What about ongoing contracts in a takeover or merger?

Are you taking over a business or planning to merge with another company? Don't rush and prepare this transaction well. One common area of concern is the handling of ongoing contracts. How to deal with them depends on the type of transaction you're considering. Here's an overview.

Contracts in Acquisitions

Acquiring a business can be done in various ways. You can take over the company's shares or choose to acquire the business assets only. Let’s look at both options.

Share Acquisition

The owners of a company are the partners or shareholders: they own the company's shares. Selling a business can occur through a transfer of these shares. The sellers sell their shares to the buyers, and thus the company's ownership structure changes. By acquiring the shares, the new shareholders own the company.

Such a transfer can occur via a private agreement, even if the company owns real estate. The real estate isn't transferred separately; only the shares are involved in the transfer.

The mere acquisition does not change the company itself. There is continuity. This means that all ongoing contracts simply continue. Employment contracts, supplier contracts, and customer contracts all remain unchanged unless there are contractual clauses regarding a takeover (e.g., change of control clauses). The contractual party remains the company itself, even if it's under new ownership. Therefore, it's crucial to review all ongoing contracts before proceeding with the acquisition and include necessary declarations and guarantees in the acquisition agreement. This ensures that no hidden issues will arise.

Business Asset Acquisition

A business asset or business fund comprises all assets used to operate a business and attract and maintain a particular clientele. This includes the trade name, brand and logo, clientele, staff, lease rights, ongoing agreements with suppliers, and more. The law doesn't define or describe a business fund.

The lack of a legal definition allows parties, in the case of a business fund transfer, to determine its components to some extent. However, essential components necessary for continuing the business must be transferred to ensure continuity of operations.

When acquiring a business asset, it's crucial to assess which ongoing contracts are inherently linked to the business. Supplier or employment contracts are typically part of the business fund. Normally, these are transferred to the buyer as they are necessary for continuing operations. However, parties can agree to exclude certain contracts from the transfer. They might also agree to transfer other rights or obligations, not essential for operations, such as claims, certain licenses...

Be careful: don’t assume other parties know there’s a new owner involved. Consider the handling of unpaid invoices. Such claims can be transferred without the consent of the party paying the invoice, but the customer must be informed. If not, they can rightfully pay the transferor. Notification can come from either the transferor or the transferee. Agree on who will handle this. For mutual agreements where the transferor and counterpart are both creditor and debtor, you'll need the counterparty's consent for the transfer. Often this isn’t a problem (e.g., with utility subscriptions and telecom contracts), but for personal contracts (e.g., sales concessions or agency contracts), it can be more complicated. For instance, you can't simply fulfill an ongoing order instead of the transferor; the customer must accept this. Otherwise, the original contract party must continue to fulfill the contract.

Merger

A merger is a legal transaction where the entire assets of a company, both rights and obligations, transfer to another company following dissolution without liquidation. This includes a counter-performance: issuing shares in the acquiring company to the partners or shareholders of the dissolved company. This other company can be an existing company ("merger by acquisition") or a newly established company ("merger by formation").

The transition is a continuity process: all rights and obligations are transferred without specific formalities. This means ongoing contracts continue to exist. Exceptions include contracts that explicitly provide for termination or cancellation in the event of a merger or restructuring.

In a merger, it's also important to review ongoing contracts beforehand. Parties must terminate contracts they don’t want to continue. For example, when two companies merge, it's unnecessary to maintain two separate contracts with an accountant or auditor. Insurance agreements should also be revisited: there's no need for double coverage.

Running parallel to notifying the contractual parties of the dissolved company about the merger. For those parties, the merger is a done deal, but they need to know they'll be dealing with a new merged contracting party. This way, they can provide their services to the correct entity or know from which entity they'll receive services.

Ongoing Contracts in 3 Scenarios

1. You Acquire a Company’s Shares

The existing shareholders or partners sell their shares to you: You are now the shareholder or partner. But the legal entity itself doesn’t change. The company remains the contracting party in all existing agreements. Consequently, all contracts continue as before, such as supplier contracts, orders in progress, etc.

Since you assume all ongoing contracts with the share acquisition, it's best to check them before the acquisition. If necessary, include specific "declarations and guarantees" in the acquisition contract.

2. You Acquire the Business Asset or Fund

A business asset or fund comprises all assets used to operate a business and maintain clientele. This includes the trade name, brand and logo, clientele, staff, lease rights, ongoing supplier agreements, and more. The law doesn’t define or describe a business fund.

The absence of a legal definition means parties can determine its components to some extent during transfer. However, essential components necessary for continuing the operations must be transferred to ensure continuity.

When acquiring a business asset, you should always assess which ongoing contracts are inherently linked to the business. Supplier and employment contracts are part of the business fund. These are typically transferred to the buyer as they're needed to continue operations. However, parties can agree to exclude certain contracts from the transfer. Additionally, they can agree to transfer other rights or obligations not essential for operations.

Unlike a company takeover via share sale, ongoing contracts like supplier agreements, orders in progress, do NOT automatically continue. You need the consent of the contracting party to transfer the contract. You can't simply fulfill ongoing orders in place of the transferor. Without customer agreement, they can dissolve their order and reclaim the deposit.

Inform customers, suppliers, and other parties that you now operate the business fund. Inform them of the new VAT or company number. This provides a clear boundary between ending contracts for the account of the transferor (via the old VAT number) and new orders or deliveries via your new VAT number.

Unless specifically agreed with all involved parties, ongoing contracts continue to be settled by the transferor (collecting outstanding client invoices; paying outstanding suppliers).

3. You Merge with Another Company

A merger is a legal transaction where a company's entire assets, both rights and obligations, transfer to another company. This involves a counter-performance: issuing shares in the acquiring company to the partners or shareholders of the dissolved company. The other company can be an existing company ("merger by acquisition") or a newly formed company ("merger by formation").

As with takeovers via shares, all contracts continue, unless they explicitly state that a merger terminates the agreement. Therefore, review all ongoing contracts before the transaction. Also important: terminate duplicate contracts (e.g., accounting firm, commissioner, insurance policies).

Inform customers, suppliers, and other contracting parties of the dissolved company about the merger. This way, they can provide their services to the proper company or know from which entity they will receive services.