Taking Control of a Change in Control

By Michael Hepburn

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With the increased interest and activity in the sourcing markets today, recent headlines regarding a potential sale of outsourcing giant Computer Sciences Corporation (CSC) might provide relatively minimal shock value to the general public.

However, such headlines could bring significant headaches for customers of CSC caught unaware of, or worse yet unprepared for, such circumstances.

Outsourcing companies like CSC are paid millions, sometimes billions, of dollars to manage and maintain IT systems and services for private and public sector customers. Customers do not enter into these arrangements lightly and are often highly dependent on the relationship that has developed with their outsourcing vendor.

That’s why a change in something as core to the relationship as the control of the vendor will give rise to many questions and concerns for a customer:

  • Do I have to accept this?
  • How will my service change?
  • Are my fees going to increase?
  • Will the people providing services change? What can I do if I don’t like the new vendor?
  • How can I get the vendor (old or new) to pay attention to my concerns?
  • An outsourcing vendor in the midst of selling a multi-billion dollar business may not be focusing on calls from one particular customer. However, there are ways for a customer to make sure that its concerns are addressed. Most of these involve anticipating and preparing for vendor change in control scenarios when drafting and negotiating outsourcing agreements.

    Preparing For the Unexpected

    There are a number of considerations when putting an outsourcing agreement together that can go a long way toward both relieving stress and protecting your organization’s best interests if a vendor change in control occurs. These include:

    Termination Rights. Make sure your outsourcing contract allows you to terminate the agreement (in whole or in part) upon the occurrence of a vendor change in control without the payment of exit fees.

    This provision should give you the right to terminate according to your schedule. For instance, you might want to assess how the newly configured company performs for a period of time after the merger or change in control before making a termination decision. However, a termination right based simply upon the occurrence of the change of control event is preferable to one that is contingent on a slip in vendor performance.

    Practically speaking, the fact that you hold a right to terminate will, at a minimum, get you meetings with the right people and access to the relevant information, and give you a clearer picture of how this change in control may affect your organization.

    Assignment Clauses. Require your prior written consent to any assignment of the agreement by the vendor and have your attorney draft this provision so that changes in control fall within the meaning of assignment.

    If you are not successful in negotiating an assignment clause that requires your prior written consent to all vendor assignment scenarios, be sure to at least restrict the vendor from assigning the agreement to a list of certain entities, including your competitors, without your prior written consent.

    Key Personnel Provisions. People determine the success or failure of outsourcing relationships. Make sure that your agreement locks key vendor personnel on your project for the term of your agreement, regardless of a change in control.

    You may also be concerned about your vendor’s ability to retain its staff following the merger or other change in control transaction, either due to layoffs, reassignment or voluntary resignations.

    You can gain additional protection by negotiating a right to terminate without exit fees or by negotiating a service level commitment that provides you with monetary credits if staff turnover reaches a certain threshold.

    Non-Exclusivity Provisions. Sign a contract that allows you to hire other vendors to do similar work. You will want to avoid any contractual obstacles to bringing in a new provider if you conclude that your current provider is no longer the right partner.

    Location of Performance. Perhaps your current provider doesn’t have a development shop overseas and for that reason you did not expressly restrict your provider from performing development work overseas, where intellectual property and piracy risks may be more significant. Or, perhaps you have policy reasons for wanting to keep jobs in your current geographic region.

    Following a vendor change in control, your new provider’s organization may want to use overseas resources and your contract would have nothing to prevent your provider from sending the work there. Make sure your outsourcing agreements either specify the geographic area where services must be performed and/or give you the right to approve or deny requests to offshore work.

    Financial Considerations. Consider introducing financial incentives into your contract that provide benefits to you upon a vendor change in control.

    For example, these incentives could come in the form of reduced pricing that goes into effect upon a vendor change in control, or increased service levels or greater performance credits as a result of failed service levels after a change in control.

    These incentives may be more appropriate if you think your vendor is a likely takeover target. If your agreement contains a “most favored pricing” provision, you should also be sure to understand how such a provision might be impacted by a vendor change in control.

    The universe of customer comparisons used in a “most favored pricing” analysis may change for the better or worse when the new vendor takes over. It would be best if your contract provides for the widest universe possible.

    The best way to take control of a vendor change in control is to do so before the change in control circumstances arise. Make sure you are prepared by working as many of the concepts identified here into your outsourcing agreement and by thoroughly conducting all other appropriate due diligence on your vendor.

    Michael Hepburn and Thomas Levenberg are partners in the law firm of McGuireWoods, LLP. Mr. Hepburn's practice focuses on information technology transactions and electronic commerce. Mr. Levenberg's practice focuses on both information technology matters and business law counseling.