There is frequently a period of time between the signing of a definitive acquisition agreement and the closing of the acquisition. This is generally due to regulatory approvals, third-party contractual consents, and other conditions that must be satisfied before an acquisition can be completed. It is very important that both the buyer and the seller understand their obligations to the other party during this time. Frequently, the parties will also agree to do (or not do) certain things for a period of time after the acquisition has closed. These pre-closing and post-closing agreements between the buyer and the seller are generally referred to as “covenants” and are usually extensively negotiated by the parties. Below is a summary of some key covenants typically included in a definitive acquisition agreement.

Conduct of Business Pending Closing. In this provision, the parties will agree that, until the acquisition is complete or terminated pursuant to the terms of the definitive acquisition agreement, the seller shall continue to operate the business in the ordinary course, consistent with past practices. The seller will also usually agree to take reasonable measures to preserve the business during this period. The buyer, however, will also likely want the seller to affirmatively agree not to engage in specified activities outside of the ordinary course of business, such as amending organizational documents, incurring additional indebtedness, settling significant litigation, or changing the compensation of its employees. The parties frequently spend a significant amount of time negotiating these restrictions, as the seller wants to maintain flexibility in operating the business prior to the closing and the buyer wants to make sure that there are no material changes to the business during this period.

No Solicitation. In this provision, frequently referred to as a “no shop” provision, the seller agrees not to solicit, provide information to, or otherwise encourage the negotiation of an alternative sale transaction with a third party other than the buyer. However, in a sale of a publicly held company, it is customary to include a “fiduciary out” as an exception to the no solicitation provision. This exception allows the company to negotiate and complete a transaction with a third party if failing to do so would be a breach of the directors’ fiduciary duties. In many cases, the fiduciary out requires that the seller’s board of directors make a determination that the alternative proposal is a superior proposal. The parties often will spend a great deal of time carefully structuring the process of determining whether an alternative proposal is superior, including whether the buyer has the right to match any proposal before the seller is able to accept a superior proposal.

Reasonable Best Efforts; Further Action. In this provision, the parties will agree to work together to make any necessary filings or obtain any necessary regulatory approvals or third-party consents. This section will set forth the standard of conduct that will apply to the parties. For example, if a transaction is subject to the Hart-Scott-Rodino Act (HSR), the federal premerger notification program, this section may specify when the HSR filing will be made, who pays for the filing, and the ramifications if the transaction is not approved or if the applicable government entities make one or more requests for additional information.

Stockholder Approval. In connection with the sale of a publicly held company, this section requires the seller (and the buyer if the buyer’s stockholders are required to approve the acquisition) to take actions necessary to hold the stockholders’ meeting to adopt the definitive acquisition agreement and approve the transaction. This section will also cover when proxy materials must be prepared and who pays for the solicitation.  In the sale of a privately held company, stockholder approval is typically obtained prior to the execution of the definitive acquisition agreement.

Access to Information; Confidentiality. This provision ensures that the buyer has the access and ability to continue to conduct due diligence between signing and closing the acquisition. The seller will want to ensure that this access does not interfere with the seller’s ability to conduct its business and does not disrupt relationships with its suppliers, customers, and governmental entities having jurisdiction over the target business, particularly if the acquisition is not publicly announced.

Employees and Employee Benefits Matters. This section will vary depending on the structure of the transaction and is often heavily negotiated by the parties. It generally governs how the buyer will treat the employees of the seller after the transaction is consummated. This provision may require the buyer to continue to employ the seller’s employees for a period of time, keep salary and bonus compensation at the same level for a period of time, offer comparable benefits, and/or provide employees with credit under the buyer’s employee benefit plans for the time that the employees were employed by the seller. 

Directors’ and Officers’ Indemnification and Insurance. This provision assures the seller that its directors and officers will be indemnified after the closing for their actions in the same manner as they would have been if the acquisition had not occurred. It also contractually obligates the buyer and the surviving corporation to maintain the current directors and officers insurance (D&O insurance) policy, buy a substitute policy with comparable coverage and terms, or obtain what is known as a “tail” policy that provides continuation of coverage of the pre-acquisition policy for a specific period after the merger, while a separate policy is maintained for any actions or claims that arise out of director or officer action following the merger. Frequently, this section will also prohibit the buyer from altering the indemnification provisions of the surviving company’s governing documents for a specific period of time following closing.

Non-Competition. Depending on the structure of the transaction, it may make sense for the buyer to request a non-competition agreement from the seller. This provision would prohibit the seller from engaging in activities that would compete with the buyer in its operations of the acquired business after the closing. Typically, the definition of restricted business, duration of the non-competition period, and the geographic scope are heavily negotiated. This provision may also be broadened to cover the non-solicitation of employees.

While certain key covenants are highlighted here, the parties may include other covenants that are important and relevant to the transaction. Other covenants may include agreements with respect to pre-closing taxes obligations, keeping certain locations open, ensuring that the transaction is qualified as a tax-free reorganization, or electing a representative of the seller to the buyer’s board for a period of time post-closing.