The lender's consent reaches every change of control above the asset.

A construction facility, an acquisition facility or a working-capital line is secured on the company that holds the asset, and its terms include a change-of-control clause: if control of the borrower changes, the lender may call the loan, or reprice it, or require a prepayment. Control is defined in the facility, and the definition usually reaches through the chain to the fund, and sometimes to the manager and the manager's own owners. A change that happens three layers up is a change of control at the bottom if the definition says so, and most definitions, drafted by the lender's counsel for the lender's protection, say so. The clause is signed at a moment when nobody is thinking about year six, and it binds in year six, when everybody is.

This note sets out what the clause is for and why it is drafted wide, what it defines as control and how far up it reaches, the changes at the top that trigger it, why the consent is expensive when it is asked for, what a facility negotiated with the fund's life in view carves out, the other clauses that travel with it, the intercreditor's role, the register's reading, a comparison, a worked facility as a type, cases, what each party holds, the sequence, questions, terms and what to read.

What the clause is for

A lender lends to a borrower it has underwritten: its owner, its manager, its strategy, its governance. A change of control replaces the owner the lender underwrote with one it did not, and the clause gives the lender the right to decide whether to continue. The lender's interest is legitimate, and the clause is in every facility for that reason. The breadth of the definition is the lender's counsel's protection against a change that is dressed as something else, and lenders' counsel have seen enough dressing to draft wide: control of the borrower, of any holding company above it, of the fund, of the general partner, of the manager, and in some facilities of the persons who control the manager. A clause drafted to that width reaches every transaction the fund will want to do in its middle and late years.

What it defines as control

The definition usually has three limbs. Ownership: the power to exercise, or control the exercise of, more than a stated share of the votes in the borrower or in any person that controls it, directly or indirectly. Appointment: the power to appoint or remove a majority of the board of the borrower or of any such person. And management: for a fund borrower, a change in the manager or the general partner, or in the persons who control either. Each limb is read up the chain by the words "directly or indirectly" and "any person that controls", and a facility to a parcel company reaches the fund's own register if the fund's units carry votes and the definition counts them.

The changes at the top

Changes at the top happen more than managers expect, and each is a change of control at the bottom if the definition reaches it.

A continuation vehicle transfers the portfolio to a new fund with the same manager: the borrower's ultimate owner is now a different fund, with a different register, and the clause is triggered unless the same-manager carve-out exists.

A secondary sale moves a majority of the units to a new holder, or a secondary sale of the whole register to one buyer: the persons who control the fund have changed, and the clause is triggered on the ownership limb.

A distribution in kind hands the holding company to the register: the borrower's owner is now twelve holders rather than one fund, and the clause is triggered, and the new owners are persons the lender never underwrote.

A change of manager, or a change in the manager's own ownership, a merger, a sale of the management company, a founder's departure: the management limb is triggered, and the lender's consent is needed for a transaction the fund's holders may not even have been asked about.

A key person event that changes who controls the general partner: the same.

A merger of two funds, a migration of the fund to another domicile, a conversion of the fund's form: each changes a person in the chain, and each is read against the definition.

Why the consent is expensive

Because it is asked for at the moment the fund has least leverage. A continuation is a transaction with a date, a lead investor and a committee that has approved a price; a secondary sale has a buyer with a price and a timetable; a distribution has a register waiting and a term that has ended; a change of manager has a regulator's process running. The lender knows this and prices the consent accordingly, in a margin step-up, a prepayment, a repricing of the whole facility, a reduction in the commitment or a new set of covenants. The cost is not in the facility's original terms because the original terms were drafted when nobody was thinking about year six, and it is in the consent because the lender is thinking about it now.

Drafting for the fund's life

A facility negotiated with the fund's life in view defines control at the level the fund actually needs it defined, and carves out the transactions the manager can foresee.

A same-manager carve-out: a transfer of the borrower, or of any holding company above it, to a vehicle managed by the same manager or its affiliate is not a change of control, which permits the continuation.

A register carve-out: transfers of units between holders already on the register, or to holders meeting a stated test, are not a change of control, which permits ordinary secondary transfers and most secondary sales.

A distribution carve-out: a distribution in kind of the holding company to holders meeting a stated test, with the lender's right to require a guarantor or a replacement covenant, is not a change of control, or is a consent not to be unreasonably withheld.

A manager carve-out: a change in the manager's own ownership that does not change the individuals who run the fund is not a change of control, with a key person list the lender accepts.

A pricing of the remaining consents: for the transactions that are not carved out, a stated consent process with a stated cost, so that the lender's consent is a term rather than a negotiation.

That negotiation happens once, at signing, and a manager who wins it has bought the year-six transactions at year-one prices.

Why the consent is asked late

The consent is asked late because the transaction that triggers it is planned by people who are not reading the facility. A continuation is planned by the manager and its placement team with the lead investor; a secondary sale by a holder and its buyer; a change of manager by the manager's own owners; a distribution in kind by the committee at the term's end. None of them reads the asset companies' facilities, and the asset companies' facilities are three layers down in files the fund's counsel keeps. The clause surfaces when the asset company's finance director, asked to confirm something for the transaction's closing, reads the facility and writes to the lender, and the lender's reply arrives with a price. The cure is a schedule, kept in the structure paper, of every facility's clause, carve-outs and consent process, read by whoever plans a transaction at the top before the transaction is planned.

Negotiating the clause at signing

The negotiation at signing has three parts. The manager's counsel presents the fund's life as a list of transactions with dates: the continuation the memorandum contemplates, the secondary transfers the tier permits, the distribution the constitution provides for, the manager's succession. The lender's counsel reads the list and decides which are acceptable as carve-outs, which need a replacement covenant or a test, and which are consents. The price of each consent is then stated in the facility as a prepayment, a margin step or a process, so that the consent is a term. A lender that has seen the list understands the borrower's intentions and usually gives the carve-outs, because a lender's fear is the unknown buyer and the listed transactions are known. The negotiation takes a week and saves a repricing.

The manager's own ownership

The management limb is the one managers read least and regret most. A founder's retirement, a sale of a minority stake in the management company, a merger with another manager, an internal reorganisation that moves the general partner's shares: each is a change in the persons who control the manager, and a facility whose definition reaches them is triggered by a transaction at a company the fund's holders do not own. The manager carve-out names the individuals whose departure would be a change and excludes changes that keep them, and a manager with a succession plan writes the plan into the carve-out before it writes it anywhere else. A manager without the carve-out has every asset facility in the portfolio as a consent on its own succession.

Where it surfaces

At the continuation's closing, when the asset company's finance director reads the facility.

At the secondary sale, when the buyer's counsel asks whether the sale triggers anything below and the answer is every facility.

At the distribution in kind, when the lender asks the twelve new owners for a guarantee.

At the manager's succession, when three lenders price three consents for a transaction the fund did not do.

At the intercreditor, when two lenders each hold a veto and neither's consent was sequenced.

The cost of getting it wrong

A consent asked late costs what the lender prices it at, which for a continuation is commonly a repricing of the whole facility and a prepayment, and for a manager's succession is the same at every asset company. It costs the transaction's timetable, because the lender's process runs on the lender's clock. And it costs the continuation's price, where the consent's cost lands inside a price the committee has already approved. The carve-outs at signing cost a week of negotiation and, sometimes, a modest concession on margin for the flexibility, which is the year-one price of the year-six transaction.

The clauses that travel with it

The change-of-control clause is not alone. A facility also carries a restriction on disposals, which a continuation's transfer of the portfolio breaches; a restriction on amendments to the borrower's constitutional documents and to the fund's, which a continuation's re-papering breaches; a negative pledge, which a new vehicle's facility breaches; an assignment restriction, which a secondary sale of the fund's receivables breaches; and a most-favoured-lender clause, which a new facility at the continuation vehicle may trigger. Each is read with the change-of-control clause, because a transaction that clears the change-of-control carve-out and breaches the disposal restriction has cleared nothing.

The intercreditor's role

Where the asset-level facility sits beneath a fund-level facility, the intercreditor settles whose consent governs a change at the top: the fund-level lender's, whose security is the fund's chain, or the asset-level lender's, whose clause reaches the fund. A continuation needs both consents, and the intercreditor either sequences them or subordinates one to the other, and a structure without an intercreditor discovers at the continuation that two lenders each hold a veto priced separately.

The register's reading

The register reads the change-of-control clause for what it does to the fund's own life: whether the continuation the memorandum contemplated can happen without the lender's consent, whether a holder can sell its units without triggering a consent at the asset, whether the distribution in kind at the end is available. A memorandum that promises a continuation and a facility whose clause makes it a consent event are two documents the register reads together, and the register's counsel asks for the facility's definition of control before the holder subscribes to the promise.

By transaction · by clause	Triggered if drafted wide	Carved out if drafted for the fund's life	The consent's usual price
Continuation under the same manager	Yes, on the ownership limb	Same-manager carve-out	Repricing; prepayment; new covenants
Secondary transfer between holders	Yes, if the units carry control	Register carve-out	Margin step-up
Secondary sale of the register to one buyer	Yes	Consent process with a stated cost	Repricing; prepayment
Distribution in kind of the holding company	Yes	Distribution carve-out with a replacement covenant	Prepayment; guarantor
Change in the manager's ownership	Yes, on the management limb	Manager carve-out with a key person list	Repricing
Change of manager	Yes	Consent not to be unreasonably withheld, with a test	Prepayment or repricing

A timeline, as a type

Year one: the fund lists its life's transactions; the first asset facility is negotiated with the carve-outs and a priced consent for the rest; the schedule of clauses is opened in the structure paper. Year two: a second and a third facility, negotiated to the same carve-outs, so that the three facilities read alike; the schedule grows to three rows. Year three: a secondary transfer between two holders; the schedule is read; the register carve-out covers it in all three. Year five: the manager's founders sell a minority stake; the manager carve-out's key person list is unchanged; no consent. Year six: the continuation; the same-manager carve-out covers it; the amendment restriction's carve-out covers the re-papering; the intercreditor's sequencing is not needed because no consent is. Year eight: a sale of the register to an outside buyer; the priced consent is paid at the stated prepayment, which the buyer's price assumed.

The structure paper's schedule

The structure paper carries a schedule of every facility in the chain: the borrower, the lender, the change-of-control definition's three limbs and how far up each reaches, the carve-outs, the consent process and its stated price, the disposal and amendment restrictions, the negative pledge, the assignment restriction, and the intercreditor's sequencing. The schedule is read by whoever plans a transaction at the top before the plan is made, and it is the document the continuation's lead investor, the secondary buyer and the manager's own owners each receive when they ask what the transaction will trigger below.

The regulated asset's own clause

An asset that is itself regulated, a licensed business, a concession, a utility, carries a second change-of-control regime beside the lender's: the regulator's, which requires approval of any change in the persons who control the licensee above a threshold the regulator sets. The regulator's definition and the lender's are not the same, and a transaction that clears the lender's carve-out may still need the regulator's approval, on the regulator's clock. The schedule carries both, and the worked structure on a change of control reads them together.

The co-investor's and the landlord's clauses

The lender is not the only counterparty with a change-of-control clause. A co-investor's shareholders' agreement has one, protecting its bargain with a specific partner, often turning on named individuals at the manager. A landlord's lease, a franchisor's agreement, a concession grantor's grant and a supplier's contract each may have one, protecting something else. Each defines control for its own purpose and each holds a consent on its own terms. The schedule in the structure paper carries them beside the facilities, because a continuation that clears every lender's carve-out and triggers the co-investor's pre-emption has cleared the lenders and lost the asset.

Reading the clause from the lender's side

A lender that gives the carve-outs is not giving away its protection; it is defining it. The lender's fear is a borrower controlled by a person it did not underwrite: an unknown buyer, a distressed fund, a manager it has not met. A transfer to the same manager's next fund, among the same register, or to holders meeting the tier's test, delivers a borrower controlled by persons the lender has already underwritten or can, and a lender that reads the list sees that. The carve-outs that lenders refuse are the ones that would let an unknown person in, and a manager asking for those is asking for something the lender cannot give; the ones lenders grant are the ones that describe the fund's ordinary life, and a manager that does not ask for those has left them on the table.

The continuation's price with the consent inside it

A continuation's transfer price is set by a process the committee approves: an independent valuation, a market check, or a lead investor's negotiated terms. The lender's consent, if the facility requires one, arrives after the price is set and lands inside it: the prepayment, the repricing or the new covenants are costs of the new vehicle that the price did not carry, and either the rolling holders bear them in the new vehicle's economics or the lead investor renegotiates. A committee that approved a price without the facility's consent in view approved a price that moved, and the committee's minute shows an approval of a number that was not the number. The same-manager carve-out, negotiated at the asset facility's signing, is what keeps the continuation's price the price.

The register carve-out's test

The register carve-out excludes transfers among existing holders and transfers to holders meeting a stated test, and the test is the lender's protection against an unknown buyer arriving under the carve-out. The test is usually the tier's own investor test, sometimes with a credit standard the lender names, and a transferee that passes it is a person the lender accepts by definition. A carve-out without a test is a carve-out the lender will not give; one with the tier's test is one the lender gives readily, because the tier's test is the manager's own test for admitting holders and the lender is asking for nothing the manager does not already apply.

A facility, as a type

A fund with a five-year remaining term finances a parcel company with a construction facility. Its counsel negotiates the change-of-control clause with the fund's likely transactions listed: a continuation in year six, secondary transfers among the register, a possible distribution in kind, and the manager's own succession plan. The facility carves out transfers to a vehicle managed by the same manager, transfers among existing holders or to holders meeting the tier's test, a distribution in kind to such holders with a replacement covenant on the parcel company, and changes in the manager's ownership that keep the named individuals. A sale of the register to a single outside buyer is a consent event with a stated prepayment. The disposal restriction, the amendment restriction and the negative pledge are drafted to the same carve-outs. The intercreditor with the fund's capital-call lender sequences the two consents. In year six the continuation clears the carve-out, the re-papering clears the amendment restriction, and the lender's consent is not needed.

Four cases, as types

A fund finances three asset companies with three facilities, each with a change-of-control clause drafted by the lender's counsel to reach the manager's own ownership. In year five the manager's founders sell a minority stake in the management company to a strategic investor. All three facilities are in default on the management limb; the three lenders price their consents separately; the fund pays three repricings for a transaction at the manager that the fund's holders were not party to.

A fund proposes a continuation in year six. The asset-level facility's clause has no same-manager carve-out; the lender prices its consent at a full repricing and a prepayment; the continuation's transfer price, agreed with the lead investor, now carries the lender's consent inside it, and the rolling holders' committee reads a price that moved after the vote.

A fund's constitution and memorandum promise a distribution in kind at the end of the term. The facility's clause reaches it; the lender declines consent unless the holders, as new owners, give a guarantee the holders cannot give; the distribution becomes a sale at the term's end to whoever is there.

A fund negotiates the clause at signing with its life's transactions listed, carves out the foreseeable ones, prices the rest, and aligns the disposal and amendment restrictions and the intercreditor. The continuation in year six, the transfers in years three and five and the manager's succession in year seven each clear without a consent, and the one consent needed, for a sale of the register to an outside buyer in year eight, is at the price the facility stated.

What each party holds

The manager holds the list of its fund's likely transactions, the negotiation of the clause and its carve-outs at signing, and the alignment of the other restrictions and the intercreditor.

The lender holds the clause, its definition and its consent, priced at signing or at the moment.

Counsel holds the drafting of the definition and the carve-outs, and the reading of the clause against the fund's memorandum.

The register holds the memorandum's promises, read against the facility's definition.

The fund-level lender holds its own consent and the intercreditor's sequencing.

The manager's own owners hold a change in the management company that may be a consent event three layers down.

The sequence

1. The fund's likely transactions over its life are listed before any asset-level facility is negotiated.
2. The change-of-control definition is negotiated to the level the fund needs, with the carve-outs for the foreseeable transactions and a priced consent for the rest.
3. The disposal, amendment, negative pledge and assignment restrictions are drafted to the same carve-outs.
4. The intercreditor with any fund-level lender sequences the consents.
5. The memorandum's promises are read against the facility's definition before the facility is signed.
6. Every later transaction at the top is read against every facility's clause before it is proposed.

Questions a manager asks

Can the clause be limited to the borrower itself. Lenders rarely accept that, because a change above the borrower changes who controls it; the negotiation is the carve-outs, not the limb's reach.

Is the same-manager carve-out standard. It is common where asked for and absent where not; a lender that refuses it has told the manager the continuation will cost a consent.

Does the clause reach a feeder's dissolution. If the feeder holds a controlling stake in the fund and the definition counts indirect control, a feeder's participants arriving on the register may be a change; the carve-out for holders meeting a test covers it.

What about a change in the manager's own shareholders. The management limb reaches it where the definition names the persons who control the manager; the manager carve-out with a key person list is the answer.

How many facilities does a fund have to read. Every one at every asset company, because each has its own clause and each lender prices its own consent.

Is the consent ever refused outright. Rarely; it is priced. A refusal is a lender that wants out of the credit, and the price is the prepayment.

Terms used

Change of control: the event, defined in the facility, on which the lender may call, reprice or require prepayment.

Limbs: ownership, appointment and management, the three ways control is defined.

Same-manager carve-out: the exclusion of a transfer to a vehicle under the same manager from the definition.

Register carve-out: the exclusion of transfers among holders meeting a test.

Replacement covenant: the undertaking a lender requires when a new owner takes the borrower.

Intercreditor: the agreement between lenders at different levels, here sequencing their consents.

What to read

Every asset-level facility's change-of-control definition, disposal and amendment restrictions, negative pledge and assignment restriction; the fund-level facility's equivalents; the intercreditor; the constitution's and the memorandum's provisions on continuation, transfer and distribution in kind. On this site, the financing and continuation rooms under Structures and the worked structure on a change of control.