A change-of-control clause is a contractual provision that is triggered when a party’s ownership or control changes. The clause may entitle the counterparty to terminate the contract, to demand a renegotiation, to exercise a put option, or to require a consent. An NCLT scheme that results in a change of control can trigger these clauses, and the consequences can be significant for the transferee company.
The Trigger
The trigger is defined in the contract. A typical clause defines a change of control by reference to a change in the ownership of more than fifty per cent of the voting shares, a change in the composition of the board, or a change in the person who controls the company. The NCLT scheme’s transfer of the undertaking may or may not result in a change of control, depending on the shareholding pattern of the transferee company and the definition in the contract.
The Consequences
The consequences depend on the clause. A termination right allows the counterparty to terminate the contract, which can be disruptive for the business. A put option allows the counterparty to sell its shares or its interest to the transferee company at a specified price. A consent right allows the counterparty to withhold its consent to the change of control, which can delay or block the scheme.
The Management Strategy
The scheme should identify the material contracts that contain change-of-control clauses, assess the likelihood of the trigger, and engage with the counterparties before the effective date. The transferee company may negotiate a waiver, a consent, or an amendment to the clause. The scheme should also provide for a contingency plan where the counterparty terminates the contract.
A technically sound scheme treats the change-of-control clauses as a risk that is identified, quantified, and managed, not as an afterthought.
Call to Action
Anuj Desai & Associates advises companies on the change-of-control aspects of an NCLT scheme—from the contract review and the trigger analysis to the counterparty negotiations and the contingency planning. If your scheme may trigger a change-of-control clause, we can help you manage the risk.
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