Commentary: This example provides an explicit exception for mergers or reorganization of a party’s business. This covers changes in legal form, where for all intents and purposes the party is still the same entity.
Such exceptions are common, but the other parties to the agreement should be sure that the entity assuming the obligations can fulfill them as originally contemplated. In this example, the assigning party must guarantee the performance of the assignee, and obtain a written promise from the assignee that it will fulfill the assignor’s obligations under the contract. This is probably sufficient if the assigning party continues in business; however, if the assigning party ceases to exist, for example because it is legally merged into another corporation, then additional guarantees may be necessary. Adding a right to terminate an agreement in the event that an automatic assignment results in sub-par performance by an assignee would be one way to assure that an assignment would not be detrimental to the other parties to the agreement.
The Assignment clause determines whether rights, obligations and duties under an agreement may be transferred in whole in or part to another, and under what conditions. Under U.S. law, contractual rights are freely assignable or delegable, unless prescribed or limited by agreement.
The cause frequently overlaps with "Successors and Assigns" or "Parties In interest" clauses that controls whether successors or assigns can assume the rights and obligations under the contract.
An assignment clause will be enforced unless (i) agreement prohibits assignment; (ii) the assignment materially alters contractual rights or obligations, or (iii) it violates the law or public policy.
2. Implications in Mergers and Acquisitions
Albert J. Li of DLA provides a good examination of assignment provisions in the context of acquisitions. He concludes: "[a]s a central part of negotiating the sale of assets or a merger, or simply conducting due diligence in any acquisition, reviewing anti-assignment clauses is important from both the buyer's and seller's perspectives. Having third parties involved in the midst of a significant transaction will both complicate, and potentially sidetrack the transaction. Better drafting and clearer anti-assignment language should be a goal at the time of drafting contracts so that parties can accommodate a future acquisition." Understanding Anti-Assignment Clauses and their Implications on Your Acquisition, July 12, 2004.
Assignment and consent provisions "can give the non-assigning party quite a bit of leverage if the assigning party finds itself in an M&A or situation." Assignment-consent provisions, by D. C. Toedt III)
3. Assignment Considerations
- Rights and Obligations: Can either or both the parties assign their rights and obligations?
- Duties or Performance of Obligations: Can performance be transferred, delegated or subcontracted?
- Conditions: If permitted, what conditions apply?
- of Obligations: Can successors assume rights and obligations?
4. Assignment Checklist
- Do you want the freedom to delegate tasks in the agreement?
- Do you want the ability to assign the revenue you receive from a contract?
- Do you want the ability to assign all rights under the agreement to a company that acquires your business?
- Do you want to make sure that the other party to the agreement will always be responsible to you, even if the agreement is assigned?
- Do you want to prevent the other side from assigning the delegating their obligations?
See also, Assignment (of contract)