Meaning
Contractual restrictions in a purchase agreement dictate how a target company must run its business between the signing of the deal and the formal closing. Compliance with the interim operating covenant ensures that the business is preserved in its ordinary course and that no material assets are sold or debt incurred without the buyer’s prior consent. This commitment prevents the seller from depleting the company’s value before ownership transfers.
Operational Limits
Under these terms, the target cannot enter into major new contracts, change employee compensation, or issue new shares without written approval. The interim operating covenant outlines the boundaries of daily management and requires the seller to maintain standard customer and supplier relationships. This restriction maintains the operational status quo during the transition period.
Transaction Protection
The buyer receives protection against the erosion of the target’s value during the time required to obtain regulatory clearances. While the transaction is pending, the interim operating covenant ensures that the seller cannot pay out extraordinary dividends or deplete cash reserves. This structure guarantees that the buyer receives the business in the same financial state as when the deal was signed.
Breach Consequence
Failure to comply with these restrictions allows the buyer to terminate the transaction or adjust the purchase price. It can also lead to claims for damages if the breach reduces the value of the target.
