Meaning
Contractual promises in a business acquisition govern the conduct of the parties during the transitional phases of the transaction. In a structured divestiture, asset purchase agreement covenants establish the operating rules that the seller must follow before the transfer of ownership occurs and specify the obligations that persist after the transaction completes. These provisions protect the buyer from value leakage by prohibiting actions like selling equipment or raising employee salaries without approval.
They also bind the buyer to assume specific liabilities and complete regulatory filings by agreed deadlines. By establishing these boundaries, both parties minimize the risk of operational disruption during the critical period before the transfer of ownership.
Interim Governance
Operational control between the signing of the transaction and the official closing remains with the seller, but under strict limits. The seller must operate the target assets in the ordinary course of business, preserving customer relationships and maintaining physical inventory levels. Should a major customer threaten to terminate a contract, the seller must notify the buyer immediately to discuss mitigation.
This period of monitoring ensures that the acquired assets do not deteriorate before the buyer takes possession.
Post-Closing Obligation
Transitions require continuing cooperation that continues long after the legal title to the assets has been transferred. Typical post-closing tasks include assisting with the migration of data systems, transferring environmental permits and resolving final invoice adjustments. The seller might also agree to non-competition and non-solicitation restrictions to prevent the immediate reclamation of the sold goodwill.
These covenants protect the investment by ensuring the seller does not set up a rival operation nearby.
Remedial Recourse
Breach of these contractual promises triggers specific indemnification rights or gives the injured party the right to terminate before closing. The non-breaching party can seek injunctive relief to halt unauthorized activities. Covenants require action rather than asserting historical facts, so survival periods for these promises often run longer than those of factual representations.
