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Larry Schroepfer License Agreements Clauses Potomac Law Group Blog: Potomac Law
Assignment and Change of Control Clauses in License
Agreements
08.31.2016 | ALERTS
MEDIA
CONTACT
By: Larry Schroepfer
There's a provision in license agreements (and many,
many other agreements for that matter) that's often
Marlene Laro
relegated to the "boilerplate" at the end of the
mlaro@potomaclaw.com
document, and it's whether either or both parties can
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assign their rights under the agreement to third
parties. Sandwiched somewhere between
"Severability" and "Entire Agreement", this clause
Recent
often says
simply, News
"neither party may assign its rights
under this Agreement without the other party's
consent".
But this one doesn't belong in the boilerplate.
Particularly in a licensing context, there are potentially
serious consequences attached to whether the
licensee can or cannot assign.
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Larry Schroepfer License Agreements Clauses Potomac Law Group Blog: Potomac Law
From a licensor perspective, it wants to be able to
control who is practicing its patent or technology, and
the terms (financial and otherwise) under which the
licensee is doing so. Just because the licensor is willing
to license a startup or small niche player doesn't mean
that it would be willing to license its biggest
competitor. Nor does it mean that it would extend the
same terms if it did decide to license the competitor.
So the licensor wants to prohibit the licensee from
assigning the license or otherwise engaging in any
transaction under which a third party acquire rights to
the patent/technology.
From a licensee perspective, the ability to assign, at
least in connection with an acquisition by a third party,
can be absolutely critical. Particularly with a startup or
small company, unless it is one of the fortunate few
that are capable of going straight to IPO, its "end game
scenario" assumes that it will be acquired at some
point.
So a prudent licensee will ask for the right to assign
the agreement in connection with an acquisition of its
assets and business to which the licensed
patent/technology relate. But the licensor is frequently
unwilling to grant this kind of carte blanche, because it
really doesn't solve the licensor's problem when it
comes to the identity of the acquirer.
So what do you do? Here's a few thoughts:
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Larry Schroepfer License Agreements Clauses Potomac Law Group Blog: Potomac Law
The most common "solution" is to add a provision
that says licensor's consent to assignment or
other transfer cannot be unreasonably withheld,
and everybody thinks the situation's well in hand.
But they're wrong: this solves nothing. If the
licensor withholds consent and takes the position
that its refusal is reasonable, the licensee's only
recourse is to sue (or arbitrate if the agreement
includes an ADR clause), but there is no acquirer
in the world that is going to wait around until this
dispute slowly grinds through the legal process.
While it's true that the licensor could be liable if it
wrongfully withheld consent, in the absence of
wrongful intent, this claim is difficult to sustain,
and it doesn't put the pieces back together again
for the licensee in any event.
One solution is to grant the licensee the ability to
assign to an acquirer, but limit the scope of the
license in that situation to only the product
volume that the licensee sold prior to the
acquisition (plus, perhaps, some reasonable
increase to account for "organic" growth). This
allows the acquisition to go forth and the licensee
to continue "business as usual", but if the acquirer
wants to substantially expand the license to
additional products or volumes that are orders of
magnitude more than what the licensee sold, it
will need to come back to the licensor and
negotiate for those rights.
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Larry Schroepfer License Agreements Clauses Potomac Law Group Blog: Potomac Law
A variant of this approach is to provide that the
license remains in effect only so long as the
licensee continues as a separate subsidiary (or,
perhaps, separate business unit), and that it only
covers sales by that subsidiary/business unit.
This would not, however, fully protect the licensor
if the acquirer substantially "ramps up" the
business. I've sometimes seen provisions
covering both product volume limitations and
separate entity requirements, which goes a long
way to limit the effect of an assignment or change
of control from the licensor point of view, but
which the licensee and its acquirer may find too
restrictive.
If the licensor is particularly concerned about the
license "falling into the hands" of its principal
competitors, one approach is to generate a
blacklist of companies to which the license would
not transfer if they acquired the licensee.
Conversely, the agreement might include a
whitelist of companies to which the license could
transfer, but to no one else. However, a note of
caution: before resorting to this approach, the
parties should check with antitrust/competition
counsel, since this could be problematic,
particularly in the EU.
Finally, a friend and astute business person whom
I respect used to talk about reducing problems to
"problems that can be cured by the payment of
money". Applying that approach here, the parties
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Larry Schroepfer License Agreements Clauses Potomac Law Group Blog: Potomac Law
could agree to a "Change of Control Fee" which
would be payable if the licensee were acquired.
There are various ways to fix the amount of this
fee -- it might be a simple negotiated lump sum,
an amount based on the acquirer's size, an
amount based on the sales volume of licensed
products, or doubtless other criteria. The point is
that a potential acquirer would know right upfront how much it had to pay for rights under the
license, and could take that into account in
determining whether to buy the licensee (or how
much to pay for the licensee).
One other point: I have seen many, many otherwise
astute lawyers who don't seem to understand that if
the stock of a company is purchased by a third party,
there is no "assignment" of the agreement, and
therefore a simple clause that says the licensee may
not "assign the agreement" doesn't work. Sometimes
people think they are solving this problem by including
any assignment "by operation of law". This might
cover a merger, but if all that happens is that the stock
of a company changes hands while the license remains
in that company, there is no assignment of anything,
whether by operation of law or otherwise. So if the
licensor really wants to restrict disposition of the
license if the licensee is acquired, it needs to go further
and address the consequences of the licensee's
"Change of Control" (as appropriately defined to
include stock acquisitions) in addition to "Assignment".
______________________________________
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Larry Schroepfer License Agreements Clauses Potomac Law Group Blog: Potomac Law
This Bulletin is not intended as legal advice. Readers
should seek professional legal counseling before acting
on the information it contains.
Related Attorneys
Larry Schroepfer
484.947.5460
Potomac Law
Represents InTec
in Acquisition by
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