignment of the contract.

Importantly, some anti-assignment provisions include prohibitions against change of control without prior written consent. For example, the provision might state the following:

Company ABC shall not assign or transfer this agreement, in whole or in part, without the prior written approval of Company XYZ. For the purposes of this agreement, any change of control of Company ABC resulting from an amalgamation, corporate reorganization, arrangement, business sale or asset shall be deemed an assignment or transfer.

In that case, a change of control as a result of a share purchase will be deemed an assignment or transfer, and prior written consent will be required.

A step in many share purchase transactions where the target is a Canadian corporation that often occurs on or soon after closing is the amalgamation of the purchasing entity and the target entity. So, what about anti-assignment provisions containing by operation of law language – do amalgamations trigger an assignment by operation of law? The short answer: It depends on the jurisdiction in which the anti-assignment provision is being scrutinized (typically, the governing law of the contract in question).

Assignments by Operation of Law

In Canada, the assignment of a contract as part of an asset sale, or the change of control of a party to a contract pursuant to a share sale – situations not normally effected via legal statute or court-ordered proceeding in M&A transactions – will not in and of itself effect an assignment of that contract by operation of law . [1]

Still, one must consider the implications of amalgamations, especially in the context of a proposed transaction when interpreting whether consent is required when an anti-assignment provision contains by operation of law language. Under Canadian law, where nuances often blur the lines within the jurisprudence, an amalgamation will not normally effect the assignment of a contract by operation of law . The same does not necessarily hold true for a Canadian amalgamation scrutinized under U.S. legal doctrines or interpreted by U.S. courts. [2]

Difference Between Mergers and Amalgamations

As noted above, after the closing of a share purchase transaction, the purchasing entity will often amalgamate with the target entity ( click here to read more about amalgamations generally). When two companies “merge” in the U.S., we understand that one corporation survives the merger and one ceases to exist which is why, under U.S. law, a merger can result in an assignment by operation of law . While the “merger” concept is commonly used in the U.S., Canadian corporations combine through a process called “amalgamation,” a situation where two corporations amalgamate and combine with neither corporation ceasing to exist. For all of our Canadian lawyer readers, you will remember the Supreme Court of Canada’s description of an amalgamation as “a river formed by the confluence of two streams, or the creation of a single rope through the intertwining of strands.” [3] Generally, each entity survives and shares the pre-existing rights and liabilities of the other, including contractual relationships, as one corporation. [4]

MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V.

As a practical note and for the reasons below, particularly in cross-border M&A transactions, it would be wise to consider seeking consent where a contract prohibits assignment by operation of law without the prior consent of the other contracting party when your proposed transaction contemplates an amalgamation.

In MTA Canada Royalty Corp. v. Compania Minera Pangea, S.A. de C.V. (a Superior Court of Delaware decision), the court interpreted a Canadian (British Columbia) amalgamation as an assignment by operation of law , irrespective of the fact that the amalgamation was effected via Canadian governing legislation. In essence, the Delaware court applied U.S. merger jurisprudence to a contract involving a Canadian amalgamation because the contract in question was governed by Delaware law. This is despite the fact that, generally, an amalgamation effected under Canadian common law jurisdictions would not constitute an assignment by operation of law if considered by a Canadian court. As previously mentioned, under Canadian law, unlike in Delaware, neither of the amalgamating entities cease to exist and, technically, there is no “surviving” entity as there would be with a U.S.-style merger. That being said, we bring this to your attention to show that it is possible that a U.S. court (if the applicable third-party contract is governed by U.S. law or other foreign laws) or other U.S. counterparties could interpret a Canadian amalgamation to effect an assignment by operation of law . In this case, as prior consent was not obtained as required by the anti-assignment provision of the contract in question, the Delaware court held that the parties to that agreement were bound by the anti-assignment provision’s express prohibition against all assignments without the other side’s consent. [5]

To avoid the same circumstances that resulted from the decision in MTA Canada Royalty Corp. , seeking consent where an anti-assignment provision includes a prohibition against assignment by operation of law without prior consent can be a practical and strategic option when considering transactions involving amalgamations. It is generally further recommended to do so in order to avoid any confusion for all contracting parties post-closing.

Practical Considerations

The consequences of violating anti-assignment provisions can vary. In some cases, the party attempting to complete the assignment is simply required to continue its obligations under the contract but, in others, assignment without prior consent constitutes default under the contract resulting in significant liability for the defaulting party, including potential termination of the contract. This is especially noteworthy for contracts with third parties that are essential to the target entity’s revenue and general business functions, as the purchaser would run the risk of losing key contractual relationships that contributed to the success of the target business. As such, identifying assignment provisions and considering whether they are triggered by a change of control and require consent is an important element when reviewing the contracts of a target entity and completing legal due diligence as part of an M&A transaction.

There can be a strategic and/or legal imperative to seek consent in many situations when confronted with contractual clauses that prohibit an assignment, either by operation of law or through other means, absent the explicit approval of the non-assigning party. However, the structure of the proposed transaction will often dictate whether consent is even required in the first place. Without considering this nuanced area of M&A transactions, purchasers not only potentially expose themselves to liability but also risk losing key contractual relationships that significantly drive the value of the transaction.

Aird & Berlis is a leading Canadian business law firm with more than 235 lawyers, patent agents and business advisors. We provide strategic legal and business advice in all principal areas of business law, including tax, corporate finance, banking, insolvency and restructuring, energy, environmental, infrastructure/P3, technology, intellectual property, litigation, workplace law, municipal and land use planning, and real estate. For more information, visit www.airdberlis.com .

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Contracts: assignment

Practical law uk practice note 7-381-7509  (approx. 44 pages), get full access to this document with practical law.

Try free and see for yourself how Practical Law resources can enhance productivity, increase efficiency, and improve response times.

About Practical Law

This document is from Thomson Reuters Practical Law, the legal know-how that goes beyond primary law and traditional legal research to give lawyers a better starting point. We provide standard documents, checklists, legal updates, how-to guides, and more.

• Increase efficiency
• Enhance productivity
• Improve response time
• General Contract and Boilerplate
• Substantive Law
• 1 Scope of this note
• 2 What is an assignment?
• 3 Effect of assignment
• 4 When is assignment used?
• 5 Types of assignment
• 6 Assignment formalities
• Personal contracts
• Assignments prohibited by public policy
• Construing non-assignment provisions
• Requirements for consent
• Circumventing restrictions on assignment
• Legal restrictions on non-assignment provisions
• "Conditional benefit" exception discredited for assigning contractual obligations
• Creating a legal assignment
• When are legal assignments used?
• Who must consent?
• Must a legal assignment be in writing?
• Who must sign the assignment?
• Is consideration required?
• Notice of assignment
• Notice must be in writing
• Must the notice take any particular form?
• Does the notice need to state the date of the assignment?
• When should notice be given?
• Who can give notice?
• To whom can notice be given?
• Can notice be given in advance of assignment?
• Can the other contracting party demand sight of the assignment agreement?
• Which methods of giving notice are valid?
• Effect of non-assignment provision on a notice of assignment
• What happens if notice of assignment is not given to the other contracting party?
• Creating an equitable assignment
• When are equitable assignments used?
• Must an equitable assignment be in writing?
• Is notice of assignment required?
• Subject to equities
• Recovery of loss by assignee
• 14 Assignment of a third party right
• Conditional fee agreements
• Construction agreements
• Consumer contracts
• Security arrangements
• General reading
• Assignment of other choses in action
• 17 Drafting assignment provisions
• 18 Section 136 of the Law of Property Act 1925

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Prohibition of assignment clause did not prevent a transfer of rights by operation of law

The Court of Appeal has held that a clause in a contract that prohibited the parties from assigning their rights under the contract did not prevent one party’s rights being transferred automatically to an insurer by operation of law. The case shines a light on how the courts may interpret a prohibition of assignment clause.

What happened?

What did the court of appeal say, what does this mean for me.

Dassault Aviation SA v Mitsui Sumitomo Insurance Co. Ltd [2024] EWCA Civ 5 involved a contract for the sale of two aircraft and spare parts.

Under the contract, which was governed by English law, Dassault Aviation would sell the aircraft to Mitsui Bussan Aerospace (MBA). Under a separate contract (governed by Japanese law), MBA would subsequently on-sell the aircraft to the Japanese Coastguard.

MBA was concerned that, if Dassault delivered the aircraft late to MBA, this would affect delivery times under MBA’s contract with the Coastguard and MBA could be liable for late delivery to the Coastguard.

To protect itself against this risk, MBA took out an insurance policy from Mitsui Sumitomo Insurance (MSI) (which, despite the name, was not connected in any way with MBA). The insurance policy was governed by Japanese law.

As it happened, the aircraft were delivered late. MBA claimed under the insurance policy, and MSI duly paid the claim.

Under article 25 of the Japanese Insurance Act (No. 56 of 2008), where an insurer pays out under a Japanese policy of insurance, the insurer is automatically subrogated to any claim the policyholder may have in connection with the event that led to the pay-out. In other words, the policyholder’s right to claim damages passes automatically to the insurer.

Essentially, the same position applies in England and Wales under the common law. See the box “ What is subrogation? ” for more information.

In this scenario, this would mean that MBA’s right to claim against Dassault for breach of contract (due to the late delivery by Dassault) would pass to MSI, so that MSI could claim directly against Dassault.

However, the sale contract between Dassault and MBA contained the following clause (the assignment prohibition):

“[T]his Contract shall not be assigned or transferred in whole or in part by any Party to any third party, for any reason whatsoever, without the prior written consent of the other Party and any such assignment, transfer or attempt to assign or transfer any interest or right hereunder shall be null and void without the prior written consent of the other Party.”

Dassault argued that the prohibition prevailed and prevented MBA’s rights under the contract from transferring to MSI under the Insurance Act. If correct, this would mean that MSI would have no right to claim against Dassault to recover the amount it had paid out to MBA.

Subrogation is a broad doctrine which essentially states that, if a person (X) pays or discharges a debt or obligation of someone else (Y), then X steps into Y’s shoes and acquires Y’s rights.

Under English law, subrogation applies in a wide range of circumstances, including the following.

• When an insurer pays out to a policyholder . The insurer is subrogated to the policyholder’s rights and can take action in place of the policyholder. For example, an individual might take out buildings and contents insurance on their property and, at some point during the policy term, a leak develops, flooding the property and causing damage. The damage is caused by faulty workmanship by a plumber. The individual may be able to claim against the plumber in negligence but instead claims under their insurance policy. The insurer is subrogated to the claim in negligence against the plumber in place of the individual.
• When a guarantor pays out under a guarantee . For example, a person (X) borrows a sum of money from a lender. Another person (Y) gives a guarantee for X’s obligation to repay the sum. The lender calls on the guarantee and Y repays the sum instead of X. By way of subrogation, Y can bring proceedings against X to claim back the amount Y has paid out to the lender. (This is also described as a right of reimbursement, rather than subrogation.)
• Where a person pays someone else’s secured debt . For example, a person (K) takes out a mortgage loan from a bank, which is secured by a mortgage over K’s property. The mortgage becomes payable, but K’s colleague (L) pays the mortgage off instead of K. Until K reimburses L, L is subrogated to the mortgage security over the property. If K does not reimburse L, L can enforce the mortgage and take possession of the property (and sell it).
• Where an agent pays out for their principal . For example, an individual appoints an agent to negotiate a purchase of land on the individual’s behalf. The purchase contract is settled and the individual is required to pay the purchase price. However, for whatever reason (perhaps for ease), the agent pays the purchase price. The seller transfers the land to the individual. By virtue of subrogation, until the agent is paid back, the agent has all the rights over the land which the seller had before the sale.

Subrogation can be complicated and how it works in practice varies greatly depending on the legal and factual circumstances. In many respects, subrogation is less a doctrine and more a form of remedy which a person who has discharged someone else’s obligations can seek in an appropriate form. The principal point of subrogation is that the person whose obligations have been discharged should not be unjustly enriched by failing to perform those obligations themselves.

However, one common factor to all types of subrogation is that it involves an automatic transfer of rights , which occurs by operation of law and does not require a specific assignment by anyone.

Initially, the dispute was referred to arbitration at the ICC in London. The arbitration panel held (by a majority) that MBA’s rights under the sale contract had transferred to MSI under the Insurance Act.

Dassault appealed to the High Court of England and Wales. The High Court overturned the arbitrators’ decision, finding that the prohibition was wide enough to capture a transfer by operation of law.

The High Court noted the words “by any Party” in the assignment prohibition were ambiguous and needed to be interpreted. It therefore embarked on the traditional process of contractual interpretation that applies when the wording of a contract is unclear. See the box “ How will the court interpret a contract? ” for more information.

It held that the words indicated an element of action or willingness by a Party, and that this was what was required for the prohibition to apply. A transfer would fall outside the prohibition only if it were outside the voluntary control of the transferring party (here, MBA).

In this case, although MBA had not directly assigned its rights to MSI, it had entered willingly into the insurance policy and made a claim under it, with the direct and predictable result that its rights would be transferred to MSI under the Insurance Act. In the High Court’s view, this amounted to an assignment by MBA and was caught by the prohibition.

MSI appealed to the Court of Appeal of England and Wales.

The court re-examined the words “by any Party” and found that they were unambiguous and clear. They covered a transfer effected by a party to the sale contract, but that did not include a transfer that occurred automatically by operation of law (as was the case under the Insurance Act).

The judges disagreed with the High Court’s approach that the key question was whether the transfer was outside MBA’s voluntary control. Rather, it was a simple case of reading the contract to decide whether the transfer had been made by MBA.

It had not. The transfer had taken place automatically under the Insurance Act and so was not prohibited by the assignment prohibition.

In reaching its decision, the court noted that the sale contract between Dassault and MBA contained provisions that specifically contemplated the parties taking out insurance (Dassault insurance against loss or damage to certain specific equipment, and MBA insurance in connection with ferry flight delivering the aircraft).

Although these specific provisions did not cover the insurance policy that MBA had placed with MSI, they did indicate that the parties were happy for insurance to cover the arrangements, suggesting in turn that they understood that rights under the contract might transfer to an insurer.

The court found, therefore, that MBA’s rights had transferred to MSI and the assignment prohibition did not apply.

If the wording of an agreement is clear, the courts will assume that it reflects the parties’ intentions and enforce the literal word of the contract. This will be the case even if the result is unusual or uncommercial.

The only exception to this is where the parties’ agreement is in some way restricted by law. For example, the court may find that a clause is unenforceable as a restraint of trade, a contractual penalty, and unreasonable exclusion or limitation of liability, or an attempt to carry out unlawful acts. In these cases, the courts may be able to strike parts of the contract out to make it work.

However, if the wording of a contract is ambiguous and could have more than one meaning, the court must embark on a process of contractual interpretation (also called construction).

The law on contractual interpretation is now settled, following three landmark cases ( Rainy Sky SA v Kookmin Bank [2011] UKSC 50; Arnold v Britton [2015] UKSC 36; and Wood v Capita Insurance Services Ltd [2017] UKSC 24).

In short, the court will examine the wording of the contract and ascertain what a reasonable person with all the relevant background knowledge at the time of the contract would have understood.

The court will look not only at the text of the contract, but also the surrounding context at the time. This is a single exercise, and the court will not automatically prefer the wording (textualism) over the surrounding circumstances (contextualism) or vice versa. However, the weight the court will give the text and the context will vary depending on the nature and formality of the contract.

If, after doing this, the court finds there is still more than one plausible interpretation of the contract, it will prefer the interpretation that is most consistent with business common sense.

The case shows the importance of formulating any prohibition of assignment provisions properly.

Here, the court felt that the wording of the sale contract was clear. By using the words “by any Party”, the prohibition extended only to direct attempts by a party to assign their rights.

Had those words not appeared (e.g. “[T]his Contract shall not be assigned or transferred in whole or in part to any third party…”), the court may have been required to embark on a deeper analysis of the clause to understand whether it would have prohibited transfers by operation of law. Indeed, the court might have concluded that it would have done so.

The case revolved around automatic transfers under Japanese law. The position might well be different under English law. This point was not argued – both Dassault and MSI appear to have accepted that, had the contract been governed by English law, the transfer of rights to MSI would have taken place – and so the court did not need to decide the issue.

But that does not mean that it is impossible to exclude the right to subrogation through a prohibition of assignment, and contract parties may wish to ensure any contractual prohibitions are worded broadly enough that they at least make an attempt to do so.

However, whether this is appropriate will need to be judged on a case-by-case basis, and may be more obviously covered by agreeing a subrogation waiver. For example, it is very common for a buyer of a business to deploy warranty and indemnity (W&I) insurance and for the seller(s) to require the W&I insurer to expressly waive any rights of subrogation.

Conversely, most liability insurance policies contain an express obligation on the insured party not to enter into any agreement with a third party that might restrict the insurer’s right of recovery. A prohibition of assignment that excludes a right of subrogation may do exactly that and could, in theory, invalidate the insurance policy itself.

Where insurance arrangements are contemplated under a contract, the parties should have a mind to the potential implications from an insurance-law perspective, including any potential subrogation following a claim under an insurance policy.

Any contractual provisions that do contemplate insurance are unlikely to stipulate a particular governing law for the insurance, so it may not be possible to make an informed assessment. In addition, the party taking out insurance may well not inform the other party that they are doing so and/or might take out insurance of a type not contemplated by the contract.

In each case, this could lead to a contract party facing legal proceedings under the contract by a third party whose identity is not known at the date of the contract.

Ultimately, where a contract party intends in advance to procure insurance in relation to the subject matter of the contract, it is important to seek legal advice to ensure that the policy and the contract operate smoothly and clearly alongside each other.

Access the court’s decision on whether a contract prohibited an assignment by operation of law ( Dassault Aviation SA v Mitsui Sumitomo Insurance Co. Ltd [2024] EWCA Civ 5)

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“By Operation of Law” (Including Draft No-Assignment Language)

30 September 2021 23 June 2011 | Ken Adams

In Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH (go here for a PDF copy), the Delaware Court of Chancery held that it’s not clear whether for purposes of a no-assignment provision a reverse triangular merger constitutes an assignment “by operation of law.” (A reverse triangular merger is when Sub merges into Target.)

I’m not going to go into any detail regarding the case, as that information is readily available elsewhere. (Plucking a couple of examples at random, go here for Milbank’s analysis and go here for Shearman & Sterling’s analysis.)

Transfers by operation of law are generally considered involuntary transfers. They include court-ordered property transfers, bankruptcy-related transfers, and transfers to or from an executor or an administrator. Whether mergers and consolidations are transfers by operation of law is an open question. The cases reach inconsistent results.

That suggests that if you use the phrase by operation of law , you run the risk of getting into a fight over exactly what it means. And the Meso Scale Diagnostics case provides a great example of exactly that.

So what should you do instead? Koncision’s confidentiality-agreement template uses a bare-bones no-assignment provision that doesn’t get into by-operation-of-law territory, so here’s a more detailed version that I’ve just come up with:

Without the prior written consent of the other party, neither party may voluntarily or by court order (1) assign any of its rights under this agreement, whether by contract or by merger (whether that party is the surviving or disappearing entity), consolidation, dissolution, or otherwise, or (2) delegate any of its obligations under this agreement or its performance in satisfaction of any conditions to any obligations of the other party under this agreement. Any assignment or delegation in breach of this section X will be void.

Some observations:

• I’m aware it doesn’t read very easily.
• If you provide for the possibility of consent, it would be safest to assume that consent can’t be unreasonably withheld. If you have a problem with that, omit any mention of consent.
• I think it’s helpful to distinguish the issue of volition (voluntary or or by court order) from the mechanism of assignment (by contract or something else).
• I suggest that “by court order” is what’s left if you eliminate mergers, consolidations, and dissolution from by operation of law .
• The reference to “the surviving or disappearing entity” covers both direct mergers, triangular mergers, and reverse triangular mergers.
• Don’t simply prohibit assigning the entire contract—a court might construe that as prohibiting just delegation of duties.
• The reference to “performance in satisfaction of any conditions” acknowledges that if you promise to pay me $50 if I mow your lawn, I might want to delegate the task of mowing your lawn to someone else. If I do so, I’m not delegating an obligation, I’m delegating performance aimed at satisfying a condition. I got this idea from  Negotiating and Drafting Contract Boilerplate , but I’ve chosen to articulate it differently.
• Saying that any assignment or delegation in breach will be void might be enough by itself. But including a prohibition too would provide a remedy if the other party nevertheless tries to assign or delegate, thereby causing you to incur legal fees.
• Saying that a court-ordered assignment will be void won’t work if the law overrides any restriction on assignment. See this August 2006 post on AdamsDrafting on how that plays out in bankruptcy.
• If you’re worried about a change of control, you might want to handle that by means of an event-of-default provision rather than a no-assignment provision: it’s a bit of a stretch to consider a change in Acme’s ownership as constituting assignment by Acme of its rights under a contract.

But once you have your broad no-assignment wording, you have to determine whether for a given transaction you need the full monty , something less, nothing at all, or a provision authorizing assignment. I won’t get into that here.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of  A Manual of Style for Contract Drafting , and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

9 thoughts on ““By Operation of Law” (Including Draft No-Assignment Language)”

Ken, thanks for the mention of the book.  Language involving “by operation of law”, seems a bit specialist for a confidentiality agreement.  As to what it means, I think it is a sweep-up that may cover oddities, eg:

– contracts with an individual that may continue when he dies, eg copyright licence agreements? – contracts that become contracts with a new entity by virtue of a law.

In the latter category, I can cite my former client Royal Free Hospital School of Medicine, which was dissolved and whose assets transferred to University College London under the University College London Act 1996 (see section 5 which deals with automatic transfer of property without any assignment).  See http://www.legislation.gov.uk/ukla/1996/3/contents/enacted 

To tee up a potential Plan B, counsel for a non-assigning party might ask for a termination right — if the other party engages in a merger that the non-assigning party doesn’t like, and the merger would not be considered an “assignment” under applicable law, then the non-assigning party can terminate the agreement.[1] [2]

[1] Of course, the consequences of termination would have to be thought through and suitably addressed.

[2] I’ve never been 100% comfortable with the concept of terminating the Agreement.  My late partner and mentor Tom Arnold was of the school of thought that contracts per se are historical facts and can never be terminated – only specific rights and duties can be terminated.

I have some nitpicks.

The Texas statute on the effect of a merger (section 10.008 at http://www.statutes.legis.state.tx.us/Docs/BO/pdf/BO.10.pdf ) specifically says that a merger vests rights in property in the successor organization without any assignment or transfer having occurred. Someone who knows this law better than me might be able to comment on whether that would include, for example, a lease to either real property or capital equipment. If you nonetheless want to prohibit the lease vesting int he successor, i think your language will have to use a word other than “assign.”

Along the same lines, the statute makes the successor entity be the primary obligor without calling it a delegation, so the non-delegation language might not be effective. The statute does allow a contract to specify additional obligors.

The two points above are important mainly because Texas law allows a merger to have multiple surviving or new entities result from the merger. So, your valuable lease might end up being held by a much less creditworthy entity. I don’t have a solution for this problem that would be generally applicable. I think instead, the drafter will have to look towards protections elsewhere, like warranties that the lessee would breach by becoming less creditworthy or a termination right that kicks in on any organic event.

You might want to change “court order” to “government action” to handle situations where regulatory bodies take control of a company (e.g. banks, insurers) and also have statutory, quasi-judicial power to transfer obligations to successors.

Finally, your construction of “neither party may” seems to run afoul of the guidance in MSCD 2.150. But the meaning of “may” in the construction remains consistent with MCSD and the alternative construction — each party shall not — is a clunky here, so I see why you chose the alternative.

Chris: Hmm. Regarding your first two points, I’ll have to put on my thinking cap. I might take a while to respond.

Yes, I will change “court order” to something that refers to “Government Body” or some such. I did something similar for purposes of Koncision’s confidentiality-agreement template.

I periodically fall foul of my own guidelines, and I’m delighted when people point that out. But regarding “neither party may,” have a look at MSCD 2.152.

“By operation of law” could also cover death, if one of the parties is an individual.  I doubt it would be any more effective than trying to prohibit assignment by court order.  There are, of course, ways of addressing the effect of death directly, if it’s a real issue.

• Pingback: Koncision » Rethinking the “No Assignment” Provision

One senior lawyer advised me a one-sided transfer of shares from A to B under “operation of law” without any transfer deed or court order. He explained the following: 1. A breached the shareholders agreement. The agreement said that in case any shareholder breaches, his shares will be bought by other shareholders. 2. Since the agreement was breached, hence the shares were transferred to other shareholders under “operation of law”. 3. Since it came under operation of law, hence the transfer of shares became “transmission of shares” which needs no court order or transfer deed. I was shocked to listen this approach. Can you comment.

so does permanent disability fall under operation of the law and therefore Transmission applies?

Your page is very useful for us mortals to understand some technical language. I am grateful indeed.

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Can I Assign My Commercial Lease? (Part 2- Assignments By Operation Of Law)

Earlier this year, I wrote a blog post about assigning commercial leases generally.  Sometimes, contractual rights or obligations get transferred without an express assignment.  This can happen, for example, where a party to the contract gets acquired by someone else, or where the party’s ownership or control changes hands.  An entity tenant under a commercial lease might be a corporation which gets bought up by another corporation, or an LLC tenant might have a change in its underlying membership.  Such a transfer of rights under a contract occurs “by operation of law” rather than through an express assignment; under such circumstances, the law ordinarily presumes that someone who buys the tenant or acquires control of the tenant naturally acquires and assumes the tenant’s rights and obligations under the lease.  We therefore refer to this succession as an assignment “by operation of law.” 

But the landlord may not be happy with the new situation for a number of reasons.  Perhaps the successor entity does not have the same financial strength as the original tenant; perhaps the new tenant has a different reputation or operates a business which would create an unpleasant or off-putting atmosphere for neighboring commercial tenants; perhaps the landlord has a specific objection to people or personalities who now control the tenant entity. 

Sometimes, tenants intentionally structure transactions to avoid triggering the need to obtain the landlord’s consent for the transfer of tenant rights under the commercial lease.  The landlord may see this as a de facto assignment which violates the spirit of an anti-assignment provision, while the tenant or successors with new control of the tenant view themselves as absolutely entitled to continue the lease over the landlord’s objection.

Under Washington law, even though they may be valid, lease provisions prohibiting or restricting rights to assignment are strictly construed as they are not favored in the law.  Therefore, where the lease is silent regarding assignments by operation of law, and where there is otherwise no breach of the lease agreement, the landlord probably has no right to object to the de facto transfer of rights and may not unilaterally terminate the lease.  In other jurisdictions, the majority view is that, “The fact that the members of the entity change, such as when the stockholders at the time the lease is made later transfer their stock, or a partner in the partnership drops out and a new partner replaces him, or the beneficiaries of the trust change, does not constitute an alienation by the landlord or the tenant that is in violation of a restraint on alienation, absent specific language in the restraint provision that covers such change in the nature of the entity involved.”  There does not appear to be any Washington case expressly adopting or rejecting this view, but Washington case law on this subject generally appears consistent with this majority view.

All of this is to say that it is critical for parties to a commercial lease to specify when a lease can or cannot be assigned.  If the landlord’s willingness to lease is based upon the personal reputation or relationship with key persons associated with an entity tenant, the landlord should carefully take the time to contemplate and negotiate an assignment provision to cover acceptable and unacceptable transfer scenarios.

Whether you are a commercial tenant looking to assign your lease, or you are a landlord being asked to consent to an assignment, the lawyers at Beresford Booth can help.  We have extensive experience advising clients on real estate matters.

To learn more about commercial lease assignments, please contact Beresford Booth at  [email protected]  or by phone at (425) 776-4100 .

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Anti-Assignment Clause Prohibiting Assignment by Operation of Law Applies to Subsequent Merger

Barry Klayman and Mark Felger writing in the Delaware Business Court Insider , discuss a recent decision by the Superior Court of Delaware holding that an anti-assignment clause prohibiting an assignment “by operation of law” without the other party’s consent applied to a subsequent merger in which the contracting party was not the surviving entity. The article also discusses some ways the parties could have avoided that result.  

To read the article, click here .

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Canada Rail Giants Plan to Shut Down After Union Talks Fail (2)

By Monique Mulima

The two largest Canadian railroad companies will shut down operations Thursday if no agreement is reached with their unionized workers, forcing industries to brace for billions of dollars in losses.

Canadian National Railway Co. and Canadian Pacific Kansas City Ltd. issued lockout notices to a union representing more than 9,000 employees at both companies, essentially starting a countdown for a nationwide work stoppage unless parties reach a last-minute deal.

The looming strike has already begun to affect the movement of products including wheat, chemicals and fertilizers throughout Canada and the US. The two rail operators started a phased shutdown of ...

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Did a law Tim Walz signed allow a child to be taken away from parents who don’t consent to ‘sex changes’?

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Wisconsin Watch partners with  Gigafact  to produce fact briefs — bite-sized fact checks of trending claims. Read our methodology to learn how we check claims.

Minnesota Gov. Tim Walz, Vice President Kamala Harris’ running mate, signed legislation allowing Minnesota courts to take “temporary emergency jurisdiction” in a child custody case involving “gender-affirming” care.

The April 2023 law does not change when the state can take custody away from parents or enable the state to take away custody in connection with such care.

The law defines gender-affirming care as “medically necessary” care that can include aligning “the patient’s appearance … with the patient’s gender identity.”

The law enables Minnesota to take temporary jurisdiction in a child custody dispute between parents in another state if one wants a child to obtain gender-affirming care in Minnesota.

Twenty-five states restrict gender-affirming care.

A spokesperson for Republican vice presidential nominee JD Vance cited the Minnesota law to back Vance’s claim Aug. 7, 2024, in Eau Claire, Wisconsin, that Walz supports removing custody from parents who “don’t want to consent to sex changes.” This fact brief is responsive to conversations such as  this one .

Minnesota Legislature:  HF 146 Status in the House for the 93rd Legislature (2023)

Minnesota Legislature:  HF 146 1st Engrossment

Minnesota House of Representatives:  Gender-Affirming Health Care; Subpoenas, Warrants, and Child Custody

FOX 9 Minneapolis-St. Paul:  JD Vance campaigns in Eau Claire, Wisconsin [FULL SPEECH]

MedPage Today:  These States Have Banned Youth Gender-Affirming Care

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Here are some of the claims you might hear at the DNC this week — and the facts

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2.9 billion records, including Social Security numbers, stolen in data hack: What to know

An enormous amount of sensitive information including Social Security numbers for millions of people could be in the hands of a hacking group after a data breach and may have been released on an online marketplace, The Los Angeles Times reported this week.

The hacking group USDoD claimed it had allegedly stolen personal records of 2.9 billion people from National Public Data, according to a class-action lawsuit filed in U.S. District Court in Fort Lauderdale, Florida, reported by Bloomberg Law. The breach was believed to have happened in or around April, according to the lawsuit.

Here's what to know about the alleged data breach.

Social security hack: National Public Data confirms massive data breach included Social Security numbers

What information is included in the data breach?

The class-action law firm Schubert, Jonckheer & Kolbe said in a news release that the stolen file includes 277.1 gigabytes of data , and includes names, address histories, relatives and Social Security numbers dating back at least three decades.

According to a post from a cybersecurity expert on X, formerly Twitter, USDoD claims to be selling the 2.9 billion records for citizens of the U.S., U.K. and Canada on the dark web for $3.5 million.

Since the information was posted for sale in April, others have released different copies of the data, according to the cybersecurity and technology news site Bleeping Computer.

A hacker known as " Fenice " leaked the most complete version of the data for free on a forum in August, Bleeping Computer reported.

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What is National Public Data?

National Public Data is a Florida-based background check company operated by Jerico Pictures, Inc. USA TODAY has reached out to National Public Data for comment.

The company has not publicly confirmed a data breach, but The Los Angeles Times reported that it has been telling people who contacted via email that "we are aware of certain third-party claims about consumer data and are investigating these issues."

What to do if you suspect your information has been stolen

If you believe your information has been stolen or has appeared on the dark web, there are a few steps you can take to prevent fraud or identity theft.

Money.com recommends taking the following steps:

• Make sure your antivirus is up to date and perform security scans on all your devices. If you find malware, most antivirus programs should be able to remove it, but in some cases you may need professional help.
• Update your passwords for bank accounts, email accounts and other services you use, and make sure they are strong and different for every account. Include uppercase and lowercase letters, numbers and punctuation marks, and never use personal information that a hacker could guess.
• Use multifactor authentication for any accounts or services that offer it to ensure you are the person logging in.
• Check your credit report, and report any unauthorized use of of your credit cards. If you notice any suspicious activity, you can ask credit bureaus to freeze your credit.
• Be careful with your email and social media accounts, and beware of phishing, an attempt to get your personal information by misrepresenting who a message or email is from.

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Project 2025: A wish list for a Trump presidency, explained

It is billed as a policy "wish list" for the next Republican president that would vastly expand presidential powers and impose an ultra-conservative social vision on the US.

Donald Trump has disavowed the Heritage Foundation's Project 2025 document, though many of its authors worked for his previous administration.

Links between the Trump campaign and Project 2025 have been highlighted by the former president's critics, and this attack line will likely continue at the Democratic National Convention in Chicago this month.

Here's your guide to what the document contains.

Who wrote Project 2025?

It is common for Washington think tanks of all political stripes to propose policy wish lists for potential governments-in-waiting.

The conservative Heritage Foundation first produced policy plans for future Republican administrations in 1981, when Ronald Reagan was about to take office.

It has produced similar documents in connection with subsequent presidential elections, including in 2016, when Trump won the presidency.

A year into his term, the think tank boasted that the Trump White House had adopted nearly two-thirds of its proposals.

The Project 2025 report was unveiled in April 2023, but liberal opposition to the document has ramped up now that Trump has extended his polling lead.

The Republican nominee himself has distanced himself from the proposal.

"I know nothing about Project 2025," he posted on his social media website, Truth Social. "I have no idea who is behind it.

"I disagree with some of the things they're saying and some of the things they’re saying are absolutely ridiculous and abysmal."

But the team that created the project is chock-full of former Trump advisers, including director Paul Dans, who was chief of staff at the Office of Personnel Management while Trump was president.

Mr Dans left the project in late July, clearing the way for Heritage Foundation President Kevin Roberts to take over. He said he was leaving during the presidential election season in order to "direct all my efforts to winning, bigly".

Russell Vought, another former Trump administration official, wrote a key chapter in the document and also serves as the Republican National Committee’s 2024 platform policy director.

More than 100 conservative organisations contributed to the document, Heritage says, including many that would be hugely influential in Washington if Republicans took back the White House.

The Project 2025 document sets out four main policy aims: restore the family as the centrepiece of American life; dismantle the administrative state; defend the nation's sovereignty and borders; and secure God-given individual rights to live freely.

Here's an outline of several of its key proposals.

Project 2025 proposes that the entire federal bureaucracy, including independent agencies such as the Department of Justice, be placed under direct presidential control - a controversial idea known as "unitary executive theory".

In practice, that would streamline decision-making, allowing the president to directly implement policies in a number of areas.

The proposals also call for eliminating job protections for thousands of government employees, who could then be replaced by political appointees.

The document labels the FBI a "bloated, arrogant, increasingly lawless organization". It calls for drastic overhauls of this and several other federal agencies, as well as the complete elimination of the Department of Education.

What does the Republican party platform say?

The party platform includes a proposal to "declassify government records, root out wrongdoers, and fire corrupt employees", pledges to slash regulation and government spending. But it stops short of proposing a sweeping overhaul of federal agencies as outlined in Project 2025.

Immigration

Increased funding for a wall on the US-Mexico border - one of Trump's signature proposals in 2016 - is proposed in the document.

Project 2025 also proposes dismantling the Department of Homeland Security and combining it with other immigration enforcement units in other agencies, creating a much larger and more powerful border policing operation.

Other proposals include eliminating visa categories for crime and human trafficking victims, increasing fees on immigrants and allowing fast-tracked applications for migrants who pay a premium.

Not all of those details are repeated in the party platform, but the overall headlines are similar - the party is promising to implement the "largest deportation programme in American history".

What a Trump second term would look like

Climate and economy.

The document proposes slashing federal money for research and investment in renewable energy, and calls for the next president to "stop the war on oil and natural gas".

Carbon-reduction goals would be replaced by efforts to increase energy production and energy security.

The paper sets out two competing visions on tariffs, and is divided on whether the next president should try to boost free trade or raise barriers to imports.

But the economic advisers suggest that a second Trump administration should slash corporate and income taxes, abolish the Federal Reserve and even consider a return to gold-backed currency.

The party platform does not go as far as Project 2025 in these policy areas. The platform instead talks of bringing down inflation and drilling for oil to reduce energy costs, but is thin on specific policy proposals.

Abortion and family

Project 2025 does not call outright for a nationwide abortion ban.

However, it proposes withdrawing the abortion pill mifepristone from the market, and using existing but little-enforced laws to stop the drug being sent through the post.

The document suggests that the department of Health and Human Services should "maintain a biblically based, social science-reinforced definition of marriage and family".

On this issue at least, the document differs fairly substantially from the Republican platform, which only mentions the word "abortion" once. The platform says abortion laws should be left to individual states and that late-term abortions (which it does not define) should be banned.

It adds that that access to prenatal care, birth control and in-vitro fertilisation should be protected. The party platform makes no mention of cracking down on the distribution of mifepristone.

Tech and education

Under the proposals, pornography would be banned, and tech and telecoms companies that allow access would be shut down.

The document calls for school choice and parental control over schools, and takes aim at what it calls "woke propaganda".

It proposes to eliminate a long list of terms from all laws and federal regulations, including "sexual orientation", "gender equality", "abortion" and "reproductive rights".

Project 2025 aims to end diversity, equity and inclusion programs in schools and government departments as part of what it describes as a wider crackdown on "woke" ideology.

Project 2025's proposals in this policy area are broadly reflected in the Republican platform, which in addition to calling for the abolishing the Department of Education, aims to boost school choice and parental control over education and criticises what the party calls the "inappropriate political indoctrination of our children".

Social Security

Although Heritage has long supported reforming the country's public pension plan, Project 2025 barely touches this third rail of American politics.

The platform says Social Security is a "lifeline" for millions of retired Americans and Republicans will "restore Economic Stability to ensure the long-term sustainability" of the programme.

The plan's future

Project 2025 is backed by a $22m (£17m) budget and includes strategies for implementing policies immediately after the presidential inauguration in January 2025.

Heritage is also creating a database of conservative loyalists to fill government positions, and a programme to train those new workers.

Democrats led by Jared Huffman, a congressman from California, have launched a Stop Project 2025 Task Force.

And many of the proposals would likely face immediate legal challenges from Trump's opponents if implemented.

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