What Happens to a Company's Contracts After a Share Purchase?

When a company is acquired through a share purchase, its existing contracts with customers, suppliers, landlords, lenders, and employees remain in force because the company continues as the same legal entity; only its shareholders change, not the contracting party. This differs from an asset acquisition, where contracts the buyer wants must be individually novated or assigned with the counterparty's consent. Many commercial contracts contain change of control clauses giving a counterparty rights to terminate or seek consent when ownership changes, so identifying such clauses before signing is a critical due diligence task. This article explains how contracts survive a share acquisition and what warranties the agreement should contain. This is one of the most important distinctions in any M&A transaction.
Any corporate lawyer in Mumbai advising on acquisitions regularly explains this to clients who assume that buying a company is like buying a clean slate. It is not. The company's entire history, including its contracts, its liabilities, and its disputes, comes with the shares. What happens to those contracts, and what the buyer needs to know about them before signing the share purchase agreement, is a core part of M&A due diligence.

In a share acquisition, the contracts between the target company and its customers, suppliers, landlords, lenders, and employees are unaffected by the change in ownership of the shares. The company remains a party to those contracts. There is no technical novation or assignment. So in theory, a counterparty to a contract with the target company does not need to consent to the acquisition simply because the company's shareholders have changed.

In practice, however, many commercial contracts contain change of control clauses that operate on a share acquisition. These clauses give the counterparty rights (to terminate, to seek consent, to revise pricing) when the ownership or control of the contracting party changes. Identifying all such clauses before signing the share purchase agreement is a critical due diligence task, because triggering undisclosed change of control provisions can cause major disruption to the business post-acquisition.

What Buyers Need to Know About the Target's Contracts

The company's contracts survive the share acquisition

Because the company continues as the same legal entity after a share acquisition, its contracts are undisturbed unless a specific trigger clause applies. The employment contracts of the company's employees continue unchanged. The lease agreements with landlords continue. The supply contracts with vendors continue. The customer agreements continue. All of the company's statutory licences, registrations, and regulatory approvals also continue to vest in the company. This is one of the key commercial advantages of a share acquisition over an asset acquisition, particularly for businesses where licences, permits, or long-term customer relationships are valuable and would be difficult to transfer in an asset deal.

What Is a Change of Control Clause and When Does It Apply?

A change of control clause is a contractual provision that is triggered when the direct or indirect ownership or management control of a party changes. Such clauses appear in loan agreements (banks routinely include them, allowing the loan to be called if ownership changes without consent), key commercial contracts (particularly with large customers or government counterparties), software licences, and critical supply agreements. The trigger for a change of control clause is defined in each contract individually: it may be triggered by acquisition of 50 percent or more of shares, acquisition of the ability to appoint a majority of the board, or any change in ultimate beneficial ownership. Due diligence must review every material contract to identify these clauses and assess their commercial impact. An undisclosed change of control clause in a key customer contract can materially affect the value of the acquisition.

What Consents Are Needed Before Closing a Share Purchase?

Where a change of control clause requires consent from the counterparty before the acquisition can be completed, the buyer needs to either obtain that consent before or at closing, or take the risk of the contract being terminated or the trigger clause activated. In practice, material consents are often conditions precedent to closing the acquisition: the share purchase agreement provides that closing will not occur until specified consents are obtained. Negotiating consents from large institutional counterparties (banks, major customers, government authorities) can be time-consuming and is sometimes more difficult than the acquisition itself. Some counterparties use the consent process as an opportunity to renegotiate terms.

Representations and warranties in the share purchase agreement

The share purchase agreement (SPA) in any acquisition includes representations and warranties given by the seller about the target company and its business. The warranties relating to contracts typically cover: all material contracts are valid and in force; no material contracts will be terminated as a result of the acquisition; there are no undisclosed defaults under material contracts; all consents required under material contracts have been obtained; and there are no change of control clauses in material contracts that will be triggered by the acquisition. If any of these warranties turn out to be false (because a change of control clause was not disclosed, for example), the buyer has a claim for breach of warranty against the seller. Warranty and indemnity (W&I) insurance has become more common in Indian M&A transactions and provides the buyer with insurance coverage for warranty claims without having to pursue the seller directly.

Asset acquisition as an alternative structure

Where the target company has extensive liabilities, undisclosed obligations, or regulatory issues, an asset acquisition may be preferable to a share acquisition. In an asset acquisition, the buyer specifically identifies and acquires the assets they want (equipment, IP, customer contracts, inventory, specific licences), and the seller retains the company (and its liabilities). Contracts that the buyer wants are novated or assigned to the buyer, requiring the counterparty's consent in most cases. Asset acquisitions are more administratively complex and typically involve higher tax and stamp duty costs, but they give the buyer a cleaner separation from the seller's historical liabilities.

Do a Target Company's Contracts Survive a Share Purchase?

In a share acquisition, the buyer inherits the target company's entire contractual universe. The company continues as the same legal entity with the same contracts, employees, licences, and liabilities. The acquisition of shares does not automatically trigger any novation of contracts or assignment of rights.

The key diligence task for a buyer is to map the target's material contracts, identify change of control provisions, understand what consents are needed before or after closing, and make sure the share purchase agreement contains appropriate representations and warranties that protect the buyer if undisclosed contract issues surface post-closing. A transaction that closes without addressing these issues can result in key contracts being terminated, financing being called in, or major post-closing disputes with the seller.

Frequently Asked Questions

If a company's shareholders change through a share sale, does the company need new contracts with its suppliers and customers?

No new contracts are needed, because the company continues as the same legal entity throughout a share sale; only its shareholders change. Contracts with customers, suppliers, landlords, lenders, and employees remain in force automatically, without any novation or assignment, unless a specific clause within one of those contracts is triggered by the change in ownership.

Which kinds of contracts most commonly contain change of control clauses?

Change of control clauses appear most commonly in loan agreements, where banks routinely reserve the right to call in a loan if ownership changes without consent, as well as in key commercial contracts with large customers or government counterparties, software licences, and critical supply agreements. Because the trigger for each clause is defined individually within the specific contract, due diligence must review every material agreement rather than relying on a general assumption about which contracts are affected.

How does a share purchase differ from an asset purchase when it comes to contracts?

In a share purchase, the target company's contracts continue unaffected because the company itself remains the same legal party; in an asset purchase, only the specific contracts the buyer wants to acquire must be individually novated or assigned, which requires the counterparty's consent in most cases and adds administrative complexity that a share purchase generally avoids.

What warranties should a share purchase agreement include about the target's contracts?

A share purchase agreement should include warranties confirming that all material contracts are valid and in force, that none will terminate as a result of the acquisition, that there are no undisclosed defaults under those contracts, that all required consents have been obtained, and that no undisclosed change of control clause will be triggered by completion of the acquisition.

What happens if an undisclosed change of control clause is triggered after closing?

If an undisclosed change of control clause causes a material contract to terminate or a lender to call in financing after closing, the buyer typically has a claim for breach of warranty against the seller under the share purchase agreement. This is one reason thorough contract diligence, covering every material agreement, matters as much as reviewing the target's financial statements before signing.

What is warranty and indemnity insurance and how is it used in Indian M&A deals?

Warranty and indemnity insurance, increasingly used in Indian M&A transactions, provides the buyer with insurance coverage for breach of warranty claims arising from the share purchase agreement. It allows the buyer to recover losses from an insurer rather than pursuing the seller directly after closing, which can be particularly useful where the seller may be difficult to locate or enforce a claim against later.

What is the main trade-off between choosing an asset acquisition and a share acquisition?

The main trade-off is risk against complexity: an asset acquisition lets the buyer select specific assets, such as equipment, intellectual property, or particular contracts, while leaving the seller with the company and its historical liabilities, but it requires novating or assigning each contract individually and typically carries higher tax and stamp duty costs than a straightforward share purchase.

Can a seller be forced to obtain consents from counterparties before a share purchase closes?

A seller can be contractually obligated to use reasonable or best efforts to obtain required consents before closing, since the share purchase agreement typically makes material consents a condition precedent to completion. However, a seller cannot always guarantee a counterparty will actually grant consent, particularly where large institutional counterparties such as banks or major customers use the process as leverage to renegotiate their own terms.

Does a share purchase trigger fresh stamp duty on the target's existing contracts?

No. In a share purchase the contracting party does not change, so the target's agreements are neither assigned nor novated and no fresh duty arises on them. Stamp duty is payable on the instrument transferring the shares, at the rate applicable to a share transfer. This is one of the practical advantages of a share purchase over an asset purchase, where each assignment, conveyance or novation can attract duty in its own right and the aggregate cost becomes material.

Do the target's employees transfer automatically on a share purchase?

Yes. Because the employer remains the same legal entity, employment contracts continue undisturbed and there is no transfer of service requiring employee consent. This contrasts with an asset or business transfer, where employees must ordinarily be terminated and re-engaged, or transferred with consent and continuity of service preserved. A buyer should still review employment terms for retention obligations, notice periods and any change of control payout triggered by the transaction itself.

What is a material adverse change clause and why does it matter before closing?

A material adverse change clause allows the buyer to withdraw, or to reopen price, if something significantly damaging to the target occurs between signing and completion. It matters most where closing is delayed by regulatory approvals, because the buyer agreed a price on the basis of the target as it stood at signing. Sellers typically resist broad drafting, and the negotiation usually centres on carve-outs for market-wide or industry-wide events outside the target's control.

Should a buyer review contracts that contain no change of control clause?

Yes. Change of control is only one reason to read the contract book. A buyer inherits the economics of every agreement the target has signed, including loss-making supply commitments, unusually long notice periods, exclusivity that blocks the buyer's own plans, and dispute resolution clauses fixing an inconvenient forum or seat. Diligence should establish what the buyer is actually acquiring, not merely whether the acquisition itself breaches anything.

What happens to litigation the target is already involved in?

Pending proceedings continue unaffected, because the company remains the same party to them. The buyer therefore acquires the outcome of every case the target is running or defending, together with any costs exposure. Litigation disclosure schedules, a specific indemnity for identified proceedings, and where exposure is material a price retention or escrow, are the usual protections. A buyer who reviews only concluded matters misses the exposure that is still live.

Related reading

Terms Employers Must Put in Writing in Employment Contracts · When Is a Payment to a Partner Profit and Not a Loan · How Are Force Majeure Clauses Interpreted in India?

Vikrant D. Shetty | Vikrant D. Shetty leads the Corporate and M&A Practice at Vikrant D. Shetty & Associates, Advocates & Solicitors. As Mumbai serves as the centre of India's corporate transaction activity, share acquisitions, asset purchases, and business transfers are a core practice area at the firm. The firm advises acquirers, sellers, promoters, and investors on share purchase agreements, due diligence, regulatory approvals, and the contractual implications of corporate transactions.

Related reading: Payments to Partners, Presumed to be Profit and Remuneration and not a Loan.

This article is for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please seek direct consultation with an advocate.