At the beginning of January, we published 8 Technology Contacting Resolutions for 2014.  To underscore that last is not always least, we thought we'd begin this series with #8 on the list, "Pay Attention to Affiliates".  Many corporations today have complicated corporate structures with a large number of affiliated entities.  How affiliates are treated in technology contracts can have a profound effect on the ultimate value of the contract to your organization.  To avoid getting into trouble when it comes to affiliates, pay particular attention to the following considerations:

  • Know your counterparty. Are you contracting with the parent company or a subsidiary? In the event of a breach, can you recover what you need to from the subsidiary or should the parent guaranty performance? Be wary of the inclusion of "and its affiliates" in the definition of a party under the agreement, as this could unintentionally create third party beneficiaries that have rights – but not responsibilities – under the contact.
  • Be specific.  Use a clear definition of "affiliates" that includes only the particular affiliates who need rights under the agreement.  Using the traditional "controlling, controlled by or under common control with" language could result in a seemingly endless list of entities that don't necessarily need rights under the agreement.

    This structure would actually be a simple one in today's world.

  • Grant (only) appropriate rights.  Should your contract grant rights directly to the affiliates or should it simply permit the contracting party to allow the affiliates to exercise certain rights?  We prefer the latter, as it keeps the contracting party in control of the rights granted.
  • Plan for changes.  Corporate structures change frequently, so it is important to anticipate what might happen if an affiliate is spun-out or divested.  Should the affiliate still be permitted to exercise rights under the contract?  It usually makes sense to state that only present affiliates are considered "affiliates" under the agreement.  However, if the rights granted under the contract have particular importance to the business of an affiliate, consider a wind-down period to cover the divested/sold entity for a period of time after ceasing to be an affiliate.
  • Ensure accountability.  If affiliates are included, someone needs to be responsible for their compliance.  Whether the contracting party remains responsible or whether affiliates are bound individually will depend upon the size and ability of the various entities to stand behind the obligations.  For example, if the contracting party is a large parent company, it is efficient and makes sense to have the contracting party be responsible for affiliates' performance.  However, if the contracting party is a small entity that holds few assets, having each affiliate agree to be bound by the terms of the agreement prior to extending rights can provide more protection.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.