Why change-of-control provisions matter

Lenders build credit decisions around the borrower’s ownership, management and financial profile. A sudden change in who controls a business can alter risk: a new owner may operate differently, provide less support, or have weaker credit. Change-of-control (CoC) provisions give lenders a contractual right to respond — often by accelerating the loan, increasing interest, requiring additional collateral, or demanding immediate payoff — when ownership shifts in ways the lender did not anticipate.

In my practice advising business owners and borrowers over the last 15 years, CoC clauses are one of the most under-reviewed terms. Entrepreneurs and family businesses frequently focus on price and structure in a sale or recapitalization, then learn too late that their loan documents treat the transaction as a defaulting event.

(For background on other common covenants that interact with CoC clauses, see FinHelp’s guide to Key Loan Covenants Explained for Small Business Borrowers: https://finhelp.io/glossary/key-loan-covenants-explained-for-small-business-borrowers/.)

How change-of-control provisions typically work

  • Trigger events: Common triggers include a sale of more than a specified percentage of voting stock (often 50% but thresholds vary), a merger where the borrower ceases to exist, a sale of substantially all assets, or a change in the controlling shareholder group. Some contracts also define control by changes to board composition or the identity of key managers.

  • Thresholds and definitions: There is no universal standard. Many agreements use simple thresholds (e.g., “more than 50% of voting securities”), while others are drafted broadly to capture de facto control through voting agreements, option exercises, or changes in governing agreements. Always read the precise definition in the loan document.

  • Lender remedies: Once a CoC event is deemed to have occurred, typical lender responses include acceleration (declaring the loan immediately due), requiring cure or substitution of guarantors, taking additional security, imposing default interest, refusing to extend credit on undrawn facilities, or enforcing cross-default provisions in related loans. Lenders may also demand a waiver or amendment in exchange for continued availability.

  • Related clauses: CoC provisions frequently appear alongside incurrence covenants (which restrict certain transactions), cross-default clauses, and change-of-control tax reporting rules (relevant for securities transactions). They are distinct from Material Adverse Change (MAC) clauses, which are broader and focus on the borrower’s financial condition rather than who controls it.

(For lenders’ remedies and borrower responses in more detail, compare FinHelp’s Default Remedies in Loan Agreements: https://finhelp.io/glossary/default-remedies-in-loan-agreements-what-borrowers-should-know/.)

Real risks and typical outcomes

  • Friendly vs hostile transactions: A friendly sale can trigger a CoC just as readily as a hostile takeover. Lenders are concerned with the result, not the tone of the deal.

  • Acceleration risk: The most immediate and severe consequence is loan acceleration. If a lender calls the loan and the borrower cannot refinance or pay, the business may face insolvency or forced asset sales.

  • Covenant renegotiation: In many cases, lenders prefer to negotiate waivers or amend terms rather than enforce remedies immediately. However, negotiation leverage depends on the post-transaction borrower profile: if the new owner improves liquidity and credit quality, lenders may be cooperative; if not, aggressive remedies are more likely.

  • Practical example: Suppose a privately held company with a $2 million term loan, collateralized by business assets and guaranteed by the founder, is sold and the founder’s stake drops from 70% to 20%. If the loan’s CoC clause defines change of control as any transfer resulting in less than 50% ownership by the original controller, the lender could demand repayment or require the buyer to post a substitute guaranty or additional collateral.

What lenders evaluate after a change of control

After a CoC, lenders typically re-evaluate:

  • The new owner’s creditworthiness, liquidity and track record.
  • Changes to cash flow, business model or management.
  • Whether collateral value or legal covenants are affected.
  • Potential cross-default exposure on related facilities.

Lenders use this review to decide whether to demand cure, accept a buyer guarantee, or enforce default remedies.

How borrowers can reduce CoC risk (practical checklist)

  1. Review definitions early: Before signing financing, negotiate precise, narrow CoC definitions (define percent thresholds, exclude passive transfers, or carve out certain reorganizations).
  2. Limit remedies: Seek to limit remedies to negotiation/waiver rather than automatic acceleration; require a lender show material deterioration in credit before enforcement.
  3. Add exceptions: Carve-outs for family transfers, management-led buyouts, intra-group reorganizations, or transfers to affiliates can preserve flexibility.
  4. Pre-notice and consent: Include a requirement that the borrower must notify lenders and obtain consent for a planned transaction, with a defined review period (e.g., 30–60 days).
  5. Obtain waivers/standstill: If you are pursuing a sale, negotiate a covenant waiver or a standstill from lenders conditioned on receiving and approving buyer information.
  6. Replace guarantees: Offer substitute guarantors or increased collateral rather than asking for a full waiver.
  7. Use escrow or holdbacks: Buyers can place some purchase consideration in escrow to provide liquidity for lender claims; lenders may accept escrowed funds as security.
  8. Consider covenant-lite structures carefully: Some leveraged loans are covenant-lite and may not include robust CoC protections for lenders, but relying on such markets is risky without backup plans.

In my client work, the most successful transactions were those where counsel and the borrower negotiated a narrow CoC definition and pre-arranged lender consents before announcing the deal. That advance planning often prevented post-closing surprises.

Negotiation language and examples

Sample narrowing language borrowers request:

“For purposes of this Agreement, ‘Change of Control’ means any transaction or series of related transactions that results in a person or group acquiring more than 50% of the outstanding voting securities of the Borrower, excluding transfers among Permitted Holders, transfers to Affiliates, or transfers effected solely for estate planning purposes.”

Sample lender-friendly language that borrowers should try to avoid:

“Change of Control means any transfer of control by any means deemed by the Administrative Agent to constitute a change in ownership or control, in its sole discretion.”

Negotiating to replace open-ended lender discretion with objective thresholds and carve-outs materially reduces enforcement risk.

When you may need outside help

  • Consider involving corporate counsel and your lender relationship manager early. Legal counsel can draft acceptable carve-outs and negotiation points.
  • If you anticipate a complex transaction (private equity sale, cross-border acquisition), include financing contingencies in the purchase agreement that require buyer cooperation with lender consents and permit termination if key consents are not obtained.

Interaction with other loan features and tax implications

  • Cross-default provisions can magnify the impact of a CoC: a default under one loan may automatically trigger defaults across other facilities.
  • Public companies and securities transactions can have parallel disclosure and tax-reporting issues (e.g., Form 1099-CAP and other corporate tax reporting in certain corporate control changes); consult tax counsel for specifics (see FinHelp’s discussion of Form 1099-CAP: https://finhelp.io/glossary/form-1099-cap-changes-in-corporate-control-and-capital-structure/).
  • A buyer’s agreement to assume or refinance debt can be part of a negotiated solution; having a committed financing source before closing reduces acceleration risk.

Common mistakes to avoid

  • Failing to read the CoC definition in full: small differences in wording (e.g., “control” vs “majority”) can change outcomes.
  • Assuming long-standing relationships prevent enforcement: lenders act to protect their underwriting model and may enforce strict remedies.
  • Not securing waivers in writing: oral assurances are insufficient once a CoC trigger has occurred.

Quick action steps if a CoC clause is triggered

  1. Immediately notify counsel and your lender relationship manager.
  2. Request a written forbearance or standstill to preserve options while you negotiate.
  3. Provide buyer/owner financials and proposed cures promptly.
  4. Explore refinancing, substitute guarantors, or collateralization options.

(See FinHelp’s guide on What Triggers a Loan Default Notice and How to Respond for practical steps after a default notice: https://finhelp.io/glossary/what-triggers-of-a-loan-default-notice-and-how-to-respond/.)

Authoritative sources and further reading

Professional disclaimer

This article is educational and does not constitute legal, tax or lending advice. Terms in loan agreements are specific and fact-dependent. Consult qualified legal and financial advisors before relying on this information for transaction planning or negotiations.