Here’s a nightmare scenario for parties involved in any M&A transaction: you’ve signed the SPA, conditions precedent are nearly all satisfied, the deal is days from closing, and the target’s biggest customer unexpectedly serves a termination notice on the target. Why? Because in the customer’s view, control has already changed hands to the acquirer, and the very deal protections that the acquirer has asked for have handed them the trigger.

Welcome to one of the most overlooked risks in M&A.

The mechanics of change of control

Change of control clauses sit in most supply contracts, leases, financing documents, shareholder agreements, essentially anywhere a counterparty wants the right to walk away and terminate a contract if the other side gets new owners. Most people assume these only come into effect when the seller transfers the shares in the target to the acquirer on completion or if there is a change of control of the target at Board level. This assumption is wrong, they don’t.

Modern change of control clauses are often drafted to capture qualitative or practical control: such as the ability to direct management, veto decisions, or influence the business. And that’s exactly the kind of language a careful buyer naturally seeks to build into pre-completion covenants to give them as much protection between signing and completion as possible.

The “own goal”

Pre-completion covenants are standard in M&A transactions. They reflect the buyer’s need to ensure that the seller does not alter the target between signing and completion, preserving certainty that the buyer acquires the business it diligenced and agreed to purchase. They don’t want the seller doing things like selling off assets, hiring a new CEO, terminating key employees, taking on debt, or going off-script between signing and completion. So the SPA restricts what the seller can do between signing and completion without buyer consent.

There’s usually a second layer of comfort built into an SPA: a condition precedent requiring all material change of control consents to be obtained before completion. Deal teams treat this as a safety net, without change of control consents, there will be no completion, and assume the box is ticked.

It isn’t. Both mechanisms quietly create the same problem. Pre-completion covenants drafted too broadly tell the world the buyer is calling the shots from the moment the SPA is signed. And the condition precedent itself can be the smoking gun: by formally putting the target’s contract counterparties on notice that control is about to change, you invite them to scrutinise the SPA, where they’ll find buyer veto rights over material decisions and argue control has already shifted. Cue termination notices, consent demands, or renegotiated pricing at the worst possible moment, months before legal title transfers.

The condition precedent protects you against completing without change of control consents. It does nothing to stop a contract counterparty pulling the trigger and seeking termination between signing and completion if a deemed change of control is taken to have occurred as a result of the pre-completion covenants that the buyer and seller have agreed to.

How to stay out of trouble

A targeted approach to negotiations and drafting can go a long way:

• Reserve buyer consent for genuinely material or extraordinary matters, not day-to-day operations.
• Use commercial thresholds (dollar values, not “any” or “all”).
• Carve out actions required by law, emergencies, or anything already baked into the deal.
• Require consent not to be unreasonably withheld or delayed.
• Avoid language suggesting the buyer is running the business.
• If the buyer can attend Board meetings, ensure that it is made clear they have observer rights, and cannot direct the Board in their decision-making process in any way.
• Most importantly: stress-test the target’s material contracts against the pre-completion covenants before signing, not after.

The bottom line

Change of control isn’t just about who holds the shares or who sits on the Board. It’s about who the relevant contracts say has practical control. Although natural instinct for a buyer is to ask for as broad pre-completion covenants as possible, this instinct should be resisted. They should be drafted very carefully in light of the change of control provisions that are contained in the target’s key contracts.

Get the pre-completion covenants wrong and you can lose key contracts before you’ve paid a cent, or hand counterparties leverage to renegotiate terms with a gun to your head.

Next in the series: how pre-emptive rights in shareholder arrangements can quietly hand counterparties the same leverage.

Tom Morgan and his team advise on M&A transactions and can help you manage change of control risk in M&A and shareholder arrangements.

This article was written by Tom Morgan, Partner, Stella Lee, Special Counsel and Jacca Chang, Solicitor.