Acquiring a business? Have all agreements thoroughly scrutinized!

In a business acquisition, existing agreements largely determine what you are actually buying. Whether contracts with customers, suppliers, landlords, financiers, and employees automatically transfer depends on the form of the acquisition. In a share transaction, most contracts remain in effect; in an asset-liability transaction, you must, in principle, transfer them one by one, often with the cooperation of the other party. Therefore, have all agreements legally scrutinized before the purchase to avoid surprises: a terminable premium contract, an unfavorable lease term, or unexpected personnel obligations can significantly reduce the value of your acquisition.

Why contracts are so important in an acquisition

When acquiring a business, people often focus primarily on the figures: revenue, profit, balance sheet, and valuation. However, a large part of a company's value lies precisely in its ongoing agreements. Consider a multi-year contract with a major customer, favorable purchasing terms from a supplier, an affordable lease for the business premises, ongoing financing, or valuable licenses. If those contracts cease to exist or change as a result of the acquisition, you are effectively buying something different than you intended.

Therefore, a thorough review of all contracts is a standard part of the acquisition process. Before the purchase, you want to know which agreements will transfer, which can be renegotiated or terminated, and which additional obligations you will incur. We call this investigation legal due diligence: a structured check of all legal risks within the company.

Asset-liability transaction or share transaction: the difference

Whether a contract transfers automatically depends heavily on how you take over the business. There are roughly two forms, with very different consequences for your contracts.

Share transaction: the contracts usually remain in effect

In a share transaction, you purchase the shares of the BV. The legal entity that entered into the contracts continues to exist; only the owner of the shares changes. For the contracting parties, legally nothing changes in principle: they are still dealing with the same BV. Therefore, the existing agreements normally remain automatically in effect. If you wish to transfer the shares, you record this in a share transfer deed that is executed by a notary.

Asset-liability transaction: transferring contracts with the cooperation of the third party

In an asset-liability transaction, you do not purchase the shares, but individual assets: for example, inventory, stocks, the customer base, the trade name, and specific contracts. An agreement does not automatically transfer with this. This is because a third party is involved in every contract, and that party does not automatically become part of the transaction.

As a rule, the cooperation of the contracting party is required to transfer a contract (assignment of contract). If the supplier, customer, or landlord is unwilling to cooperate, the contract remains with the seller, or new arrangements must be made. It is therefore worthwhile to identify key contracts early in the process and arrange the necessary consents in a timely manner. Carefully document these agreements in an asset and liability agreement.

Pay attention to change-of-control provisions

Even in a share transaction, you cannot simply assume that every contract continues as normal. Some agreements contain a so-called change of controlprovision. Such a clause gives the contracting party the right to amend or terminate the agreement as soon as control over the company changes, for example in the case of a share transfer.

This can turn out badly if you carried out the acquisition precisely because of that one favorable contract. An important customer or financier may then withdraw the moment control changes. Therefore, review every contract for change-of-control clauses and for termination, term, and penalty clauses, so that you know which contracts are truly secure. If you encounter a change-of-control clause in a key contract, it is wise to sit down with the party involved beforehand so that continuity after the acquisition is confirmed in writing.

Employment contracts: protection in the event of a transfer of undertaking

Personnel hold a special position. The law protects employees in the event of a so-called transfer of undertaking. In short, this concerns the transfer of an undertaking (or a part thereof) that retains its identity, for example, because the activities, customers, and employees remain intact. At its core, this protection means that the employees associated with the undertaking, in principle, transfer to the buyer by operation of law, retaining their existing terms and conditions of employment. This protection applies specifically to an asset-liability transaction, where contracts do not otherwise transfer automatically.

In practice, this primarily causes tension when the terms of employment of the acquired employees differ from those of the existing staff. Simply removing or reducing acquired rights is not legally straightforward. While changing terms of employment is possible under certain circumstances, it generally requires the employee's consent or a reasonable proposal with a valid reason. Ensure you receive sound advice on this matter beforehand, as personnel obligations can make an acquisition significantly more expensive than expected. Our employment law will map out these consequences for you.

Warranties and indemnities: covering risks in the contract

Not every risk can be fully assessed in advance. Therefore, warranties and indemnities are often included in an acquisition contract. With a warranty, the seller guarantees that certain facts are correct, for example, that the most important contracts are valid and have not been terminated. With an indemnity , the seller assumes a specific, known risk, so that you, as the buyer, are not held responsible if it occurs after the acquisition.

If the review of the contracts reveals a point of doubt, such as an uncertain term or a potential right of termination, you can translate this into a guarantee, an indemnity, or a price adjustment. This prevents a hidden contractual risk from falling entirely on you after the transfer. It is advisable to also consider the duration of these agreements and any potential limit on the seller's liability.

Map out the contractual consequences in advance

When undertaking an acquisition, it is wise to engage a lawyer to oversee the legal due diligence investigation. Good preparation includes, among other things:

• an inventory of all current agreements (customers, suppliers, rent, financing, licenses, personnel);
• control of change-of-control, termination, term, and penalty clauses;
• assessment of which contracts transfer automatically and which require the cooperation of a third party;
• attention to the position of personnel during a transfer of undertaking;
• translating identified risks into guarantees, indemnities, or a price adjustment;
• recording the agreements in a binding acquisition agreement.

This way, you know in advance which risks you are assuming and can factor them into the price or the warranties and indemnities. A structured approach prevents you from discovering only after the transfer that an important contract was not included.

Frequently asked questions about contracts during a business acquisition

Do contracts automatically transfer upon a company acquisition?

That depends on the form. In a share transaction, contracts usually remain in effect automatically, because the private limited company that entered into them continues to exist. In an asset and liability transaction, contracts do not transfer automatically, and the cooperation of the contracting party is generally required to transfer them.

What is a change-of-control provision?

A change-of-control provision is a clause that gives the contracting party the right to amend or terminate an agreement as soon as control over the company changes. Such a provision can ensure that an important contract lapses upon a share transfer, even if the BV itself does not change.

What happens to the staff in the event of an acquisition?

In the event of a transfer of undertaking, employees are legally protected. In principle, the employees concerned transfer to the buyer, retaining their terms and conditions of employment. Changing terms and conditions of employment is possible under certain conditions, but is subject to strict rules.

What is the difference between a share transaction and an asset-liability transaction?

In a share transaction, you purchase the shares of the BV, whereby the legal entity continues to exist with all its contracts and obligations. In an asset and liability transaction, you purchase only selected assets and liabilities; you decide yourself which components to take over, but contracts do not automatically transfer.

What is the difference between a warranty and an indemnity?

With a warranty, the seller guarantees that certain facts are correct, such as the validity of an important contract. With an indemnity, the seller assumes a specific, known risk, so that you as the buyer are not liable for the consequences if that risk materializes after the acquisition.

Why do I need to have contracts checked before buying?

Because a large part of a company's value and risks lies in its contracts. A terminable premium contract, unfavorable lease terms, or unexpected personnel obligations can strongly influence the value. By having everything checked in advance, you know what you are buying and can negotiate better.

Have your acquisition legally guided by MKB Juristen

Acquiring a company is a complex undertaking, particularly regarding contracts. Our experienced corporate lawyers map out the contractual implications in advance, point out potential pitfalls, and draft a comprehensive acquisition document. We work with fixed rates for drafting documents so that you know exactly what to expect; you can also purchase our services on an hourly basis for process guidance.

Would you like to discuss an acquisition or have your contracts reviewed? Schedule a no-obligation intake or view our expertise in contract law. We are happy to assist you.