Disentanglement covenants in M&A transactions (2)

In addition to financial and employee related covenants, the acquired business often also needs to be separated from the seller’s businesses. That’s what this blog is about.

Subjects that require attention are IP rights, insurance policies, taxation, as well as authorisation and approval policies.

  • Intellectual property rights: if IP does not constitute a significant part of the M&A transaction, some more basic aspects are dealt with in the covenants:
    • the cessation of the use of seller’s trademarks and trade names in the acquired companies business (i.e. usually such use is allowed until three months after closing) including the removal of nameplates and logos, and, less typical but for a sense of mutuality, of the acquired companies’ trademarks, trade names and logos by the seller;
    • the transfer of certain domain names and trade mark registrations (i.e. such transfer could be formalised on closing but the actual transfer registration process takes some time and is so different from country to country with so little interest by either party to have it done on closing that filling out the forms is typically a post-closing affair if it happens at all);
    • an undertaking not to permit the lapse of any IP-registration.
  • Insurances: a seller will sometimes want to ascertain that certain business risks of the sold companies continue to be covered by insurance.
  • Authorisations: in multi-party agreements, covenants may consist of authorisations or a (conditional) power of attorney to undertake certain actions on behalf of one or more parties.
  • Taxation: Although often addressed in a separate schedule or tax agreement, tax matters obviously require a sort of ‘covenant’ in the context of an M&A transaction. Matters that may need to be addressed include the seller’s and acquired companies’ respective liability for any taxes, a termination of regional tax unities, the entitlement and reimbursement of tax benefits, communications with tax authorities and the conduct of any tax-related disputes.

Other subject matters that may require attention in a covenant (but if applicable, usually more elaborately and focused on the particularities of the case) include the sale of real property, the assignment of important contracts (which may be master of framework agreements with an umbrella character or those executed on a different entity or group level), and the transfer of lease agreements or mass contracts (e.g. with consumers).

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