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This Kirkland & Ellis memo cautions about the dangers of unthinking reliance on contractual “successors and assigns” boilerplate to ensure that contract rights and obligations go where the parties want them to in spin-offs and other separation transactions.  Here’s an excerpt:

When a company separates itself into two or more pieces via a spin-off, split-off, carve-out or similar deal structure, it is not clear whether contractual rights and obligations replicate themselves at the separated entity.

To take a simple example, shareholders often negotiate a set of governance rights in a stockholders’ agreement to which the company is a party. What happens to those rights if the company spins-off a portion of the business into a separate independent company? While a party may expect contractual rights to replicate themselves at the new spin-off company, often there is nothing explicit in the agreement that dictates the outcome — the boilerplate “successors and assigns” provision typically is not implicated.

The memo notes that the consequences of this scenario can be the loss of important contract rights if the other party doesn’t agree to import the governance rights to the newly independent spin-off company. It recommends contract languge that specifically addresses the possibility of a separation transaction, and even provides some sample language:

Spin-Offs or Split-Offs. In the event that a Party effects the separation of a [material/ substantial] portion of its business into one or more entities (each, a “NewCo”), whether existing or newly formed, including without limitation by way of spin-off, split-off, carve-out, demerger, recapitalization, reorganization or similar transaction, prior to such separation the Party shall cause any such NewCo to enter into an agreement with the other Party that contains rights and obligations of the Parties that are substantially identical to those set forth in this Agreement.

– John Jenkins