Meaning
Interim operating covenants in merger and acquisition agreements require target management to conduct daily business operations in broad consistency with past practice between contract signing and transaction closing. Transaction documentation restricts target leadership from making extraordinary capital expenditures or entering unusual commercial contracts without buyer consent. Breaching an ordinary course of business covenant creates seller liability and grants the buyer contractual rights to refuse transaction completion.
The covenant obligation operates exclusively during the interim period between agreement execution and ownership transfer.
Operational Restriction
Operational boundaries require targets to maintain historical inventory levels and supplier payment schedules. Target managers must continue routine facility maintenance and fulfill standard sales commitments consistent with prior operating periods. Under an ordinary course of business covenant, target companies cannot sell core operating assets or incur non-routine corporate debt obligations without prior written approval.
Deviations from established historical patterns trigger buyer audit rights and pre-closing information demands.
Exception Boundary
Contractual exceptions allow target management to respond to external industry shocks or emergency operational crises. Materiality thresholds and specific consent carve-outs permit routine operational decisions necessary to preserve target enterprise asset value. Specific schedules attached to purchase agreements list pre-approved business actions that remain exempt from covenant restrictions during the interim period.
Interim Exposure
Breaches discovered before transaction completion enable buyers to assert failure of closing conditions and walk away from deal obligations. When a target company grants unusual price discounts to accelerate cash collection before closing, buyers claim covenant breach to seek post-closing purchase price reductions. Proving damages under an ordinary course of business covenant requires comparing interim financial metrics against multi-year historical operating baselines.
Target sellers frequently negotiate knowledge qualifiers and emergency operation exemptions to limit post-closing indemnity exposure arising from unexpected market shifts. Indemnity caps negotiated in acquisition contracts frequently restrict buyer financial recovery for pre-closing covenant breaches.
