Buying and Selling a Business

Conditions and Covenants in a Business Acquisition Agreement

Business acquisition agreements have special features that you wouldn’t normally expect to see in run-of-the-mill contracts. This articles discusses two such features: pre-closing covenants and closing conditions.

Pre-closing covenants
Business acquisition agreements generally include a few covenants which obligate the purchaser and seller to do, or refrain from doing, certain things. In deals where there is a period of time between signing the purchase agreement and the closing (similar to buying a house where you sign a contract and then close the deal a few weeks later), there are normally a number of pre-closing covenants.

The purchaser usually performs extensive due diligence of the target company’s operations and records during the period between signing the purchase agreement and the closing. (Again, this is similar to the period after signing a purchase agreement for a house during which inspections are made and bank financing is lined up.) The parties also begin obtaining consents and making governmental filings and their legal counsel draft documents necessary for the closing. The parties generally agree to do — or refrain from doing — certain things during this period. Here are some examples of the seller’s pre-closing covenants:

  • provide access to its records, assets, and facilities for the purchaser’s due diligence;
  • continue to operate the business in the normal course;
  • not amend its corporate documents;
  • not sell additional equity;
  • not do anything that would have an adverse effect on the business or its assets or operations;
  • obtain required consents;
  • refrain from negotiating with any other potential purchasers; and
  • use its best efforts to fulfill the conditions to closing.

The purchaser’s covenants are not nearly as extensive. The purchaser might covenant for the following:

  • obtain required consents; and
  • use its best efforts to fulfill the conditions to closing.

Closing conditions
Business acquisition agreements generally provide that certain things must happen before the purchaser has an obligation to proceed with closing, and certain things must happen before the seller is obligated to sell. These are known as closing conditions. In transactions where there is a simultaneous signing and closing (i.e., the acquisition agreement is signed at the same time that the transaction closes), closing conditions aren’t necessary.

Here are some examples of typical closing conditions that must be met before the purchaser is required to close the deal:

  • the representations and warranties are true and accurate;
  • required consents have been obtained;
  • the seller has performed its pre-closing covenants;
  • there has been no material adverse change in the business, or its assets or operations; and
  • there has been no legal proceeding that would stop the transaction from proceeding.

If the respective closing conditions aren’t met, the parties aren’t obligated to close the transaction.

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