There are many reasons why a company may need to undergo a restructuring. It could be facing financial difficulties. A reorganization of its debts and assets may be necessary. A company may also be merging with another. In preparation, they may need to move or even dissolve certain teams and operations.
While restructuring may offer benefits, it can also pose risks. Changes in operations or ownership can conflict with the company’s existing contractual obligations. If the company does not properly address or manage these, it may lead to serious breach of contract claims.
Types of restructuring and their implications
When companies restructure, it can affect their contracts with suppliers, partners or clients in different ways:
- Mergers and acquisitions: When companies merge, or one buys another, it can trigger clauses that allow the other party to end or change the contract.
- Divestitures: If a company sells part of its business that was a main service provider, it can disrupt existing agreements. This may lead to renegotiation or cancellation.
- Operational restructuring: These can include major changes such as closing plants or moving production. It may lead to a breach in a contract if it disrupts the agreed-on production timelines or locations.
Professional legal counsel may be necessary during this process to manage changes and stay compliant with existing agreements.
Clauses to keep an eye on
Corporate restructuring can trigger certain contract clauses. This includes:
- Change-of-control clauses: These clauses often let the other party end or change the contract if a merger or acquisition alters the original agreement.
- Assignment clauses: These state whether a party can transfer its contract rights or duties to another. If a contract doesn’t allow assignment without permission, restructuring might cause breaches unless everyone agrees to the changes.
- Termination clauses: These describe when either party can end a contract. A party may invoke this clause if the restructuring makes it difficult for them to fulfill their obligation.
Companies should carefully review these clauses to see how restructuring might affect their contracts. Working with an attorney is crucial in identifying potential contract issues or negotiating with affected parties.