Covenants in M&A transactions – general

In a previous post (click here), I discussed “covenants” in contracts. In brief, ‘covenants’ are the contractual devices ensuring that a party receives the benefits that it negotiated for in the business deal. In other words, covenants support the achievement of the purpose implied by the key provisions characterising the transaction.

In this blog post (and a few following ones), I will address what should or could be addressed in an M&A transaction agreement (SPA, share purchase agreement or APA, business or asset purchase agreement).

In M&A transactions, covenants should protect the purchaser’s interests prior to completion (i.e. covenants force a seller and the acquired companies to conduct the business in the ordinary course and to obtain the purchaser’s approval for important or extraordinary matters), as well as its commercial deal after completion in an active sense (i.e. the seller is required to take care of transaction-related interests or to continue to disentangle the acquired business) and in a passive sense (i.e. the seller should refrain from using its knowledge or business relationships to compete with the business it sold).

Accordingly, one can distinguish between disentanglement covenants, covenants ‘pending closing’ and restrictive covenants (or non-compete or non-solicitation clauses).

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