Change of Control

A material change in the ownership of a company

What is Change of Control?

In finance, a Change of Control occurs when there is a material change in the ownership of a company. The exact criteria that determine such a change can vary and are defined in legal agreements. A change of control clause is often included in creditor pacts and executive employment agreements to protect investors and managers from major changes in how the company is run.

 

Change of Control

 

Change of Control in Creditor Agreements

It is common for creditor agreements to include a change of control clauses to protect the lender in case the company comes under new ownership.  Such clauses may stipulate that the lender can demand to be repaid upon triggering of the clause.

Such clauses may be necessary as new owners can change the risk profile of the company and cause lenders to be in a worse off position.  For this reason, these clauses may be included in legal agreements.

 

Change of Control in Employment Agreements

Senior executives may have a clause in their employment agreement to protect them from termination. If there were a material change in the ownership of the company, the clause will ensure them a significant payout if the new owners want to terminate them.

Executives may insist on such a clause in their agreement due to the risk of new owners having a different view on the direction of the company. In this case, it may not be that the management team is doing a poor job, but simply that the new owners have a different vision.

 

Mergers and Acquisitions

One of the most common ways for a change of control clause to be triggered is through mergers and acquisitions (M&A). During the M&A process and the negotiation period, it’s important to consider the impact of the change of control on debt in both the target and the acquirer, as well as executive compensation arrangements in both companies.

Learn more in CFI’s M&A Modeling Course.

 

Additional Resources

Thank you for reading this guide. CFI’s mission to help anyone become a great financial analyst, and with that goal in mind these additional resources will be helpful:

M&A Modeling Course

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