How to use a contract clause glossary to identify non-assignment risks in M&A

To identify non-assignment risks in M&A, use a contract clause glossary to standardize definitions of 'assignment' and 'change of control.' By mapping these terms against your target's agreements, you can systematically flag restrictive covenants that require third-party consent, preventing deal-breaking breaches or post-closing operational disruptions.

The Strategic Role of a Contract Clause Glossary

In M&A due diligence, the volume of contracts often exceeds the capacity of human review teams. A contract clause glossary acts as your legal taxonomy, ensuring that every reviewer—or AI model—identifies 'assignment' and 'change of control' provisions using the same criteria. Without this, inconsistencies lead to missed risks, such as 'deemed assignments' that occur by operation of law during a merger.

Why Standardized Definitions Matter

• Consistency: Ensures that 'assignment' includes both direct transfers and indirect changes of control.
• Efficiency: Reduces the time spent debating whether a specific clause constitutes a 'consent-required' event.
• Risk Mitigation: Standardizes the threshold for 'materiality' across the entire contract repository.

Key takeaway: A glossary is not just a reference tool; it is a risk-calibration instrument that ensures your due diligence team speaks the same language when assessing contract transferability.

Identifying Non-Assignment Red Flags

When reviewing contracts, your glossary should help you categorize clauses based on their restrictive nature. Use the following table to classify the risk level of common assignment language.

Common Triggers to Watch For

• Change of Control: Does the clause define a merger or stock sale as an assignment?
• Operation of Law: Does the clause trigger upon a merger, even if the entity remains the same?
• Notice Requirements: Are there strict timelines (e.g., 30 days prior) for providing notice of a transaction?

Action Item: Audit your current contract repository to identify all agreements containing 'Sole Discretion' consent clauses; these represent your highest immediate risk.

Step-by-Step Process for M&A Due Diligence

1. Standardize the Glossary: Define 'Assignment' to include mergers, consolidations, and sales of substantially all assets.
2. Automated Extraction: Use an AI tool to scan all contracts for the defined terms in your glossary.
3. Risk Categorization: Map extracted clauses against your risk table to prioritize high-impact agreements.
4. Consent Strategy: Develop a communication plan for counterparties, prioritizing those with 'Sole Discretion' or 'Absolute Prohibition' clauses.
5. Validation: Confirm that the target company has complied with all notice requirements to avoid 'deemed breach' scenarios.

Jurisdictional Nuances and Legal Precedent

Assignment law varies significantly by jurisdiction. In Delaware, for example, courts generally interpret non-assignment clauses narrowly unless the contract explicitly includes 'change of control' language. However, in other jurisdictions, a merger may be viewed as an assignment by operation of law regardless of the contract's specific wording.

• Delaware: Focus on the specific inclusion of 'merger' or 'change of control' in the clause.
• New York: Strict adherence to the plain language of the contract is the standard.
• International: Be aware of civil law jurisdictions where 'assignment' may have broader implications for intellectual property rights.

Key takeaway: Always verify the governing law of the contract. A clause that is unenforceable in one state may be a deal-breaker in another.

Leveraging AI for Scalable Due Diligence

Manually reviewing thousands of pages is prone to human error and fatigue. TermScore automates this process by applying your custom contract clause glossary to your entire data room. Our AI identifies non-assignment risks, flags missing consent requirements, and categorizes clauses by risk level in seconds, allowing your legal team to focus on high-level negotiation rather than document hunting. Contact us today to see how TermScore can accelerate your next M&A transaction.