Meaning
Contractual arrangements made between signing a transaction and its final closing govern how a target company is run during the transition period. This interim operating agreement restricts the target company from taking major corporate actions without the buyer’s prior consent. It protects the value of the acquired business while regulatory and antitrust approvals are pending.
Transitional Rule
Directors of the target company must continue to run the business in the ordinary course of trade during the transition period. Under the terms of the interim operating agreement, the target cannot issue new shares, declare dividends, or take on significant debt without approval. This constraint prevents the seller from depleting the company’s assets before the deal closes.
Operational Control
Buyers gain a monitoring role that allows them to oversee operations and prepare for the integration of the business. The interim operating agreement establishes a joint committee or liaison system to review operational decisions, but the buyer must not exercise full control before closing to avoid gun-jumping charges. This balance protects the parties from regulatory enforcement.
Risk Allocation
Parties define who bears the financial loss if the target company’s business performance deteriorates before the final transfer of ownership. A well-drafted interim operating agreement outlines the specific conditions under which the buyer can walk away from the deal or renegotiate the purchase price. This protection is vital for managing market and operational risks during long regulatory waiting periods, ensuring that the buyer does not inherit a significantly weakened enterprise.
It establishes the legal framework for risk management during the critical pre-closing phase.
