Make the Deal

CHAPTER 7 Covenants

Covenants in M&A Negotiations

Covenants are a collection of agreements between the parties to take or refrain from taking specific actions during—and in some cases after—the acquisition process.

The operating covenants govern the operation of the target’s business between signing and closing. The so-called “get the deal done” covenant, which is also referred to as the efforts covenant, obligates the parties to use their efforts to satisfy the closing conditions and to take actions designed to support bringing the deal to closing. An acquisition agreement may also include any number of other specific covenants relevant to the transaction, such as a noncompete obligation by the seller, post-closing confidentiality arrangements, a restriction on the seller hiring or soliciting employees of the target business, or procedures to regulate the process for antitrust and other regulatory approvals.

Some covenants apply only between signing and closing, such as the operating covenants and the covenant to use efforts to satisfy the closing conditions. Other covenants are designed to apply only after closing, such as a restriction on the seller competing with the business it just sold in the transaction.

Operating Covenants

The operating covenants balance the interests of the buyer and the seller in controlling how the business is run during the period between signing and closing. On the one hand, the buyer has committed itself to acquire the target, as long as the ...