PRE-CLOSING COVENANTS - Business Purchase Agreement
Business Purchase - Letter of Intent - Due Diligence - Negotiations - Asset vs Share - Purchase Agreement - Closing
Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
Pre-closing covenants are contractual promises within a business purchase agreement that define the obligations and restrictions of the buyer and seller during the period between the signing of the definitive purchase agreement and the actual closing of the transaction. This interim period can last from a few weeks to several months, especially in complex deals requiring regulatory approvals or third-party consents.
As such, pre-closing covenants can be particularly important as they serve to preserve the value and integrity of the target company for the buyer, which can facilitate:
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Value Preservation: The most common and essential covenant is that the seller must operate the target business "in the ordinary course of business." This ensures that the buyer receives the business in substantially the same financial and operational condition as it was when they conducted their due diligence and agreed to the price.
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Risk Mitigation: They prevent the seller, who still controls the company, from engaging in opportunistic or self-serving behavior that could diminish the company's value before ownership officially transfers.
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Condition to Closing: Compliance with these covenants is typically a condition to closing for the buyer. If the seller materially breaches a covenant, the buyer usually has the right to walk away from the deal or terminate the acquisition agreement.
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Facilitating the Closing: They require both parties to take specific actions necessary to complete the transaction, such as obtaining required regulatory approvals or third-party consents.
Pre-closing covenants are typically imposed on the seller (as they remain in control of the business) and are generally divided into affirmative (things the seller must do) and negative (things the seller must not do without the buyer's consent), with common pre-closing convenants including:
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Ordinary Course of Business: A promise to continue operating the business consistent with past practices and in a way that preserves the company's value (examples might include: maintaining existing employee relations, inventory levels, and sales practices).
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Access to Information: A promise to allow the buyer continued access to the company's books, records, and personnel. This might entail allowing the buyer to monitor the business and prepare for the transition.
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Negative Restrictions: A list of specific actions the seller cannot take without the buyer's prior written consent (examples might include: selling significant assets; incurring new debt; making major capital expenditures; increasing executive compensation; entering into or terminating material contracts; changing accounting policies).
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Exclusivity: A promise not to solicit, encourage, or negotiate with any other party regarding the sale of the business. This secures the deal for the current buyer.
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Efforts to Close: A promise to use reasonable or best efforts to take all necessary steps to complete the transaction. This might entail making required regulatory filings (e.g., antitrust), and obtaining third-party consents (e.g., from landlords or major customers).
A well-drafted business purchase agreement is the foundation of a successful acquisition. It should be a robust document that protects the buyer from future surprises and gives them clear remedies if the business is not as it was represented. For knowledgeable and experienced legal representation when purchasing a business, contact corporate business lawyer Christopher Neufeld at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.
