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CS Professional · Corporate Restructuring, Valuation and Insolvency · Process of M&A Transactions

During legal due diligence on Sagar Foods Ltd, the acquirer Meru Retail Ltd finds that a key factory lease contains a clause allowing the lessor to terminate if control of the lessee changes. Meru intends to buy 70% of the shares. What is the most appropriate step?

The clause is a change-of-control risk that a share purchase can trigger. The acquirer should obtain the lessor's consent or waiver, or make it a condition precedent to closing, so the factory lease is not terminated after the deal completes.

  1. AIgnore the clause because share purchase never affects contracts
  2. BTreat it as a change-of-control risk and seek the lessor's consent or make it a condition precedent in the agreementCorrect
  3. CReduce the number of shares to be bought below 70% and take no other action
  4. DWait until after closing to inform the lessor

Explanation

A change-of-control clause is triggered by the shift in ownership even in a share deal, so the lease could be terminated. The buyer should obtain the lessor's waiver or consent, or make it a condition precedent to closing. Ignoring it or informing the lessor after closing leaves the buyer exposed to losing the factory.

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