Posted by Jennifer M. Settles, Esq. | Apr 25, 2025
Navigating Third-Party Consents for Contract Assignments in M&A Asset Purchases
In an asset purchase transaction, Buyers typically seek to acquire specific assets and assume select liabilities of the target company. Depending on the nature of the business, a critical – and often overlooked – components of this process is obtaining third-party consents for the assignment of contracts. Failure to properly handle third-party consents can delay closing, increase transaction costs, or even derail a deal entirely. Additionally, if the closing proceeds without the receipt by Buyer of the needed third party consents, this can lead to a disastrous outcome for the Buyer.
Here’s what you need to know:
What Are Third-Party Consents in the Context of an Asset Purchase Transaction?
In an asset sale, the Buyer is not purchasing the Seller entity itself but rather selected assets — which can often include key commercial contracts. However, many contracts contain provisions restricting assignment without the consent of the non-party to the transaction (i.e., a customer, vendor, or landlord). These “anti-assignment clauses” trigger the need for a third-party consent before the Buyer can assume the contract.
Determining Whether Consents Are Required
Early in diligence, Buyers must perform a careful review of all material contracts to identify assignment restrictions. Simply assuming all contracts can be transferred is a dangerous misstep. Look closely at the language:
• Express Prohibition: Some contracts state outright that assignment is prohibited without consent. • Assignment by Operation of Law: Some contracts treat a change of control or transfer of assets as an “assignment” even if technically it is not, still requiring consent. • Silent Contracts: Where the contract is silent, assignment may generally be permitted under applicable law — but careful legal analysis is still necessary.
If there is any doubt, it must be flagged and resolved early. At the Law Office of Jennifer M. Settles, we help our clients review and understand contact assignment provisions, and develop a strategy and process for obtaining the needed consents.
Why Obtaining Third-Party Consents Is Critical
Without necessary consents, key contracts may not transfer to the Buyer. This could mean losing critical revenue streams, vendor relationships, or licenses that are fundamental to the Buyer’s intended use of the purchased assets. Worse, operating without proper assignment can lead to immediate breaches of contract, litigation exposure, and reputational harm.
Coordinating with the Seller
Because the Seller is the existing party to the contract, it holds the relationship with the third party. Therefore, Buyers must collaborate closely with the Seller to plan and execute the consent process. Sellers are typically more successful in obtaining consents — but Buyers must remain actively involved to ensure the communications are timely, strategic, and appropriately documented. That said, a Buyer must never contact a Seller’s contract-counterparty unilaterally without the Seller’s prior approval. Doing so could be damaging to the Seller, could foster mistrust, potentially derailing the deal, or even lead to Buyer liability.
Addressing Consents in the Asset Purchase Agreement (APA)
The APA must clearly address third-party consents, typically through:
• Closing Conditions: Requiring delivery by Seller of all “Required Consents” before closing. • Schedules and Disclosure: Sellers must identify all contracts needing consents in the APA’s disclosure schedules. • Risk Allocation: The APA should state which party bears the risk if consents cannot be obtained, and whether the Buyer must close regardless.
Failing to deal with consents explicitly in the APA invites disputes and unnecessary risk.
How to Procure Consents
The consent process should be proactive, well-orchestrated, and diplomatic. It often involves:
Seller initiating informal outreach to key counterparties. Buyer and Seller jointly drafting formal consent letters or agreements. Allowing time for negotiation. Counterparties may request meetings, an introduction to the Buyer, concessions and/or fees. Unfortunately for the Buyer and Seller, if the counterparty wants to terminate the contract or improve its terms for whatever reason, the counterparty will now have the leverage to make those demands. The counterparty may also require additional time for their internal management or legal counsel approval before granting the consent.
Timing Considerations
Buyers should push to begin the consent process early — ideally, immediately after signing the letter of intent or confidentiality agreement, during diligence. Some consents may take weeks or months to obtain, especially with larger counterparties, government agencies, or landlords. Waiting until the APA is signed is a recipe for last-minute scrambling and heightened risk. That said, Sellers often do not want to start the consent procurement process until the APA is signed, so that the Seller has a higher comfort level that the deal is likely to in fact proceed.
Alternatives
In some cases, the necessary consents may not be forthcoming before the closing of the asset purchase transaction. In those scenarios, alternatives can be explored to help protect the Buyer in the event the parties still wish to proceed with the closing. One approach can involve the escrow of a portion of the purchase proceeds at closing, pending receipt of the necessary consents. Then, when the consent is received, the allocated escrow sum is released to the Seller, or, alternatively, if the consent is not received by a specified date, the escrow sum is released to the Buyer. Another approach can involve a delegation, license, or “sublet” by the Seller to the Buyer of the contract in question. In some cases, this type of “lesser” mechanism might technically not be prohibited by the terms of the underlying contract in question, and therefore can work as an interim measure pending receipt of the necessary consent.
Bottom Line
In M&A asset purchases, third-party consents are not a box-checking exercise. They are a mission-critical component of a clean, risk-mitigated transaction. Buyers who identify consent issues early, coordinate closely with Sellers, address the issues explicitly in the APA, and drive an early and proactive consent process significantly increase their chances of a successful, low-risk closing.
Jennifer M. Settles, Esq. is a corporate lawyer with the Law Office of Jennifer M. Settles. She advises clients on M&A transactions, commercial contracts, real estate matters, financing transactions and corporate law. To schedule a free consultation with Jennifer, call (602) 617-3938, or connect through our contact form on the website.
Category: Mergers & Acquisitions
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