Capittal's view: when I sell, do my contracts, lease and bank facilities survive?

Quick answer

Capittal's view is that if you sell shares, most of your contracts survive the transaction, because the company remains the same contracting party and none of them changes hands. Only those containing an express change-of-control clause are put at risk, and they tend to be precisely the ones that matter most to you: the large customer, the software licence, the leasing agreements and the bank facilities.

What exactly is a change-of-control clause and where does it hide?

It is the clause that lets the other party terminate the contract, renegotiate it or require its consent when control of your company changes, even though the signing company stays the same. Without such a clause, a change of shareholders is irrelevant to the contract.

It always turns up in the same places.

• Contracts with large customers. Especially where the customer is a multinational: a right to terminate if the supplier comes under third-party control, and sometimes an express ban on that third party being one of their competitors.
• Distribution, agency and franchise. Territorial exclusivity is granted to specific people, and the manufacturer reserves an exit if those people change.
• Software and technology licences. Non-transferable licences tied to the corporate group that took them out. A sale can force relicensing and a fresh price negotiation.
• Bank finance. Credit lines, loans and leasing with acceleration on change of control, plus covenants recalculated if a leveraged financial investor comes in.
• The lease on your premises. Where the contract expressly treats a change of shareholders as an assignment.
• Grants and subsidies. With obligations to maintain activity, employment or ownership for a period, on pain of repayment.

This is not an unusual or abusive clause. It is standard. The problem is not that it exists, it is finding out that it exists once the buyer has already tabled an offer.

Does it matter whether I sell shares or sell the business?

It changes almost everything. This is the single most important practical distinction here.

In a share sale the company does not move: it remains the same legal person, with the same tax number and the same signed contracts. What changes is who its shareholder is. That is why contracts survive by default and are only affected if they carry a change-of-control clause.

In an asset or business-unit sale the contracting party does change: contracts have to be assigned one by one. And assigning a contract with outstanding obligations requires the counterparty's consent. Article 1205 of the Spanish Civil Code is clear on the point: substituting the debtor without the creditor's consent does not bind that creditor. In short, every customer, every supplier and every bank holds a veto.

That is why many deals are structured as share sales even when the buyer would prefer assets. It is not only about tax: the chain of consents in an asset sale is slow and noisy, and noise is the last thing a seller wants.

What happens to the lease on my premises?

If you sell shares, nothing happens: the tenant is still the same company and there is no assignment. Unless the lease contains a clause treating a change of shareholders as an assignment, in which case the contract governs.

If the deal is structured through a merger, conversion or demerger, Spain's Urban Leases Act (Ley 29/1994) comes into play. Its article 32 provides that, in leases for uses other than housing, a change of tenant caused by the merger, conversion or demerger of the tenant company is not deemed an assignment, but it entitles the landlord to raise the rent by 20%. The Act itself allows the parties to agree otherwise, so read the contract before you read the statute.

Where the property is yours personally rather than the company's, the problem is reversed: on completion you become your former company's landlord. Before signing, the lease must be properly documented, at a market rent, with a long term and an agreed review mechanism. No buyer pays a full price for a company occupying premises with no lease, or on a token rent its former owner could raise a year later.

And the workforce? Does the buyer take the employees on?

Again, it depends on the structure. In a share sale there is no business transfer: the employer is still the same company and employment contracts continue with no change of counterparty.

Where a business, a workplace or an autonomous production unit is transferred, article 44 of the Spanish Workers' Statute applies. The transferee steps into the employment and social security rights and obligations of the previous employer, both are jointly liable for three years for employment obligations arising before the transfer, and there is a duty to inform employee representatives.

None of this can be contracted around. If what is transferred is an economic unit that retains its identity, article 44 applies whatever the sale agreement says. In practice that means you cannot pick which employees move and which stay simply by writing it into the contract.

Can the bank call in my facilities because I sold?

Yes, if the contract provides for it, and it usually does. Credit lines, loans and leasing agreements routinely include an acceleration event on change of control, and sometimes on a change in the board as well.

There is a second layer people forget: personal guarantees. If you signed as guarantor, selling your shares does not release you. The guarantee is yours, not the company's, and it only disappears if the bank releases you expressly in writing, or if the buyer refinances and cancels the guaranteed facility. A buyer undertaking to "handle" the release is not the same as being released.

Before going to market, ask the bank for your full risk position and read the facility documents one by one. In most cases the answer is not to negotiate with the bank up front, but to set out in the sale agreement who refinances, within what deadline, and who bears the cost if the bank does not play along.

When should the contract sweep happen: now or in due diligence?

Now, before going to market. The difference shows up in the price.

If you find the issue, it is a task on your own list: you request the waiver, renegotiate the licence or fix the lease with time to spare. If the buyer finds it in due diligence, the same issue becomes a price reduction, an escrow holdback or a condition precedent to closing.

The sweep means reviewing, one by one, every contract that carries meaningful revenue, cost or rights, and sorting them into four boxes.

• No clause. Survive a share sale with no formality at all.
• Notification only. Notifying the change within a deadline is enough. Zero cost, provided nobody forgets.
• Prior consent required. These need a waiver from the counterparty. They are what drives the closing timetable.
• Automatic termination. The serious ones. Renegotiate them beforehand or reflect the loss in the valuation.

The same sweep covers operating licences, customer approvals, sector certifications and, if you work with the public sector, your contractor classification and live public contracts. Spain's Public Sector Contracts Act (Ley 9/2017) governs assignment of a public contract with the prior authorisation of the contracting authority, and succession in the person of the contractor in corporate restructuring situations. Losing a classification because the deal was not planned for means losing the public share of your revenue overnight.

How do I ask for consent without the market finding out?

Late, and to very few people. Asking for a waiver tells a third party that you are selling, so the request is made once the buyer is identified, the price agreed and the contract essentially finalised.

The sequence that works: use the sweep to identify which contracts are genuinely material, normally a handful of customers, the bank, the landlord and one or two licences; leave everything else out of the exercise; and approach only those, through a single point of contact and with a prepared message. If information has to be shared, it is shared under a signed confidentiality agreement.

If a key customer refuses, the deal does not die: that contract becomes a price variable instead. The three standard routes are adjusting the price by the margin that customer contributes, holding part of the price in escrow until the contract renews, or moving that contract into an earn-out payable if the customer stays. None of them is free, and all of them beat discovering the problem the week before signing.

What is the next step if I want to know which contracts constrain my sale?

Build a table listing the contracts behind most of your revenue and your significant costs, plus the lease, the bank finance and the licences, and add three columns: is there a change-of-control clause, does it require notification or consent, and what happens if the counterparty says no. With that table in front of you, you will know which deal structure you can propose, which waivers you will need and how much of your revenue is genuinely transferable. It is a few weeks of work, and it belongs before a buyer exists, not once one is already waiting.

At Capittal Transacciones we work on the change-of-control sweep as part of the confidential valuation we prepare for owners considering a sale. We are a mid-market M&A boutique operating in the approximate range of 3 to 250 million euros, with eight offices in Spain (Barcelona as headquarters, Madrid, Girona, Lleida, Tarragona, Palma, Zaragoza and Valencia) and we are part of the NRRO group. The partner handles each mandate directly, including the review of the contracts, the lease and the bank facilities that could constrain your sale.

Keep reading

• Guide: every decision you face when selling your company
• The buyer cuts the price after due diligence
• What happens to your personal guarantees when you sell

Check which contracts gate your sale: talk to Capittal