The “Successors-and-Assigns” Clause – Without It, All Can Be Lost

http://skloverworkingwisdom.com/blog/index.php/the-%E2%80%9Csuccessors-and-assigns%E2%80%9D-clause-%E2%80%93-without-it-all-can-be-lost/

Published on July 15th, 2008 by Alan Sklover

“Carelessness is worse than theft.”  

- Gaelic Proverb

ACTUAL CASE HISTORY:  Shortly after college,
at age 23, Simon was hired by a family-owned  real estate development
firm as a Project Manager. At first he was given rather simple tasks,
like making sure that “punch list” items – those last, small items on
every job, such as replacing cracked windows and burned-out light bulbs
– were attended to. With his attention to detail and rare perseverance,
Simon’s reputation as a good employee blossomed. By age 29, he was
supervising construction crews and overseeing condo sales teams. And as
his responsibilities grew, so did his compensation. By age 31, Simon’s
annual salary and bonus exceeded $200,000. 

To keep Simon motivated, each year he was awarded bonuses of
$100,000, to be paid to him $25,000 per year, for four years, in the
last week of December. To discourage Simon from going into business for
himself, the company’s owners promised him he would be an owner of at
least 20% if he stayed another five years. A written employment
contract was prepared for Simon to sign. It was to last 5 years.  After
his cousin Barbara, an immigration attorney, reviewed and approved the
contract, Simon signed it.

Two years later the family that owned the company was offered $25
million for it by a publicly-traded REIT (shorthand for real estate
investment trust.) The REIT was going to do an “asset purchase,” which
means that Simon’s company would be selling its assets, not the stock
of the company, itself, a common way to buy a business. The family
members were elated. Simon was concerned; he wanted to know what this
meant for him. After all, he wasn’t really “family.” He was assured
that this would be a great thing for him, too. He even met with his new
bosses, and they seemed to be true professionals.

After the sale of the business’s assets, Simon was given greater
responsibilities, and oversight, as the old crew became a new division
of the REIT. He was confident that things would go quite well. When
Christmas time came around, Simon was waiting for word regarding when
he would receive the “first” $25,000 installment he was owed for last
year’s bonus, and the “second” $25,000 installment he was due from the
bonus of the year before. When he was told “There must be some mistake,
because we don’t give bonuses,” his heart sank.  Then Simon inquired
about the 20% of the company that he was to receive in two years. When
he was told “You must be confused,” his heart skipped a few beats.  He
was crestfallen.

After “the lawyers did their thing,” Simon learned that those two
big promises in his employment contract – for his $100,000 bonuses, and
for his 20% business ownership – were promises of the “old” company,
not the “new” company he now worked for. If he was to collect on those
promises, he had to collect from the old company. Problem was, there
was no more “old” company to collect from. The company, itself, had no
more assets; all had been sold. The monies derived from the sale of the
company’s assets were divided up among the 23 family members, who lived
in states from Maine to California. While each family member he spoke
with was sympathetic, none was willing to pay him from their own
pockets. Instead, each suggested “Speak to your lawyer.”

While his lawyer, Cousin Barbara, couldn’t seem to explain what had
happened, she sure seemed upset. Simon had lost $175,000 in bonuses,
but far, far worse, 20% of a $25 million company, worth $5 million. A
big loss, and an easily avoidable one, at that. All because one single,
simple sentence was missing from his contract: the “Successors and
Assigns” clause. 

If only they’d added a sentence that read something like this:  “The
rights and obligations of the parties to this agreement will be binding
on, and will be of benefit to, each of the parties’ successors,
assigns, heirs and estates.” That would have made the “successor” REIT
bound to the agreement (and benefit Simon’s estate, if he passed on.)
One simple sentence can be worth so very much.  

LESSON TO LEARN:  An agreement binds only
the parties to that agreement. Most agreements are between two parties:
in sales agreements, they are the (a) buyer and (b) seller; in lease
agreements, they are the (a) landlord and (b) tenant; in employment
agreements, they are the (a) employer and (b) employee. No one else is
bound. Most importantly, anyone who later “takes the place:” of one of
the parties is not bound. That’s usually a problem. The solution? It is
a “successors-and-assigns clause.”

Imagine the following: You rent an office from the owner of an
office building. You paint, put down carpet, install lighting, buy
custom-fit furniture, have stationery printed with your new address on
it, and move in. The next month someone new buys the building. The new
owner stops by and says, “Nice to meet you. Your rent has been
tripled.” You say, “But I have a signed lease.” He says, “Not with me,
you don’t.” That’s what a “successors-and-assigns” clause is meant to
prevent.

A standard “successors-and-assigns” clause reads like this: “This
Agreement is binding upon, and will inure to the benefit of, the
parties to this agreement, and their respective successors and/or
assigns.”  (A slightly more comprehensive variation would be this: 
“This Agreement is binding upon, and shall inure to the benefit of the
parties themselves, as well as their respective representatives,
successors, permitted assigns, heirs and estates.”) 

[A “successor” is a person who steps in to the shoes of a party,
that is, “succeeds” to the interests of a former owner. An “assign” is
the recipient of the property of a party, who has been given the assets
of a predecessor owner by “assignment.” Generally, a “successor” buys a
whole company; an “assign” just buys its assets.]

In employment agreements, and all employment-related agreements that
give you something (including stock option agreements, commission
agreements, and deferred compensation agreements) it is essential that
you have a “successors-and-assigns” clause. (On the other hand, any
agreements that “take” something from you – such as a non-compete
agreement, that takes your freedom from you – is better for you if it
fails to have such a clause.)

Any employer could be merged or acquired out of existence. Any
employer could decide to sell its assets, divvy up the sale proceeds,
and then simply go out of legal existence. Any employer could find
other ways, too, to deny you what you have been promised, and have
earned. The key to preventing this is simple: make sure you have a
“successors-and-assigns clause” in your agreement.  Otherwise, all
you’ve worked so hard for could be lost, without a chance of getting it
back.

WHAT YOU CAN DO:  This is how you can protect yourself: 

1. In Every Agreement, Always Look for the “Successors-and-Assigns” Clause: 
No matter what type of agreement you are looking at, always look for
the “successor-and-assigns” clause. As a matter of customary contract
drafting, if it’s there you will usually find it among the last four or
five sections in an agreement. It might be labeled “Parties Bound,” 
“Binding Upon” or “Successors and Assigns,” or any number of other
titles. It might also be “buried” among other provisions, with a
totally unrelated title. (That’s why we read every word.)  Such a
clause should be present in every employment agreement, stock option
agreement, restricted stock agreement, commission agreement, indemnity
agreement, retention agreement, and everything “in between.”   

2. If It’s Not There, Always Ask for It:  There is
nothing improper, impolite or aggressive in asking that a
“successors-and-assigns” clause be added to your agreement. It’s
“standard” language in business agreements, and employment agreements
are a type of business agreement. It could be said that the absence of
a “successors-and-assigns” clause in an employment agreement (or one
related to employment), in and of itself, has profound consequences,
because it suggests the parties did not intend that the successor
employer should provide to the employee what the original employer did
not. Think about it: if you work for a small accounting firm, and you
are promised a bonus of $10,000 if you stay for two years; if your
accounting firm is merged with a larger one, and you stay the two
years, what was intended: that you’d get paid the bonus, or that you
would not? The absence of a “successors-and-assigns” clause says,
simply, “It was intended you would not.”  If you ask for a
“successors-and-assigns” clause, and are turned down, you can safely
assume there is a reason for that denial, and that the reason is not a
good one for you.

3.  The Two Exceptions: When It’s Truly Not Intended, and When It Makes No Sense: 
There are two circumstances in which we do not expect a
“successors-and-assigns” clause. First, in some circumstances it is not
intended that a “successor” or “assignee” be obligated to the “other
side.” For example, if you were promised a bonus that was to be paid to
you only if the company was not sold; then in the event of a sale, it
was not intended you would receive a  bonus. In that case, the
successor paying you a bonus was not intended. Second, for the
employee, it would not make sense to ask for a “successors-and-assigns”
clause in a non-compete agreement, because then it is not in his or her
interests; in that case, asking for one to be put in makes no sense. If
the employer did not have the sense to insert it, don’t wave flags.

4.  Watch Out for the “Old One-Way Trick”:
Occasionally we see what we view to be dishonest lawyering by attempted
trickery, most commonly by those in large law firms who have been told
and taught they are “the cleverest.” This is what we call the “Old
One-Way Trick”: “The obligations and interests of the parties under
this agreement shall inure to the benefit of the employer, and its
representatives, successors and assigns, and be binding upon the
employee, his/her representatives, successors and assigns.” Read the
words carefully: notice that the way it is worded, (a) the employer
(and its successors and assigns) enjoys the benefits of the agreement,
but not its burdens, and (b) the employee (and his/her successors and
assigns) suffers the agreements burdens, but fail to enjoy its
benefits. The first time I saw this I was upset; the tenth time, I was
surprised; now I simply send an email to the senior partner of the
opposing firm reminding him that this is not how law used to be
practiced.

5.  It’s Especially Important When Working for a Smaller “LLC” and “INC.”: 
As in our case history above, it is most important to have a
“successors-and-assigns” clause when working for a smaller limited
liability company or corporation. Why? Because they are more likely to
be purchased, merged or dissolved. In each instance, you want the party
who takes over or receives the remaining assets to be liable to you. In
companies owned by the grandchildren of the founder, it is essential,
as they are notorious for not getting along with each other, “running
down” the company, and wanting to “cash out” the company.

6. Your Employer Being Sold or Merged?  Send an Email Reminder:
Surprises in business are usually not fun. If the company that acquired
your employer is not aware that you are owed a $50,000 retention bonus,
or eighty-two accrued vacation days, you might engender ill will when
you ask for payment. Instead, send an email to General Counsel of your
own employer, not the other side, and write “It is my expectation that
the new acquirer is aware of my rights and interests, which are binding
on successors and assigns. If not, please ensure that they are.” That
will place your company’s primary attorney in a place where he or she
will either (a) let the acquirer know, or (b) likely be later accused
of fraud. Let him or her do your duty.

7. Sound Like a “Hassle?” Remember You Are Doing This for Your Loved Ones, and Heirs:
Sure, looking for, and asking for, a “successors-and-assigns” clause in
your employment-related agreements may sound like a hassle, and today
is not the day you needed more hassles in your life. However, the
absence of such a clause may deny what you’ve earned today to you and
your family another day. And don’t forget: in the event of your
passing, your heirs are your successors, will be without you being
there for them, and so will have a greater need for what you’ve
earned.    

    

Our Quality Vs. Power™ (QVP™) Method of Workplace Negotiating
emphasizes smart negotiating – and navigating – for yourself at work.
Negotiation of work and career issues requires that you be aware, alert
and assertive regarding words, phrases, clauses and sentences that
appear – or do not appear - in your employment-related agreements.
Without a “successor-and-assigns” clause, all you’ve earned could end
up lost.  

Always be proactive.  Always be creative.  Always be persistent. 
And always do what you can to achieve for yourself, your family, and
your career. Take all available steps to increase and secure employment
“rewards” and eliminate or reduce employment “risks.”  That’s what our
Quality Vs. Power™ Method is all about.

A note about our Actual Case Histories: In order to preserve
client confidences, and protect client identities, we alter certain
facts, including the name, age, gender, position, date, geographical
location, and industry of our clients. The essential facts, the point
illustrated and the lesson to be learned, remain actual.