Selling your Business? Don't Forget About Third-Party Consents
Whether you are selling your business vis-à-vis an asset sale (selling the underlying assets of the business) or a share sale (selling the shares of a corporation that owns the assets and operates the business), you will need to consider the issue of third-party consents. Very often when a business enters into a contract with a third party (e.g., landlords, equipment lessors, franchisors, etc.), the contract provides that the consent of such third parties must be obtained prior to the sale or transfer of the business to a new owner. If you sell or transfer the business without obtaining such consent or approval from the applicable third parties, you may be considered to have breached such contract (and may be liable to the third party and the new owner/buyer for significant damages as a result) and it may materially adversely affect the deal between you and the purchaser.
These third-party consents or approvals are barriers that must be overcome before any sale or transfer of the business can be completed; As such, they are typically noted as conditions precedent in the purchase and sale agreements for the business. As the vendor in such transactions, it is also often the case that you will be required to provide a representation and warranty to the purchaser with respect to certain assets or the shares of the business being free and clear of all third-party claims. You would only be in a position to provide such representation and warranty when you can confirm that such third-party consents or approvals have been obtained or are not necessary. Some assets of a business, like licences, may not even be assignable and the transaction may instead require that the new owner/purchaser apply to the relevant regulatory or governing agency to obtain a new licence.
Most contracts or agreements will contain provisions that prohibit assigning or transferring the business’ assets without first obtaining the consent or approval of the other party. For instance, if you are operating your business at leased premises, the commercial lease will almost certainly contain assignment and change of control restrictions. They will allow the tenant to assign its interest in the lease to the new owner/purchaser of the business, but only if the landlord consents to such assignment. Typically, the wording of the provision will stipulate that such consent shall not be unreasonably withheld or delayed. These assignment and transfer provisions may also outline certain criteria that must be fulfilled prior to the landlord granting its consent, such as payment of a consent fee to the landlord, the landlord being satisfied with its due diligence against the new owner/purchaser, and all parties entering into a consent to assignment of lease agreement prepared by the landlord’s lawyer.
Where the transaction is being completed as a share sale, the assets of the business are legally not changing hands as the purchaser is simply taking control of the corporation that owns these assets. In these transactions, no third party consents would need to be obtained, unless the agreement involving the business treats the “change of control” of the corporation the same as an assignment or transfer. If so, the third-party consent provisions will still apply and the vendor would need to undergo a similar consent/approval process with this third party as if involved in an asset transaction.
Some common examples of third parties that may need to be consulted with respect to obtaining consents or approvals when selling a business include landlords, equipment lessors, creditors, mortgagees, franchisors, customers/suppliers, regulatory authorities and governing bodies. Careful review of documentation such as the lease, the security agreement, the mortgage documentation, the franchise agreement, the supplier contract or the by-laws of the professional governing body, respectively, would be necessary to determine if consent or approval needs to be obtained.
It can be a time-consuming and detail-driven process to review such documentation, deal with the relevant third parties and wait for their consent or approval (or lack thereof). Accordingly, such due diligence should be conducted as early as possible in the transaction to address assignment or transfer issues and avoid prolonged delays. You and your business lawyer will need to review such agreements and instruments involving the business and make appropriate inquiries with relevant third-party agencies or governing bodies to verify if such third-party consents or approvals are required. Your business lawyer should be able to guide you through the consent and approval process, while ensuring your rights and interests are protected.