Private Equity

Every corporate lawyer knows that there is a difference between an anti-assignment clause, which restricts a party from assigning its rights under the agreement in question (or triggers a default in the agreement if an assignment occurs), and a change of control provision, which triggers a termination or default of an agreement if there is a change of control of a party to the contract. Generally speaking a change in control of a party to an agreement is not an assignment of that agreement by the party who experienced the change of control. But an anti-assignment clause can be drafted in such a way that a change of control of a party is deemed to constitute an assignment of the underlying agreement. It is critical, however, to review any of these provisions carefully before jumping to any conclusions as to what (or more importantly, who) they do or do not prohibit.

In a recent Delaware Superior Court case, The American Bottling Co. v. BA Sports Nutrition, LLC, 2021 WL 6068705 (Del Super. Dec. 22, 2021), a distribution agreement between American Bottling Company (ABC) and BA Sports Nutrition, LLC (BodyArmor) contained a provision allowing BodyArmor to terminate the agreement “With Cause,” and thereby avoid payment of a significant termination fee, if “[ABC] transfers or attempts to transfer, directly or indirectly, any of its rights or privileges hereunder in violation of Section 10.2 [of the Distribution Agreement].” Section 10.2 of the Distribution Agreement provided as follows:

This Agreement is being entered into by [BodyArmor], on the basis of careful investigation of [ABC’s] reputation, experience and knowledge of its personnel. This Agreement and [ABC’s] duties and privileges may not, without the prior written approval of [BodyArmor] (which consent shall not be unreasonably withheld) be transferred by assignment, pledge or hypothecation, merger, consolidation, reorganization or similar event, change in the management or control of [ABC], sale or transfer of securities or otherwise by operation of law, or sale of all or a substantial portion of [ABC’s] business or assets, or otherwise.

Dr. Pepper Snapple Group (DPSG) was ABC’s publicly traded great-grand parent (i.e., ABC was wholly-owned by DPSG through two intermediate subsidiaries). DPSG entered into a merger transaction pursuant to which “(1) Keurig Green Mountain, Inc. would became an indirect wholly owned subsidiary of DPSG, (2) [JAB Holding Company (JAB)] would receive a majority of DPSG’s shares, (3) and DPSG would change its name to Keurig Dr. Pepper.” Importantly, “neither ABC nor its parent or grandparent entities was one of the merging entities.” But DPSG’s ownership did change significantly from being entirely publicly owned to being 87% owned by JAB, with the remainder of its stock continuing to be publicly traded. And following the merger there was in fact significant changes in the management of ABC, including many people that BodyArmor had worked with and valued at ABC.

Unhappy with the changes occurring post-merger at ABC, BodyArmor sought a new distribution arrangement with The Coca-Cola Company (Coca-Cola). BodyArmor was confident that the above quoted provision permitted them to replace ABC as their distributor, without payment of any termination fee, because they believed it was a change of control provision that was triggered by the DPSG merger, and ABC had not sought BodyArmor’s consent. Coca-Cola’s attorneys apparently concurred in BodyArmor’s interpretation of the merger’s effect under Section 10.2 and the related termination provision (in part based upon their view that ABC had “directly or indirectly transferred its rights or privileges [under the Distribution Agreement]” and “because [they ‘presumed that’] ABC was part of an integrated organization that underwent a change of control”). Accordingly, BodyArmor formally terminated the Distribution Agreement with ABC “With Cause,” and entered into a new arrangement with Coca-Cola. ABC then sued BodyArmor for breach of contract and Coca-Cola for tortious interference.

In a motion for summary judgment by ABC, the court ruled that the only reasonably interpretation of Section 10.2, and the corresponding termination provision, was that an actual “transfer” of the Distribution Agreement must have occurred to trigger BodyArmor’s right to terminate “With Cause.” According to the court, simply because there was evidence “that a change in management or change of control occurred at ABC or at its parent or grandparent levels is not enough to indicate a transfer occurred.” Only if a change in management or change of control actually effectuated (i.e., was the means by which) a transfer occurred would the fact that there was a change in management or a change of control matter. According to the court, “[t]he word ‘by’ confirms that the examples that follow must actually affect a transfer and do not themselves constitute a transfer.” And the court was unpersuaded that the first sentence of 10.2 somehow converted what was in essence an anti-assignment provision into a provision providing BodyArmor a free termination right if the personnel at ABC changed.

Even more critical to the court’s analysis was the fact that ABC was not a player in the merger.^[1] “ABC did not cause any transfer of control as required by [Section 10.2] because ABC did not effectuate the Merger.” As noted in a prior Weil Private Equity blog post, adding “directly or indirectly” to an anti-assignment clause is rarely considered enough to convert an anti-assignment clause into a change of control provision.^[2] The question always is who is the person being restricted and who is the person who actually effectuated the complained-about act.

Here it was only ABC (as the only DPSG-related entity that was an actual party to the agreement) that was actually restricted, not its upstream parents. And ABC did nothing, “directly or indirectly.” Indeed, ABC’s control actually didn’t change, only its great-grandparent’s did; and “[t]he fact that certain individuals assigned to oversee ABC’s performance under the Distribution Agreement changed did not transfer ABC’s right and duties to a new person or entity.”

When analyzing change of control and anti-assignment provisions always determine who is being restricted before jumping to the question of whether the contemplated transaction constitutes a change of control or assignment, whether directly or indirectly.^[3]