What Happens to Business Contracts When a California Business Is Bought or Sold?
When a California business changes hands, the contracts that keep it running do not always change hands with it. Leases, vendor agreements, customer contracts, and licenses each have their own rules about whether they can be transferred, who must approve the transfer, and who remains responsible afterward. Buyers who assume everything will simply carry over can find themselves without a location or a key supplier, and sellers can remain on the hook for obligations they thought they had left behind. Here, our Fremont attorney for buying and selling a business explains what business owners should know about contracts in a California business sale.
The Structure of the Deal Largely Determines What Happens to Contracts
The first question is whether the transaction is an asset sale or a sale of the ownership interests. In a sale of stock or membership interests, the company itself stays in place and remains the party to its contracts, so most agreements continue without any assignment. Even then, some contracts include change of control provisions that treat the sale of the company as a trigger for consent or termination rights. In an asset sale, the buyer acquires selected assets and contracts from the seller, so each contract that the buyer wants must be transferred. California’s Civil Code draws a useful distinction here. A right arising out of an obligation may generally be transferred, but the burden of an obligation may be transferred only with the consent of the party entitled to its benefit. In plain terms, a seller can often assign its rights under a contract, but a buyer who wants to take on the duties usually needs the other party’s agreement, often through an assignment and assumption agreement or a novation. Without a release, the seller may also remain liable to the other party after closing.
Leases, Vendor Agreements, and Customer Contracts Raise Different Issues
Commercial leases are often the most important contract in a business sale. Under California’s commercial lease statutes, a tenant generally has the right to transfer its interest unless the lease restricts transfer, and a lease can require the landlord’s consent or can even prohibit transfer outright. If a lease requires consent but states no standard, California law implies that the landlord may not unreasonably withhold it. Many leases also treat a sale of the tenant’s ownership interests as a transfer, and landlords may ask for a new guarantee, a larger deposit, or revised terms as a condition of approval. Vendor and customer contracts raise different concerns, including anti-assignment clauses, exclusivity or minimum purchase commitments, and agreements that were negotiated based on the personal relationship or reputation of the seller. Licenses and permits also deserve attention, because many professional and business licenses do not transfer automatically and may require the buyer to apply on its own.
During due diligence, the parties should review each important contract for:
- Anti-assignment and change of control provisions
- The standard for giving or withholding consent
- Termination rights triggered by a sale
- Personal guarantees tied to the contract
- Notice requirements, renewal terms, and exclusivity clauses
Bulk Sale Rules and Creditor Claims Can Affect Asset Deals
California’s bulk sales law adds another layer for certain asset sales. It can apply when the seller’s principal business is selling inventory from stock, including businesses that manufacture what they sell and restaurants, although sales below $10,000 or above $5 million in value and certain other transactions are exempt. In those cases, the buyer must obtain a list of the seller’s business names and addresses from the past three years and give notice of the sale at least 12 business days before it occurs. A failure to follow these rules does not necessarily undo the sale, but it can expose a buyer to claims from the seller’s creditors. Because the parties negotiate who is responsible for existing liabilities, the purchase agreement should clearly allocate which debts and contract obligations the buyer is assuming and which remain with the seller.
Contact Our Fremont Attorney for Buying or Selling a Business
Every sale involves its own set of contracts, and the time to identify the problematic ones is before a purchase price is agreed. Lynnette Ariathurai represents both buyers and sellers in California business transactions, and our Fremont buying or selling a business attorney can help you map out which contracts will transfer, which need consent, and how to protect your interests at closing. Whether you are preparing to sell or considering an acquisition, we welcome the chance to discuss your plans with you. Contact The Law Firm of Lynnette Ariathurai today to learn more about what happens to business contracts when a California business is bought or sold and schedule a confidential consultation.