July 2, 2018

Asset Deals: Time to Rethink the Non-Assignment Workarounds?

This Weil blog discusses a widely used technique for avoiding the application of widely-used “workaround” for addressing non-assignment clauses in contracts that are part of an asset purchase – and says that recent case law may require the parties to give some more thought to whether it works.

The workaround is undoubtedly familiar to many readers – it involves language in the asset purchase agreement providing that regardless of any other provision, no contract will be assigned if such assignment would be ineffective or breach the contract in question. That language is accompanied by a covenant to the effect that the buyer will be entitled to the benefits and subject to the economic burdens of the contract & that the seller will hold any payments it receives in trust for the buyer & act as its agent until any required consent is received.

But does this work? The blog discusses a recent English case giving a qualified “yes” answer to that question, but also notes that the clause may not work as intended. The problem is that anti-assignment workaround provisions only work because they prevent an assignment of the contract from occurring – and that’s not close to duplicating the effect of an actual assignment:

Anti-assignment workarounds may be important backstops in situations where consents cannot be obtained and a risk assessment as to the likelihood of counterparty blowback is deemed low, but they are hardly a panacea. After all, the key to ensure that the workaround language actually works is to negate any actual assignment having been made to the extent an assignment would violate or be ineffective in the face of a specific anti-assignment clause.

And the workaround language then requires the seller to actually continue to be involved with and assist in delivering the benefits of the contract, with the buyer performing on behalf and as the agent of the seller, any required obligations. Awkward at best and, in some cases, truly problematic if the buyer actually requires any specific action by the seller and the seller is then out of business or has instituted bankruptcy proceedings and is still deemed to be the actual party to the contract.

The blog suggests that parties should place renewed focus on which contracts containing anti-assignment clauses truly can come off the required consent list, and what risks the buyer is assuming as a result of these contracts. In particular, consideration should be given to risks associated with the need for continued involvement of a seller that may have lost interest, or whose involvement may be difficult if not impossible to obtain.

John Jenkins