What is the Impact of refusing to consent to a change of control?

Significant government contracts, where the identity of the people associated with the contractor is important, can include a clause requiring the contractor to seek the principal’s consent before selling off the shares in the contracting company. This kind of clause is called a ‘change of control’ clause.

You may have been asked by a contractor to agree to a sale of shares in the contractor’s company and wondered: do I have to agree to this?

The decision of the Queensland Supreme Court in Impact Healthcare Pty Ltd v St Vincent’s Private Hospitals has some important lessons for the exercise of the principal’s discretion in this scenario.

Facts

Impact manages and operates a successful emergency centre at a private hospital owned by St Vincent’s under a contract. Impact’s sole director and shareholder proposed to sell 70 % of his shareholding to a company called PEHA, a reputable company that operates emergency centres in several private hospitals in Australia.

Impact sought St Vincent’s approval as required under its contract and provided ample information about PEHA during the following four months.

When the approval was still not forthcoming, Impact applied to the court.

Decision

The Supreme Court declared that St Vincent’s had unreasonably withheld its consent to the share sale.

The judge found that:

• The sale of the shares would not affect Impact’s operation of the Emergency Centre. Impact would continue to perform its role under the contract with the same people and the same proven procedures.
• The contract would continue. The fact that St Vincent’s wanted to change the contract to make it more modern did not give St Vincent any legal basis to refuse its consent.

Key takeaways

1. If a contractor is seeking the principal’s approval to a change of control, the principal does not have any legal right to insist that the contract be amended or replaced and making its consent conditional on that is unreasonable.
2. A principal can only request information about the deal that is necessary to approve the sale of the shares. Information that might be relevant to deciding whether to enter into a new service agreement with a new operator such as balance sheets or audited financial statements may not be reasonably necessary to protect the legitimate interests of the principal. That is because a shareholder’s financial position is quite separate to the financial position of the company in which it is a shareholder.
3. The purpose of a change of control clause is to protect a legitimate interest of the principal and it cannot be used to unreasonably obtain a collateral, commercial advantage.
   
   If you need assistance with contract management, contact Melinda Pugh at melinda.pugh@crownlaw.qld.gov.au.