Assignment Clause

What is an assignment clause?

An assignment clause (German: Abtretungs- oder Übertragungsklausel) is a contractual provision that governs whether a party may assign its rights under the contract to third parties or transfer the entire contract. Assignment means that a claim, such as a claim for payment, passes to a new creditor. A consent requirement is customary: the transfer needs the consent of the counterparty, with exceptions for, say, group companies or financing banks. A clause that excludes transfer is also known as an anti-assignment clause.

A comparison from everyday life is the tenancy agreement. A tenant cannot transfer the lease to a successor tenant without the landlord's involvement. Likewise, a company cannot simply pass a customer contract on to the buyer of a business unit.

The clause appears in customer, supply, licence and loan agreements as well as in the business purchase agreement and the participation agreement. In due diligence, that is, the review of the company by buyers or investors before the contract is signed, it helps determine which contracts can pass to an acquirer. In the transaction agreements themselves, it governs whether buyers or investors may pass on their claims.

Assignment and transfer of contracts under German law

Assignment of claims and prohibition of assignment

Under Section 398 of the German Civil Code (Bürgerliches Gesetzbuch, BGB), a creditor can transfer a claim by agreement with the new creditor without the debtor having to consent. The debtor keeps the defences that already existed at the time of the assignment, for example because of defective performance (Section 404 BGB). If the debtor pays the previous creditor while it is unaware of the assignment, it is released from its obligation (Section 407 BGB).

The parties can, however, exclude assignment by contract (prohibition of assignment). An assignment in breach of this prohibition is invalid under Section 399 BGB. An important exception for monetary claims is contained in Section 354a of the German Commercial Code (Handelsgesetzbuch, HGB): if the underlying transaction is a commercial transaction for both sides, the assignment is effective despite the prohibition. Commercial transactions are transactions of a merchant (Kaufmann) in the course of its business; a GmbH (German limited liability company) is always a merchant. The same applies if the debtor is a legal entity under public law, such as a municipality.

In these cases, however, the debtor may continue to pay the previous creditor with discharging effect. Deviating agreements are invalid, so the parties cannot contractually switch off Section 354a HGB. The exception does not apply to loan claims of credit institutions.

Transfer of the entire contract

The entire contractual position with all rights and obligations passes only with the involvement of the counterparty. This assumption of contract (Vertragsübernahme) is not generally regulated in the BGB but is recognised. It requires the consent of all three parties: the departing party, the entering party and the remaining counterparty. Even a single debt cannot pass to a new debtor without the creditor (Sections 414 and 415 BGB).

A contract without an assignment clause is therefore not freely transferable. The clause can, however, grant consent in advance (advance consent), for example for affiliated companies or for the acquirer of the business.

The position is different in a merger, that is, the combination of two companies under the German Transformation Act (Umwandlungsgesetz, UmwG). Upon entry in the commercial register, the assets, including contracts, pass as a whole to the acquiring company (Section 20(1) no. 1 UmwG). According to the prevailing view, a contractual prohibition of transfer does not prevent this transfer in a single act (universal succession, Gesamtrechtsnachfolge). Whether the counterparty may terminate in this case depends on the wording of the clause; some contracts expressly treat a merger as equivalent to a transfer.

Assignment clause in a business acquisition

Asset deal

In an asset deal, the acquirer buys not the company but individual assets, and each of them is transferred separately. Every customer, supply, lease and licence agreement therefore passes only with the counterparty's consent, unless it contains advance consent. Employment relationships, by contrast, pass by operation of law in a transfer of business under Section 613a BGB; employees can object.

For material contracts, consent is often agreed as a condition to closing (closing conditions). This is a requirement that must be met before the purchase is completed and the purchase price is paid. For the remaining contracts, purchase agreements frequently provide for a pass-through arrangement: the seller continues the contract externally and passes proceeds and costs on to the acquirer.

Share deal

In a share deal, the acquirer buys the shares in the company. The company remains the contracting party; contracts are not transferred. What matters here are clauses on a change of control (change of control), which establish a termination right or a consent requirement when shareholders change. Some contracts expressly treat a change of control as equivalent to a transfer.

Transaction agreements and financings

In the business purchase agreement, the buyer wants to be able to assign its claims, above all under warranties, to group companies and financing banks. The seller wants to prevent such claims from ending up with an unknown third party. A common compromise is: assignment only with consent, excluding affiliated companies and assignments by way of security to financing parties, with the buyer remaining liable. An assignment by way of security (Sicherungsabtretung) is an assignment that secures a loan.

In debt financings, such as a loan for a business acquisition (acquisition financing) or venture debt, a loan for venture-capital-backed companies, lenders have receivables of the company assigned to them as security. Prohibitions of assignment in customer contracts generally do not prevent this between merchants because of Section 354a HGB. The customer can, however, continue to pay the company, and the lender must then collect the amount there. The same applies to factoring, the sale of customer receivables to a financing provider.

Practical example: assignment clause in the sale of a business unit

A GmbH with several software products sells its logistics software business unit in an asset deal. This includes 60 customer contracts with total recurring annual revenue of EUR 4.0 million.

• 22 contracts with EUR 1.4 million in revenue contain advance consent to transfer to an acquirer of the business; notice to the customer is sufficient.
• 38 contracts with EUR 2.6 million in revenue contain no provision. They are therefore not freely transferable, and each of these customers must consent.
• The condition to closing is consents covering at least EUR 2.0 million in revenue from the second group. Together with the first group, EUR 3.4 million, or 85% of revenue, would be secured.
• By closing, 30 customers with EUR 2.1 million in revenue consent. Contracts worth EUR 3.5 million, that is 87.5% of revenue, are transferred.
• For the remaining eight contracts worth EUR 0.5 million, the pass-through arrangement applies for a maximum of twelve months. If consent is still missing after that, the contract stays with the seller, and a portion of the purchase price agreed in advance lapses.

The advance consent in 22 contracts secures 35% of revenue without any negotiation (EUR 1.4 million of EUR 4.0 million). For the remaining 65%, the transfer depends on the willingness of individual customers. This risk is reflected in the condition to closing and the purchase price rule; the more contracts contain advance consent, the smaller the part of the purchase price that is subject to a reservation in the sale.

Distinctions: assignment clause, change of control and Vinkulierung

• Change of control: is triggered by a change of shareholders, not by a transfer of the contract. In a share deal it is what matters; in an asset deal, the assignment clause is.
• Vinkulierung (restricted transferability of shares): an articles-of-association rule under Section 15(5) of the German Limited Liability Companies Act (GmbHG), under which the assignment of shares requires consent. It concerns the shares, not the company's contracts.
• IP assignment: transfer of intellectual property rights or grant of rights of use, for example from founders to the company. Under German law, copyright itself is not transferable.

Common mistakes

• Treating silence as a free pass. A contract without a provision is not freely transferable. Without consent, only individual claims can be assigned, and even that only where there is no prohibition of assignment.
• Overlooking change of control clauses. Anyone who in a share deal looks only for transfer prohibitions overlooks termination rights that are triggered by a change of shareholders.
• No exception for financing parties. If the purchase agreement lacks permission for assignment by way of security, this can delay the buyer's acquisition financing.
• Overestimating Section 354a HGB. The assignment is effective, but the debtor may continue to pay the previous creditor.
• Consents without a standard and too late. If there is no requirement that consent may be refused only for a material reason, counterparties can make it conditional on better terms, especially shortly before closing.

Frequently asked questions

What does a typical assignment clause look like?

Usually as a consent requirement with exceptions. A common version reads, in substance: “Neither party may assign or transfer rights and obligations under this agreement, in whole or in part, without the prior written consent of the other party. Consent may not be refused without a material reason. Transfer to affiliated companies within the meaning of Sections 15 et seq. of the German Stock Corporation Act (Aktiengesetz, AktG) does not require consent.”

May a contract be transferred to another company without the counterparty's consent?

No. The transfer of the entire contractual position requires the counterparty's consent, which can also be given in advance in the contract. Without consent, only individual claims can be assigned. Exceptions apply by operation of law, above all for universal succession in a merger and for employment relationships in a transfer of business.

Is an assignment effective despite a contractual prohibition of assignment?

In principle, no (Section 399 BGB). For monetary claims arising from transactions that are commercial transactions for both sides, it is nevertheless effective under Section 354a HGB, but the debtor can continue to perform to the original creditor.

Do the GmbH's contracts pass to the buyer when all shares are sold?

No, and that is not necessary. The contracts stay with the GmbH; only its shareholders change. Counterparties can generally react only if their contract contains a change of control clause.

Can a buyer assign its warranty claims to the financing bank?

Yes, if the purchase agreement does not exclude assignment or permits it for this case. Assignment without the seller's consent is often excluded, but assignment by way of security to financing banks is permitted.

The Roemer Capital view

When a client is preparing a company sale, we review the material customer and supply contracts early for consent requirements and change of control clauses and assign each its share of revenue. The overview shows whether an asset deal can be carried out with reasonable effort or whether a share deal simplifies the transaction, and which counterparties should be approached before signing.

The legal assessment of the clauses lies with the client's law firm. We coordinate with it on the timing of the approach to customers, so that consent requests do not lead to renegotiations under time pressure, and we factor missing consents into the purchase price negotiation.