Many M&A-agreements address the seller’s or acquired companies’ behaviour during certain periods of time. The transaction agreement either permits certain acts because they are in the ordinary course of business, warrants that various acts have been conducted in the ordinary course, or requires that an approval is obtained for certain acts outside the ordinary course.

Accordingly, the purchaser would be protected against unusual acts or omissions affecting the acquired companies’ business or intrinsic value, whilst the acquired companies are not burdened by unworkable approval requirements. For this purpose, the transaction agreement refers to the ordinary course of business, to acts consistent with past practice or wording importing the same concept. Albeit that such standard of conduct implies a vague term, it does achieve an appropriate objective standard of measurement.

Examples. Clauses in which the ordinary course test typically appears are in seller’s warranties and the covenants addressing the period between the transaction’s effective date (or signing) and completion. For example:

Seller shall procure that pending Closing, Acquired Companies shall conduct business in all material respects only in the ordinary course of business.

Sellers shall not permit Acquired Companies to do any of the following pending the Closing without the prior written approval of Purchaser (which approval shall not be unreasonably withheld or delayed): …
(b)     enter into an agreement or a series of related agreements that are not in the ordinary course of business, for an aggregate amount in excess of EUR ____ ;

None of the Acquired Companies is a party to, or bound by: …
(viii)     any agreement or commitment relating to the disposition or acquisition of assets or any interest in any business enterprise outside the ordinary course of business;

Defining ordinary course of business. The difficulty is to define what is in the ordinary course of business (and what not). A drafting technique to increase the likelihood that your description covers everything is to think ‘MECE’ (see section 1.4). In defining the ordinary course, it makes sense to start with what the Acquired Companies themselves believed was suitable in view of their size and the workability of what operational personnel and staff had always considered efficient (at a time when they did not anticipate the M&A transaction). This suggests a reference to such acquired companies’ or seller’s internal approval policies, as well as to the normal operations and acts of purchase ordering. Alternatively, and in fact a strong argument for the purchaser during its negotiations, the SPA could refer to the purchaser’s approval policies.

Ordinary course in internal contract approval policies. A properly drafted set of internal approval policies should obviously divide what the various non-executive employees may or must do, from the unusual or significant acts that would require a decision from management. Because M&A transactions are sometimes stalled because a seller is fed up with the cowboy-type of behaviour of the companies to whom it sells, an objective standard should expressly set out the criteria of what is in the ordinary course of business, For example:

An action taken by a company will be deemed to have been taken in the ordinary course of business only if:

(a)     such action is consistent with the past practices of such company and is taken in the ordinary course of the normal day-to-day operations of such company;
(b)     such action is not required to be authorised by the managing board or general meeting of shareholders of such company (or by any person or group of persons exercising similar authority) and is not required to be specifically authorised by an affiliate of such company; and
(c)     such action is similar in nature, magnitude and frequency to actions customarily taken, without any authorisation by the managing board or general meeting of shareholders (or by any person or group of persons exercising similar authority), in the ordinary course of the normal day-to-day operations of other companies that are in the same line of business.

Although uncommon, if the sold companies have adopted a written contract approval policy, it is recommended to refer to such policy.