Clarify What “Change of Control” Actually Means in Your Agreement
In senior credit facilities, the definition of a “Change of Control” is not a mere formality. It is a negotiated construct that can be broader, narrower, or differently sequenced than corporate law concepts or stock exchange rules. A typical definition may include transfers of voting power above a specified threshold, changes in the composition of the board beyond a set number of “continuing directors,” or shifts in beneficial ownership among sponsor groups. It may also include cascading triggers tied to holding company structures. The legal effect is often immediate: the occurrence of a change of control constitutes an Event of Default or a mandatory prepayment trigger, usually requiring repayment at par plus accrued interest, and potentially the unwinding of hedges and cash management arrangements.
A common misconception among management teams is that any intra-sponsor reallocation or routine secondary trade will not trigger the clause. In practice, ostensibly benign transactions can trip the threshold if not exempted, such as an internal reorganization, a recapitalization that shifts voting rights, or the addition of a co-sponsor whose equity comes with vetoes or board seats. As an attorney and CPA, I advise clients to map the exact voting power, beneficial ownership, and board continuity mechanics in the credit agreement and to cross-check them against the company’s charter, bylaws, shareholder agreements, and upstream governance to prevent a stealth default triggered by corporate housekeeping.
Trace the Ownership and Control Stack Through Every Entity
Borrowers often sit beneath holding companies, intermediate entities, and special purpose vehicles. Even with a single sponsor, the ownership cap table can have multiple funds, co-investors, and management rollover equity, each with distinct rights. “Control” in credit agreements may reference direct or indirect ownership and may rely on voting arrangements, side letters, or proxy rights that are not obvious in the cap table alone. I recommend a written, diagrammed “control stack” that tracks how control flows through entities, voting agreements, and board appointment rights, with the credit agreement definition annotated at each point.
From a tax and accounting perspective, this exercise is critical. Consolidation analyses under GAAP, variable interest entity assessments, and tax consolidation elections can change when rights shift among entities, even if economic ownership is steady. A rebalancing that appears immaterial under corporate law may alter the primary beneficiary assessment or the financial reporting presentation, which, in turn, could affect covenant compliance calculations and auditor comfort. Early involvement of counsel and finance is essential to ensure that structure and documentation align with the negotiated covenant and to avoid retroactive surprises in covenant compliance certificates.
Negotiate Portability, Continuing Director, and Sponsor Group Concepts
To preserve transactional flexibility, sponsors often seek a portability feature that permits a change of control without a default if the new owner meets pre-agreed criteria, such as leverage tests, minimum size or ratings, and the absence of certain defaults. Lenders, in turn, may insist on tighter tests, limits on permitted acquirers, and a requirement to deliver updated financial statements, pro forma models, and officer certificates. The continuing director concept is another pressure point; ensuring that a majority of the board remains “continuing” after a transaction can be impractical where M&A requires fresh directors. Negotiations often revolve around defining “continuing” to include future directors approved by an initial cohort, but even that must align with shareholder rights and fiduciary duties.
The “sponsor group” definition looks innocuous but carries significant weight. If it is too narrow, a transfer to a new fund within the same family might trigger a default. If too broad, it can undercut lender protections by allowing wholesale turnover without lender consent. A careful practitioner will calibrate sponsor group wording to the fund structure and investment periods, and will build in mechanics for co-investors and limited partner transfers. The goal is to codify what the parties view as benign changes, while ensuring any true ownership pivot is brought back to the negotiating table with transparency and lender input.
Coordinate Change of Control with Other Covenants and Defaults
Change of control rarely operates in a vacuum. It interacts with financial covenants, asset sale covenants, restricted payments, and debt incurrence provisions. For example, the acquisition of a borrower by a new owner may trigger an asset sale sweep if certain business lines are divested as part of a regulatory remedy. An “automatic acceleration” on a change of control, when layered with cross-defaults to hedging or leasing arrangements, can produce a cascade of defaults and termination payments. In addition, standard “event of default” baskets can be exceeded inadvertently when multiple change-of-control-related actions occur in quick succession, such as resignations of key officers combined with missed deadlines for notices or compliance certificates.
One of the most overlooked areas is the interaction with EBITDA definition mechanics and pro forma treatment. If the change of control is part of a broader transaction, the allowed add-backs, run-rate synergies, and cost saves may be relevant to post-closing covenant compliance. Lenders often require detailed diligence on the EBITDA bridge and a timeline for realizing projected savings. Overconfidence in add-backs is a frequent pitfall; the credit agreement likely caps add-backs or imposes verification requirements. It is prudent to build conservative compliance models that reflect what the agreement permits, not what the business hopes to achieve.
Plan for Mandatory Prepayment and Refinancing Liquidity
Senior facilities commonly require mandatory prepayment upon a change of control, sometimes coupled with termination of revolving commitments. Even if prepayment is at par, the borrower must secure liquidity for principal, accrued interest, breakage costs, and fees, including amounts owed to agents, issuing banks, and hedge counterparties. If the facility contains a “soft call” or premium, that premium can materially increase the cash need. Clients often underestimate the timeline: arranging a refinancing, obtaining board approvals, coordinating payoff letters and lien releases, and managing escrow mechanics takes weeks, not days, especially where multiple lenders and collateral jurisdictions are involved.
As a CPA, I also focus on cash tax impacts and financial reporting. Early redemption can accelerate debt issuance cost amortization and original issue discount, affecting earnings and potentially covenant headroom. There may be withholding or gross-up considerations on exit fees or payments to foreign lenders. The finance team must model these impacts alongside the refinancing to avoid unpleasant surprises at quarter-end. A well-prepared borrower will maintain an updated data room, precedent payoff packages, and bank account instructions to execute a change-of-control payoff with minimal friction.
Align Equity Documents, Shareholder Rights, and Board Process
Change-of-control planning must be synchronized with shareholder agreements, investor rights, and charter provisions. Drag-along and tag-along rights, ROFR/ROFO mechanics, and preferred stock vetoes can influence whether and how a transaction proceeds. These instruments often contain their own definitions of “change of control,” which may not match the credit agreement. Misalignment can force a borrower into an awkward position where a transfer permissible under equity documents nevertheless triggers a debt default, or vice versa. Harmonization requires careful redlining and, often, targeted amendments prior to initiating any sale or sponsor handoff.
The board process is equally consequential. Lenders scrutinize whether the board observed fiduciary duties, engaged appropriate advisors, obtained fairness or solvency analyses as needed, and generated a clear record. Where a “continuing director” construct exists, the board should sequence appointments and resignations to preserve continuity, consistent with fiduciary obligations and the credit agreement. Minutes, resolutions, and certifications should be prepared to satisfy the agent’s closing checklist. A disciplined process is not mere optics; it is essential risk management that supports both lender relations and litigation resilience.
Prepare Robust Notice, Certification, and Consent Protocols
Credit agreements typically require prompt written notice of a potential or actual change of control, often coupled with officer certificates, legal opinions, and updated schedules. The exact timing—“immediately,” “within three business days,” or “promptly”—varies by agreement, and miscalculating can constitute a separate default. Borrowers should pre-draft templates for notices, bring-down certificates, and solvency certificates, and identify signatories in advance. Agents appreciate precision: cite the specific sections invoked, state whether the transaction constitutes a change of control under the agreement’s definition, and append pro forma financials where relevant.
Consent processes demand similar rigor. If the intended transaction relies on a portability provision or requires a waiver, begin lender outreach early, provide a succinct transaction summary, and anticipate credit questions regarding leverage, liquidity, governance, and strategic rationale. Prepare to offer concessions if necessary, such as enhanced reporting, a margin step-up, or tighter covenants. From experience, the cost of a well-structured consent is usually lower than the cost and risk of executing without clarity and litigating after the fact. Written consents should be archivable, counterpart-friendly, and synchronized with agent instructions for wire and lien release logistics.
Model Financial Covenant Compliance Before and After the Event
Change-of-control transactions often reset the borrower’s risk profile. Even if your facility has a covenant-lite term loan, revolving facilities frequently retain a springing leverage covenant tested when utilization crosses a threshold. If revolver availability will be drawn to fund fees or working capital during the transaction, a once-remote covenant can spring into relevance. Build sensitivity analyses that reflect seasonality, working capital swings, and delayed synergies. Ensure that your model uses the agreement’s defined terms, not management’s internal metrics; the two rarely align perfectly.
Watch for measurement date traps and pro forma treatment. Many agreements allow giving pro forma effect to acquisitions, divestitures, and cost saves subject to caps, timing requirements, and good faith determinations. In practice, auditors and lenders expect traceable support for each adjustment. Develop a binder of contracts, executed termination notices, headcount plans, and vendor quotes to substantiate run-rate savings. Overaggressive adjustments can erode credibility and jeopardize the consent process, especially when ratings agencies or mezzanine lenders are observing the same numbers from different angles.
Integrate Intercreditor, Hedging, and Cash Management Arrangements
Where there is a layered capital structure—term loans, revolvers, second lien, mezzanine notes, or ABL facilities—the intercreditor agreement governs priorities and remedies. Many intercreditor agreements treat change-of-control-triggered payments as “refinancing debt” or require specific payoff protocols. Hedging and cash management agreements secured on a pari or junior basis may have their own closeout rights and indemnities. A borrower that pays off only the term loan, but not related secured hedging obligations, may find liens lingering and collateral releases delayed. Compile a comprehensive payoff package covering all secured obligations, not merely the headline facility.
Operationally, expect to coordinate with multiple administrative agents, collateral trustees, and custodians. Payoff letters must be precise as to amounts, per diem interest, and instruction for releasing UCC filings, mortgages, share pledges, IP security interests, and foreign registrations. Cross-border groups should plan for local counsel filings, notaries, and registries that can add days or weeks to the timeline. Pre-clearing form releases and tracking filing receipts reduces the risk that a post-closing audit discovers a legacy lien that complicates future financing or sale options.
Anticipate Rating Agency, MAC, and Market Flex Considerations
If the borrower’s debt is rated or if a rating is contemplated for a take-out facility, a change of control can lead to a rating watch or downgrade based on business profile, leverage, and sponsor support. Rating agency feedback can influence lender sentiment, pricing, and covenant structure. Engage with agencies early, with a unified narrative on strategy, governance, and financial policy. Provide transparent pro forma figures and clearly delineate any planned deleveraging steps. Ratings volatility can also affect baskets indexed to ratings and may influence the cost of ancillary facilities such as letters of credit.
Separately, acquisition financing commitments may include market flex rights and material adverse change conditions. A change of control occurring near a financing launch can alter risk perception and trigger flex, even if the borrower views the event as credit neutral. Ensure the commitment papers contemplate the timing and terms of the control change, and verify that disclosure documents accurately present the ownership transition. The cost of capital can move quickly; embedding cushions in pro forma models and negotiating reasonable flex ceilings is prudent risk management rather than pessimism.
Address Tax, Accounting, and Valuation Pitfalls Early
From a tax perspective, ownership changes can implicate Section 382 limitations on the use of net operating losses, trigger “built-in gain” or “built-in loss” considerations, and alter eligibility for consolidated return filing. Debt repurchases or modifications around the transaction may yield cancellation of debt income or reissuance accounting. If the facility is significantly modified, the IRS may treat the old debt as exchanged for new debt, potentially generating taxable income and resetting original issue discount accruals. Careful timing and structuring can mitigate these exposures, but only if tax advisors are integrated early in the transaction planning.
Accounting ramifications are similarly nontrivial. A change in control can convert an investment from equity method to consolidation or deconsolidation, requiring fair value measurement and potential step-ups or step-downs. Debt extinguishment accounting may accelerate unamortized costs, and hedge accounting can be disrupted if hedges are dedesignated or terminated. These outcomes affect reported leverage, interest coverage, and covenant compliance. Assemble a cross-functional team—legal, tax, controllership, and treasury—to align on technical positions, auditor expectations, and disclosure plans. Good documentation is indispensable when auditors and lenders ask “why” after the numbers move.
Build a Scenario Playbook and Test It
Executives often assume they can address a change of control when it happens. In practice, the operational load is significant: coordinating with multiple law firms, agents, trustees, regulators, rating agencies, and auditors while running the business is taxing. A written playbook that assigns clear responsibilities—communications, diligence room management, certificate drafting, lender outreach, payoff logistics, lien release tracking—can cut weeks off the timeline and reduce execution risk. Rehearse with tabletop exercises that expose dependencies, such as board meeting schedules, signatory availability, and notary or apostille needs.
A robust playbook also includes a clear communication plan. Misstatements to employees, suppliers, or customers can leak into the lender community and complicate consent negotiations. Define what will be disclosed, to whom, and when, with counsel reviewing scripts for accuracy and compliance. In my experience, disciplined communication improves bargaining position with lenders, who value predictability and professionalism when evaluating portability requests or waivers.
Debunk Common Misconceptions That Create Risk
Misconception one: “If the same sponsor family stays involved, there is no change of control.” Reality: the agreement’s black-letter definition governs, and a shift between funds, introduction of a co-sponsor, or a board refresh can satisfy the test even if the brand name remains unchanged. Misconception two: “We can always get a waiver later.” In tight markets, waivers are neither automatic nor inexpensive; lenders may demand pricing, fees, or structural protections that exceed the cost of addressing the issue proactively. Misconception three: “Internal reorganizations are operational and do not touch the credit agreement.” Many reorganizations alter voting, guarantees, or collateral, each of which can carry consequences.
Misconception four: “The EBITDA definition is flexible if we explain our business.” Financial definitions are contractual and typically precise. Add-backs, cost saves, and pro forma treatment are limited and subject to good-faith determinations that must be supportable. Misconception five: “Lien releases are a formality handled by the agent.” Agents act on clear instructions and releases only when all secured obligations are paid in full or adequately cash collateralized. Overlooking a small secured obligation, such as a cash management product, can delay releases and complicate closing. The unifying theme is that “simple” matters are rarely simple; the contract, not intent, dictates the outcome.
Engage Experienced Advisors Early and Document Every Decision
Experienced legal counsel and financial advisors are not a luxury in change-of-control scenarios; they are risk controls. Counsel can identify definition traps, negotiate portability and consent terms, and calibrate intercreditor implications. A seasoned CPA can model covenant compliance, tax effects, and accounting consequences with the precision lenders and auditors expect. Advisors can also benchmark terms to market and help prepare materials that anticipate lender diligence. The cost of proactive engagement is modest compared to the economic and reputational damage of a misstep that triggers an avoidable default.
Documenting the analysis and decisions is equally important. Maintain a closing folder with drafts and finals of notices, officer certificates, solvency analyses, board minutes, payoff letters, and lien release confirmations. Capture the rationale for judgments on EBITDA adjustments, pro forma effects, and tax positions. When the dust settles, these materials will support future financings, audits, and, if necessary, dispute resolution. A company that treats documentation as part of its risk culture will navigate change-of-control events with fewer surprises and stronger negotiating leverage.
Action Checklist to Prepare Now
Even if no change of control is imminent, prudent borrowers can prepare by executing several concrete steps. First, perform a definition audit: compare the credit agreement’s “Change of Control,” “Continuing Directors,” “Sponsor Group,” and “Permitted Holders” definitions against corporate documents and investor agreements, and propose harmonizing amendments where misaligned. Second, build a pre-approved communication and notice framework, including template officer certificates and a list of signatories and backups. Third, assemble a full inventory of secured obligations across loans, hedges, and cash management, with contact details for agents and custodians and a draft comprehensive payoff letter.
Fourth, develop conservative covenant models under multiple scenarios, including a change of control coupled with an acquisition, a divestiture, or a market downturn. Fifth, refresh valuation and solvency analyses periodically to accelerate execution when needed. Sixth, establish a governance calendar that anticipates board approvals and advisor retention timelines. Seventh, convene a cross-functional working group—legal, tax, treasury, controllership, FP&A, and investor relations—to meet quarterly and update the playbook. These steps do not merely mitigate risk; they create strategic optionality, enabling management to move decisively when opportunities or necessities arise.
Final thought: Change-of-control covenants in senior credit facilities are a focal point of lender risk management, and seemingly minor structural changes can have outsized consequences. With disciplined planning, precise drafting, and experienced advisory support, companies can preserve flexibility, protect relationships with lenders, and execute transactions without avoidable disruption.
