Change of Control

Change of Control Definition

Change of control refers to a scenario when the majority ownership of the company and therefore, its business decision making powers moves from one to another. Such controls are always sold to potential buyers at a reasonable price.

Explanation

Venture capitalVenture CapitalVenture capital (VC) is long-term finance extended to startups with high-growth potential to help them succeed exponentially. The investors are venture capitalists who bear the excessive financial risk and provide guidance to startups to attain their objectives.read more investors invest in companies that are at the initial stage. They provide funding and imposes control over the management. Slowly when the company starts to grow, and the product starts to gain popularity in the market, the venture capitalist sells its stake to a private equity firmPrivate Equity FirmPrivate equity firms are investment managers who invest in many corporations' private equities using various strategies such as leveraged buyouts, growth capital, and venture capital. The top private equity firms include Apollo Global Management LLC, Blackstone Group LP, Carlyle Group, and KKR & Company LP.read more. So this is a change of control. Now the private equity firm will provide capital to make the company grow further. When the company starts to reach a steady stage, then the private equity firm will either sell it to another private equity or make the company public. So like this at several stages, change of control takes place.

Change of Control

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Source: Change of Control (wallstreetmojo.com)

Example

In 2008, Emami acquired a controlling stake in Zandu from Vaidyas at INR6,900 per share. The bidding went for several months and is considered the biggest hostile takeover in INDIA. In the end, INR750 crore was the consideration paid by Emami for a 72% stake in the company. So change of control took place, and Emami was controlling Zandu after that.

Change of Control Agreement

Several agreements may apply to the management of the company.

Change of Control Clause

This clause gives certain rights to a party (such as consent, payment, or termination) if there is a change in ownership or change in control of an organization. It is a provision in the agreement of change in control. Not all of this control will trigger this provision. There could be specific criteria that the change in control will trigger if another company acquires more than 50% stake of a company, or maybe sell off most of the assets of the company to a third party, or maximum board members changed.

When it gets triggered, the existing management can ask for payment or quit the organization.

Advantages

Conclusion

Change of control is common throughout the world. It has been seen that companies have benefited from a change in control. If the new controller is visionary and plans to grow the company forward, then it will be beneficial.

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