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This article is written by Vinay Yerubandi, pursuing a Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho. The article has been edited by Tanmaya Sharma (Associate, LawSikho) and Zigishu Singh (Associate, LawSikho).


In a typical acquisition transaction, the acquirer conducts due diligence and assumes that the condition of the company at the time of conducting the due diligence and at the time of acquisition will be substantially the same. The best way to get the appropriate value through the transaction, for the acquirer, is to make sure that the business operations of the target company between the signing and the closing will be the same as how they operated in the past. For this, the acquirer does not want the target company to make significant changes to its business, organizational structure, and any other material aspects during this period. 

For this, the acquirer and the target company agree on terms that are commonly known as interim operating covenants. These provisions of the acquisition agreement regulate the functioning and the conduct of the target company in the period between the signing and closing of the deal. These provisions are significant in driving the deal forward as they provide the acquirer with an assurance that the business of the target company won’t suffer any significant changes at the time of closing the deal.  

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Interim operating covenants also regulate other aspects of the transaction like establishing various rights and duties between the buyer and seller, concerning activities like the transitional services that are to be provided by the target company to the acquirer, acquirer’s access to information of the target company, regulating target company’s intellectual property during this interim period, etc. 

Target company’s compliance with the interim operating covenants is a condition to closing in most acquisition agreements. If the target company is found breaching the interim operations covenant, the acquirer gets the right to terminate the acquisition agreement or refuse to complete the transaction. This right is subject to the acquirer’s right to cure the breach if any, provided in the agreement. So, by including this provision in the acquisition agreement, the acquirer will be protected from any risk and uncertainty that can stem out from any material change in the business after the signing of the deal and this risk will be shifted on to the target company, who is in the best position to deal with it.

Preference of acquirer and the target company

The acquirer would want to include the comprehensive list of actions which the target company is required to undertake, forbidden to undertake, and actions that are permitted with the acquirer’s consent. The intention is to construct a rigid provision so that the target company has fewer chances of conducting an activity that is not in the ordinary course of a business unless otherwise agreed between them. 

Whereas, the target company would want fewer restrictions on its activities so that it is less likely to violate these provisions inadvertently. It expects to have flexibility in taking crucial business decisions and conducting its activities.


“Ordinary Course of business” Covenant 

According to Marcel Telles, an eminent business person, “A company can seize extraordinary opportunities only if it is very good at ordinary operations”. Acquirer expects the target to function in its ordinary course of business till the time of closing of the deal. This provision is also intended to disincentivize the owners and the management of the target company from engaging in self-serving conduct in the pre-closing period as the assets of the target company are no longer owned by them once the closing occurs.    

The main purpose of an ordinary course covenant in an acquisition agreement is to ensure that the acquirer acquires the target company in the same condition (in substance) as it was in when the agreement was entered. Almost every acquisition happening in the market has this protection to the acquirer. But the scope of operation of this provision may be different in different agreements as stated below. 

1. “Consistent with Past Practice” qualifier

If the ordinary course clause in an acquisition agreement states that “the conduct of the target company until closing shall be in the ordinary course of business consistent with past practice”, then the interpretation of the term ordinary course is in consonance with the past practice of the company. So, in these cases, the target company is not allowed to perform any activity that is not consistent with its past practice. If the target company was engaged in unusual conduct in the past, when compared to other companies in the industry, then this qualifier will give greater scope to conduct its activities in the pre-closing period. So, the acquirer is required to understand the past practices of the company before including such clauses because this qualifier has the ability to both increases or decrease the scope of the target’s activities. 

2. “Materiality” qualifier

In some agreements, this ordinary course clause is further subjected to a materiality qualifier. This qualifier is beneficial to the target company as it increases the flexibility to conduct its business activities in the pre-closing period.

3. “Efforts” qualifier

In some acquisition agreements, the ordinary course clause includes phrases like “best efforts” “reasonable efforts” and “commercially reasonable efforts”. Generally, the conduct of the target company is not affected by any third party unless otherwise agreed in any agreement. But there can be scenarios where its conduct is affected by the decisions of third parties. This clause intends to not shift the risk onto the seller in cases where despite taking all reasonable measures the target company is not able to conduct its business in the ordinary course. 

Dealing with actions outside the ambit of the ordinary course of business

COVID-19 Pandemic had a massive impact on the acquisition transactions which were signed in the pre-covid period and were in the pre-closing stage at the time of the beginning of the pandemic. Many sellers have had to make significant changes to their businesses due to the COVID-19 outbreak which can’t be accepted as in the ordinary course of businesses by the acquirer. This created greater difficulties for the target companies to cope with the pandemic along with the ordinary course provision. So, the parties must give due care and provide for these unforeseeable situations in the acquisition agreement. 

One way to do it is to let the parties decide during the negotiation, the list of actions that are outside the company’s ordinary course of business but are permitted to be performed such as; making investments up to a certain amount, incurring capital expenditure, etc.

Another way to deal with these events is to specify a procedure in the agreement to obtain the buyer’s consent for any action outside the scope of the ordinary course. It includes laying down the provisions regarding: 

  1. appointing a person by the acquirer to whom requests for consent should be made; 
  2. specifying the time limit in which acquirer shall respond to a request; 
  3. providing for “deemed consent” if the acquirer fails to respond in time. 

It is also advisable to establish a concrete communication mechanism like conducting recurring weekly calls for informing about the actions of the company and providing periodical updates to the disclosure schedules to the acquirer.   

Other interim operating covenants in a typical acquisition agreement

  1. Non-solicitation: Under this clause, the target company is prohibited to solicit, negotiate regarding the proposed transaction with any person except the acquirer. The objective behind this provision is to protect the acquirer from losing out on the transaction due to the reason that a third party may quote a higher bid than the acquirer. This provision is often referred to as “No shop Clause”.
  2. Right to access information and facilities: Often during the negotiation stage of an acquisition, the acquirer expects to have the right to access certain manufacturing facilities, offices and some private information of the acquirer. At the same time, the target company expects to restrict access to its private activities as it may interfere with the functioning of the company. This clause in the acquisition agreement provides for the rights of the acquirer to acquire information of the target or to inspect its facilities.   
  3. Transitional services: Under this clause, the target company agrees to provide its services and know-how related to the assets, infrastructure, systems acquired by the acquirer from it for a specified time to support a smooth transition of ownership without any interruptions or inconvenience in the functioning of the business.  
  4. Duty to inform: There will be many events concerning the business of the target company happening between signing and closing of the deal. Some of these events may impact the decision of the acquirer to acquire the business. Under this provision, the target company gives an undertaking that it will inform the acquirer about the information not limited to the following:
  1. any material event that might affect the value of the business
  2. any warranties provided by target company becoming incorrect
  3. periodic disclosure schedules. 
  1. Non-competition: In some situations where the acquirer and the target company are in similar business or product lines, the acquirer asks for an undertaking to ensure that the activities of the target company in the pre-closing period will not compete with the businesses of the acquirer. 
  1. Approval rights of the acquirer: In the acquisition agreement, the target company includes some actions which can be performed by the target company only with the prior approval of the acquirer. In a typical acquisition agreement, these matters include actions like entering new contracts, increasing capital expenditure, settlement of disputes, disposal of assets.


Provisions regarding the conduct of business during the pre-closing period of acquisition should be negotiated with due care and proper forecasting by both parties. Even so, the risk of another pandemic-like situation cannot be taken away. It is essential to prepare for uncertain events and predetermine the remedies for the same during the stage of negotiations. If not, it can create a big barrier to either of the parties in the transaction. In this article, the author tried to analyze the importance and explain different kinds of provisions related to the conduct of business in the pre-closing period of an acquisition transaction and also tried to address the problems with these provisions on the occurrence of unforecastable events. 


  2. Pre-Closing Covenants and the Pandemic, Joe Castelluccio and Jenna Miller, THE M&A JOURNAL – Volume 20 Number 4
  3. Pre-Closing Covenants: Operating in the Ordinary Course of Business By Nicholas V. Perricone, mintz

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