Interim covenants in a business acquisition: how buyer and seller control conduct between signing and closing without blocking operations.
BRANDAUER Rechtsanwälte
Salzburg law firm for corporate, company and transaction law
Every transaction is handled by a coordinated team of lawyers, legal staff and specialists. In company acquisition matters we look at structure, contract, tax and liability together.
Much can happen between signing and closing. The buyer already has an economic interest in the target, but does not yet control management.
Interim covenants therefore regulate what the seller may do in this interim period and which actions require prior buyer consent. They protect value without unnecessarily blocking day-to-day business.
This topic complements the posts on closing conditions and the MAC clause: those deal with completion requirements and termination. This post deals with conduct until completion.
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The key point is whether extraordinary actions, payments or contract changes could affect value.
If signing and closing are very close and no special measures are planned, a short ordinary-course covenant may be sufficient.
Still review distributions, investments, staffing decisions and contract changes.
A concrete catalogue with consent matters, thresholds and response periods gives both sides certainty. The seller remains able to operate and the buyer prevents value-changing steps.
The clause should be aligned with closing conditions and information duties.
A mere general clause often creates disputes: what is ordinary course, what requires consent, and what happens if the buyer remains silent?
Refine the catalogue, exceptions and escalation before signing.
Interim covenants bridge the gap between contract signing and completion. The seller continues to run the business, but must coordinate value-relevant extraordinary measures. These may include unusual investments, new loans, distributions, staffing decisions, contract terminations or changes to key customer and supplier agreements.
The clauses must not suffocate the business. The company must continue to sell, buy, manage staff and serve customers. Good provisions therefore use thresholds, objective exceptions and short response periods.
Consent rights primarily concern actions outside the ordinary course. Typical examples are sale of material assets, taking on new financing, changes to corporate documents, unusual discounts, termination of key contracts, hiring senior managers or settling litigation with material economic effect.
Coordination with change-of-control clauses is particularly important. If a contract requires third-party consent before closing, it should be clear who obtains it and which information may be disclosed.
The table shows typical consent matters and contract solutions.
| Action | Why it matters | Typical solution |
|---|---|---|
| Investments Investments | Can change liquidity and valuation | Threshold plus consent |
| Staff Staff | Key people influence handover | Senior roles require consent |
| Contracts Contracts | Customer and supplier base must be protected | Termination/change only with consent |
| Financing Financing | New security burdens the target | Debt cap and bank approval |
| Distributions Distributions | Avoid value leakage before closing | Ban or locked-box rule |
Caution: Interim covenants are not silent management by the buyer. Excessive influence before closing can create antitrust and practical concerns. The clause must separate value protection from operational independence.
A breach does not always have to derail the whole deal. Possible consequences include damages, indemnity, price adjustment, closing condition or, in serious cases, termination. The right consequence depends on the weight of the action and the harm to the target.
In practice, information rights, consent by email, deemed-consent periods and escalation should be documented. This makes it easier to prove later whether an action was approved.
It means ongoing, customary management without extraordinary measures. What is customary should be specified in the contract with examples and thresholds.
No. Consent rights should be limited to value-relevant extraordinary actions. The seller must remain able to run the business properly until closing.
Depending on the contract, damages, indemnity, price adjustment, an unsatisfied closing condition or termination in serious cases may apply.
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