Sale of a business and transfer of commercial agreements | In Principle

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Sale of a business and transfer of commercial agreements

The acquirer of an enterprise does not automatically become a party to commercial agreements concluded as part of the business operated by the seller. The acquirer should be careful when planning the transaction to assure that the transfer of such agreements is conducted as easily as possible.

Transactions involving the sale of a business—understood functionally to mean economic activity conducted by the target—may take a number of legal forms. The most basic forms include sale of shares in the company operating the business and direct sale of the enterprise in which the activity is conducted.

The sale of shares in a company conducting economic activity consists, in a functional sense, in the acquirer’s taking over the business indirectly, by gaining control over the entity directly carrying out the economic activity. From a legal perspective, such share transactions generally do not affect the business itself, because the economic activity continues to be carried out by the same entity, using the same assets as before and on the basis of the existing commercial agreements, with no change in the parties.

The legal situation appears somewhat different in the case of transactions involving direct sale of the enterprise in which the economic activity is conducted. An enterprise as such is not a legal entity under Polish law, but is defined in Art. 551 of the Civil Code as an organised set of tangible and intangible elements intended for conducting economic activity. This means that the sale of a business in the form of sale of the enterprise results in a change in the entity operating the business following the transaction. The acquirer of an enterprise acquires the assets making up the enterprise, trade secrets, commercial books and records, and, as a rule, concessions, administrative permits and the like, but does not automatically become a party to commercial agreements concluded as part of the activity conducted by the seller of the enterprise.

Such agreements were concluded between specific entities, while the sale of the enterprise covers only the objective side of the business, i.e. a set of specific tangible and intangible assets. While it is true that a claim arising under a commercial agreement is an asset of the enterprise that passes to the acquirer (Civil Code Art. 551(3)), full transfer of the agreement (involving a change in the parties) also requires a transfer of the obligations under the agreement. This would constitute assumption of a debt within the meaning of Civil Code Art. 519 §1(2), which requires the consent of the other party to the agreement.

For these reasons, when planning the transfer of a business in the form of sale of the enterprise, it is worthwhile at the transaction planning stage to address the issue of obtaining prior consent of the customers and suppliers of the enterprise to transfer commercial contracts to the acquirer of the enterprise. It appears that the most obvious solution is to obtain a statement from the other party consenting to a change in the parties to the commercial agreement or to include clauses in the commercial agreements themselves granting consent in advance to a change in the parties, which will enable the parties to be changed more or less “automatically” in the case of sale of the enterprise by either of the existing parties to the contract.

Piotr Wcisło, Mergers & Acquisitions, Corporate Law, Restructuring, and Business-to-Business Contracts practices, Wardyński & Partners