A change of control is characterised afterwards, by documents drafted for other reasons.

A transaction at the top of a structure, a sale of the manager, a transfer of a majority of the fund's units, a continuation sale to a new vehicle, a reorganisation of the principals' holding company, is one event. Beneath it are contracts drafted for other reasons, each with a definition of change of control written by whoever drafted that contract for whatever that contract was protecting: the lender's facility, the onshore licence's conditions, the joint venture agreement's partner protections, the lease's landlord consent, the concession's state approval, the key person clause, the management agreement's termination right. Each definition asks its own question of the event, and the event is a change of control under some, not under others, and arguable under the rest. The transaction is characterised afterwards, definition by definition, and a structure has as many answers as it has definitions. A manager that asks whether the transaction is a change of control has asked a question with no single answer; the question is which definitions it triggers, and the answer is a list.

This note sets out where definitions live and why they differ, the elements a definition tests, the events at each level and the definitions they reach, the lender's definition, the licence's definition, the joint venture's, the lease's and the concession's, the continuation sale as the hardest case, the survey and the list, the consents and the waivers, the sequence of approaching counterparties, the onshore interface, a comparison, a worked transaction as a type, cases, what each party holds, the sequence, questions, terms and what to read.

Where the definitions live

A facility defines change of control to protect the lender against a borrower whose owner changes: it tests the borrower's ultimate owner, its manager, or both, by a percentage and a concept of control. An onshore licence conditions its holder's ownership to protect the state's policy on who may hold licensed activities: it tests the licensee's shareholders, often at every level, by nationality and percentage. A joint venture agreement tests the partner's ownership to protect the other partner against a stranger: it tests the partner entity's control, sometimes its manager, by a concept the partners negotiated. A lease tests the tenant's control to protect the landlord's covenant strength. A concession tests the concessionaire's control to protect the state's grant. A key person clause tests the manager's control to protect the register. A management agreement tests the manager's control to give the fund a termination right. Seven contracts, seven drafters, seven purposes, seven definitions.

The elements a definition tests

Each definition has elements, and the elements differ. The entity tested: the borrower, the licensee, the partner, the manager, the fund, or the ultimate parent. The level: the entity's direct shareholders, or any level up to the ultimate owner. The concept: a percentage of shares, of votes, of economic interest, or the power to appoint a majority of the board, or the power to direct management, or any of these. The threshold: a majority, a stated percentage, or any change. The carve-outs: transfers within a group, transfers to affiliates, changes among existing holders, the manager's internal reorganisations. The trigger: the change itself, or the change without consent, or the change with notice. A transaction tested against seven definitions is tested on seven sets of elements, and the answer under each depends on which elements that definition has.

The events and the definitions they reach

A sale of the manager to a third party changes the manager's control: it triggers definitions that test the manager, including the key person clause's change of control limb, the management agreement's termination right, and any facility or joint venture that tests the manager rather than the fund. It does not change the fund's ownership, so definitions that test the fund's holders are untouched. A transfer of a majority of the fund's units changes the fund's ownership: it triggers definitions that test the fund's holders, including facilities that test the borrower's ultimate owner through the fund and onshore licences that look through to the fund's holders, and does not touch definitions that test the manager. A continuation sale changes both, because the positions move to a new vehicle with new holders and the same manager. A reorganisation of the principals' holding company changes nothing in substance and may trigger definitions that test the manager's direct shareholders by name.

Why the definitions differ

Each drafter wrote for a counterparty with a concern. The lender's concern is the borrower's credit, which depends on who owns and who manages it; the lender's definition tests both and sets the threshold low. The state's concern is policy, which depends on who ultimately owns the licensed activity; the state's definition looks through every level and tests nationality. The developer's concern is the partner it chose; its definition tests that partner's identity in substance. The landlord's concern is the covenant; its definition tests the tenant's financial backing. The register's concern is the people; the key person clause tests the manager's control. The fund's concern is the manager it appointed; the management agreement tests the manager's ownership. No drafter was writing for the structure, and no drafter's definition was meant to agree with another's. The differences are the purposes, and a manager that expects them to align expects seven counterparties to have had one concern.

The arguable case

A definition whose elements do not clearly reach the transaction, because the concept is control in substance and the transaction changes form, or because the carve-out's words fit imperfectly, is arguable, and the manager chooses: ask the counterparty, which discloses the transaction and invites a price; proceed on counsel's reading, which risks the consequence; or restructure the transaction so that the definition clearly does not reach it. The third is often available and rarely considered: a sale of the manager structured so that the principals retain the control the definition tests, a transfer of units in tranches below the threshold, a continuation sale in which the onshore vehicles are retained by the fund and the units above them are what moves. The list's arguable lines are the transaction's design questions.

The counterparty's reading

A counterparty reads its own definition when the transaction is announced, with its own counsel, for its own advantage, and a definition the manager read as not triggered is read by the counterparty as triggered if the consequence is worth having. A lender whose facility is below market reads its definition for a prepayment it would welcome; a developer that wants a renegotiation reads its definition for a consent it can price. The manager's reading is one reading, and the list records the counterparty's likely reading beside it, because the arguable case is arguable from both sides.

The lender's definition

The facility's definition is the one with the sharpest consequence, because a change of control is a mandatory prepayment event or a default, and the lender's consent is the only cure. Facilities to the fund test the manager, because the lender lent on the manager's management; facilities to the onshore vehicle test the vehicle's ownership up to the fund and sometimes the manager. The definition's carve-outs are negotiated at the facility and are the manager's protection: a carve-out for transfers of units among existing holders, for the manager's internal reorganisations, and for a continuation sale to a vehicle the same manager manages. A facility without the carve-outs has a definition every event at the top triggers.

The licence's definition

An onshore licence conditions the licensee's ownership, and the condition looks through to the ultimate owners by nationality and percentage under the state's foreign ownership rules. A change in the fund's holders that changes the nationality mix above a threshold, or a change in the fund's control, may be a change the licence requires approved in advance, and a change not approved is a breach with the licence's revocation as the consequence. The licence's definition is the state's, not negotiated, and it reaches events the facility's definition does not: a transfer of units between two holders of different nationalities, which changes nothing in control and changes the licence's look-through.

The joint venture's, the lease's and the concession's

The joint venture's definition was negotiated by the developer to protect itself against a new partner, and it tests the platform entity's control and often the manager's, with a consent right or a purchase option as the consequence. The lease's definition tests the tenant's control with the landlord's consent as the consequence, and the tenant is the onshore vehicle, whose control runs up to the fund. The concession's definition is the state's grant condition, tested like the licence's. Each is read for its elements, and the consequence under each is different: a consent, an option, a termination.

The regulators' own definitions

Beyond the contracts are the regulators: the centre's regulator, whose rules define a change of control of a licensed manager and require its prior approval; the state's capital markets authority, where the manager holds a licence there; the state's investment authority, whose foreign ownership rules define a change in the licensed vehicle's ownership. The regulators' definitions are statutory and not negotiated, they carry approval periods the transaction's timetable must hold, and a transaction completed without the regulator's prior approval is a breach with the licence as the consequence. The survey carries the regulators' definitions beside the contracts', and the approach to the regulators is the sequence's first regulatory step, before the counterparties whose consents depend on the regulator's.

The transfer of units as a change of control

A holder's transfer of its units is the event most often tested without being recognised as one, because the manager reads it as the holder's own affair. A facility to an onshore vehicle that tests the vehicle's ultimate owners by percentage reaches a transfer of a large holding; a licence that looks through by nationality reaches a transfer between holders of different nationalities; a joint venture that tests the platform's control reaches a transfer that shifts the majority. The constitution's transfer provisions give the manager the consent right over transfers that lets it test each against the survey before it takes effect, and a manager that consents to transfers without the survey has consented to events its counterparties will characterise.

The continuation sale

A continuation sale moves the positions from the fund to a new vehicle with new holders under the same manager, and it is the hardest case because it changes the owner of the onshore vehicles without changing who runs them. The facility to the onshore vehicle tests the vehicle's owner, and the owner has changed; the licence looks through to the new vehicle's holders, and the nationality mix may have changed; the joint venture tests the platform entity, which has been sold; the lease tests the tenant's control, which has moved. Every definition that tests ownership is triggered, and every definition that tests the manager is not. The continuation sale's sequence carries the consents under each ownership definition, obtained before the sale's completion, and a continuation sale run without them is a sale that completes into a row of defaults.

The definition the manager drafts

In the contracts the manager drafts, the constitution, the management agreement, the co-investment documents, the onshore service agreements, the manager writes its own definition, and it writes it to reach the events the register should be protected against and to exclude the events the manager needs freedom for. The register's counsel reads it for the first and the manager's for the second, and the negotiated definition is the template the manager proposes to every counterparty afterwards. A manager with a definition of its own has a position at each negotiation; one without accepts each counterparty's.

The survey and the list

The method is a survey: every contract in the structure, every definition in it, its elements, its carve-outs, its trigger and its consequence, in a schedule. The transaction is then tested against each line, and the result is the list: triggered, not triggered, arguable, with the consequence and the cure beside each. The survey is done at the structure's formation, because the definitions are easier to negotiate then, and maintained as contracts are added. A structure surveyed at formation has a list in a day; one surveyed at the transaction has a list in a month and a transaction whose timetable the survey sets.

The consents and the waivers

Each triggered definition has a cure: consent in advance, waiver after, or the consequence. Consents are sought from the counterparty with the transaction's terms, on conditions the counterparty sets, and the conditions are priced. A lender consents on a charge and a fresh review; a developer consents on a renegotiation; a landlord consents on a guarantee; a state approves on an application with its period. The arguable definitions are approached or not, and the decision is a risk the manager takes with counsel's reading.

Where it surfaces

It surfaces at the term sheet for the sale of the manager, when the buyer's diligence asks for the list and there is no survey. It surfaces at the lender's announcement-day letter. It surfaces at the onshore licensing authority's suspension. It surfaces at the developer's consent request, priced. It surfaces at the continuation sale's first quarter, when the new vehicle's counterparties arrive in turn. And it surfaces at the buyer's price, which carries every consent not yet obtained as a condition and a discount.

The cost of getting it wrong

A transaction characterised afterwards by the counterparties costs the lender's prepayment or its consent charge, the developer's renegotiation, the landlord's guarantee, the state's suspension, and a timetable the counterparties set. A transaction characterised beforehand on the survey costs the consents' conditions at prices negotiated with the transaction's leverage, in an order the manager set. The survey's cost is a schedule at formation and an hour per new contract.

The carve-outs at signing

The time to shape a definition is at the contract's signing, when the manager has the leverage of a counterparty that wants the contract. The carve-outs the manager needs are foreseeable: transfers of units among existing holders and to their affiliates, the manager's internal reorganisations that keep the principals in control, a continuation sale to a vehicle the same manager manages on notice, a change in the principals' holding company's shareholders below a threshold. A manager that negotiates the carve-outs at each signing has a survey whose lines are mostly not triggered; one that accepts each counterparty's definition has a survey whose lines are mostly triggered and a structure in which every transaction at the top needs forty consents.

A timeline, as a type

At formation the survey is made from the constitution, the management agreement and the first facility, and carve-outs are negotiated in the facility. Each onshore vehicle's licence, facility, joint venture and lease is added to the survey as signed, with carve-outs negotiated where the counterparty will give them. In year four the manager's principals agree to sell the manager; the list is written in a day from the survey; the lender to the fund is approached under non-disclosure and consents on a review; the committee waives the key person event; the developer consents; the transaction completes in three months. In year eight the continuation sale is planned; the list shows every ownership definition triggered; the onshore lenders, licensing authorities, developer and landlords are approached in the order of their power to stop the sale; the consents are obtained in five months and the sale completes into no defaults. The survey was the structure's memory of its own definitions, and the transactions ran on it.

The sequence of approaching counterparties

The counterparties are approached in an order: the ones whose refusal ends the transaction first, which is usually the lender and the state; then the ones whose consent is conditioned and priced; then the ones whose definition is arguable and whose consent is sought for certainty. Each approach discloses the transaction, and the order is also the order of confidentiality's loss, so the first approaches are under non-disclosure terms and the transaction's announcement follows the last necessary consent.

The onshore interface

The onshore regimes' definitions are the state's and are tested by the state's authorities on their own reading: the registrar reads the shareholder change, the investment authority reads the foreign ownership, the licensing authority reads the licence's condition. Each has its own application, period and consequence, and the onshore column of the list is written by onshore counsel. A change at the top that the onshore authorities read as a transfer of the onshore company's shares, because the state's rule looks through, is a change with transfer tax and a fresh foreign ownership review, and the list carries the cost.

By definition · by test	Tests whom	Concept	Consequence	Triggered by a sale of the manager	By a transfer of units	By a continuation sale
Facility to the fund	The manager	Control of the manager	Prepayment or default	Yes	No	No
Facility to the onshore vehicle	The vehicle's owners up to the fund	Ownership percentage	Prepayment or default	Sometimes	Yes, above the threshold	Yes
Onshore licence	The licensee's ultimate owners	Nationality and percentage	Approval or revocation	Rarely	Yes, if the mix changes	Yes
Joint venture	The platform entity and the manager	Negotiated control	Consent or option	Yes	Sometimes	Yes
Lease	The tenant's control	Control up to the fund	Landlord's consent	Rarely	Yes	Yes
Key person clause	The manager	Control of the manager	Key person event	Yes	No	No
Management agreement	The manager	Control of the manager	Termination right	Yes	No	No

A transaction, as a type

A manager's principals agree to sell the manager to a larger group, with the principals remaining. The structure's survey, maintained since formation, lists forty definitions. The sale of the manager triggers the facility to the fund, the key person clause's change of control limb, the management agreement's termination right, and the joint venture's manager test; it does not trigger the onshore facilities, licences or leases, which test ownership. The list is written in a day. The lender to the fund is approached first under non-disclosure and consents on a review of the group's standing. The committee is approached on the key person clause and waives the event on the principals' continued time commitment. The fund's board reads the management agreement's termination right and does not exercise it. The developer consents on the principals' continuation. The sale completes, the onshore authorities are notified of the manager's change of control where their rules require notice of the licensee's manager, and no onshore definition was triggered. The characterisation was a list, and the list was the transaction's timetable.

The structure paper's page

The structure paper carries the survey as a schedule: each contract, its definition's elements, its carve-outs, its trigger and its consequence, the counterparty's likely reading, and the cure. The page is written at formation and kept current, and it is the page the buyer of the manager, the buyer at a continuation sale and the lender at a refinancing each ask for first.

The buyer's own reading

A buyer of the manager, or of the fund's positions, reads the survey for what its purchase triggers, because the consents are its conditions precedent and the consequences are its price. A buyer handed a survey reads it in a day and prices the consents; one that must build the survey from the data room builds it over a month and prices the uncertainty. The survey is the manager's asset at the sale of the manager and the fund's asset at the continuation sale, and the manager that kept it sells on it.

The second fund's reading

A manager's second fund is raised on a structure whose survey the first fund built, and the second fund's contracts are drafted with the first fund's carve-outs as the starting point. A manager whose first fund's sale of the manager or continuation sale ran on a list has a method the second fund's anchor reads; one whose transactions were characterised by counterparties has a record of defaults the anchor reads too. The survey is the method's evidence, and the second fund's constitution carries the transfer consent right that lets the manager use it.

Four cases, as types

A manager sells itself and asks whether the sale is a change of control. Counsel says the fund's ownership is unchanged. The facility to the fund, which tests the manager, declares a default the day the sale is announced.

A fund's anchor transfers its units to a holder of a different nationality. Nothing changes in control. The onshore licence's look-through finds the nationality mix across the threshold, and the licence is suspended pending a fresh approval.

A continuation sale completes with the manager's reading that the same manager means no change of control. Every onshore facility, licence and lease tested ownership, and the new vehicle's first quarter is spent obtaining consents after the fact at the counterparties' prices.

A structure surveyed at formation and maintained tests each transaction against the list, approaches the counterparties in order under non-disclosure, and completes with every consent in hand.

What each party holds

The manager holds the survey, the list and the order of approach.

Counsel holds the reading of each definition's elements and the arguable cases.

Onshore counsel holds the state's definitions and their applications.

The lender, the developer, the landlord and the state hold their consents and their conditions.

The committee holds the key person waiver and the reading of the transaction.

The fund's board holds the management agreement's termination right.

The sequence

1. The survey is made at formation: every contract, every definition, its elements, carve-outs, trigger and consequence.
2. Carve-outs are negotiated at each contract's signing for the events the manager foresees.
3. The survey is maintained as contracts are added.
4. At a transaction the list is written: triggered, not, arguable, with cure and cost.
5. The counterparties are approached in the order of their power to stop the transaction, under non-disclosure.
6. The transaction completes with the consents, and the onshore notices follow.

Questions a manager asks

Can one definition be used for all the contracts. The manager can propose its own definition in contracts it drafts; lenders, states and landlords use theirs, and the survey records the differences.

What about a transfer among existing holders. A carve-out in the facility and the joint venture if negotiated; a look-through question for the licence regardless.

Is a reorganisation of the principals' holding company safe. Under definitions that test control in substance, usually; under definitions that test named shareholders or direct holders, no; the list says which.

Who decides whether an arguable definition is triggered. The manager, on counsel's reading, taking the risk; or the counterparty, if asked; the choice is made per definition.

Does the committee have a role. On the key person clause's change of control limb and on the continuation sale, yes; on the lender's consent, no, unless the constitution reserves the facility's amendment.

How long does the list take. A day on a maintained survey; a month without one.

Terms used

Change of control definition: a contract's own test of whether a transaction changes who controls a named entity.

Elements: the entity tested, the level, the concept, the threshold, the carve-outs and the trigger.

Look-through: a definition that tests ownership at every level up to the ultimate owner.

Survey: the schedule of every definition in the structure with its elements and consequence.

The list: the transaction tested against the survey, with cures and costs.

Order of approach: the sequence in which counterparties are asked, by their power to stop the transaction.

What to read

Every facility's, licence's, joint venture's, lease's, concession's, key person clause's and management agreement's definition; the survey; onshore counsel's column; the non-disclosure terms for the approaches. On this site, the worked change of control, the financing room and the continuation room under Structures.