Interim Covenants

Summary

This clause, known as interim covenants, contains covenants made by the target company regarding the operation of its business in the period between the signing of the acquisition agreement and closing. This clause contains practical guidance and drafting notes. This clause may be used in any type of acquisition agreement where the closing of the transaction will take place on a date after the signing of the agreement. The buyer will want to include these covenants to ensure that the target company has not materially changed its business or business practices during the interim period. As a general matter, the buyer will negotiate for more restrictions and lower dollar value thresholds in these covenants, and the seller will want fewer restrictions and higher dollar value thresholds. It is also worth noting that a seller would likely subject a buyer to similar restrictions during the interim period if the acquisition includes stock or other equity consideration. In negotiating these covenants, the parties should be aware of the Federal Trade Commission's restrictions on "gun jumping." The buyer must not have so much control over the operation of the company that it could be deemed to beneficially control the company prior to merger review and antitrust clearance of the transaction. Covenants that restrict the seller's ability to compete prior to closing, such as restrictions on pricing and new customer contracts, or that require the buyer's consent for actions in the ordinary course of business are of particular concern. For further discussion of these antitrust concerns, see Transaction Agreements: Antitrust Issues. Additionally, these covenants should not be so restrictive as to limit the ability of the company to operate in the ordinary course both to prevent the company from losing value prior to the closing and to protect the company's ongoing operations in the event that the transaction does not close. You should customize the defined terms used in this clause to be consistent with the defined terms in the underlying acquisition agreement. For further discussion of these and other covenants, see Covenants in Acquisition Agreements. For a full listing of related practical guidance, see Private Merger Transaction Resource Kit, Public Merger Transaction Resource Kit, Asset Acquisition Resource Kit, Stock Acquisition Resource Kit, and M&A Provisions Resource Kit.