Conduct of business pending the merger: Overview, definition, and example
What is conduct of business pending the merger?
Conduct of business pending the merger refers to the specific actions and restrictions placed on a company during the period between the announcement of a merger or acquisition and the actual completion of the merger. During this interim period, both parties typically agree to operate their businesses in a manner that preserves value and ensures that no actions are taken that would negatively impact the merger’s success. These provisions often include guidelines about maintaining normal business operations, limiting major business changes, and obtaining approval for specific actions.
For example, a company may agree not to make large investments, take on significant new debts, or engage in significant transactions without approval from the other party to protect the value of the company during the merger process.
Why is conduct of business pending the merger important?
The conduct of business pending the merger is important because it ensures that neither party takes actions that could undermine the value of the merger or cause complications in completing the deal. By maintaining normal business operations and limiting risky decisions, both parties help preserve the merger’s value and minimize potential legal or financial risks. This period is crucial for ensuring the companies involved remain stable and operate smoothly while awaiting the finalization of the merger.
For businesses involved in a merger, clear guidelines on how the business should be run during the pending period help manage expectations and prevent any potential disputes over changes in operations or financial conditions.
Understanding conduct of business pending the merger through an example
Imagine two companies, Company A and Company B, agree to merge. Pending the merger, Company A agrees to continue normal operations and refrain from making any major financial decisions, such as acquiring new assets or entering into large contracts, without the approval of Company B. This ensures that the merger value remains unaffected by unexpected changes during the waiting period.
In another example, a private equity firm is acquiring a technology company. The agreement includes provisions stating that the company must maintain its current staffing levels, retain key employees, and avoid making any changes to its product lines until the merger is complete. This ensures that the technology company remains stable and retains its value while the deal is finalized.
An example of a conduct of business pending the merger clause
Here’s how a conduct of business pending the merger clause might appear in a merger agreement:
“During the period between the execution of this Agreement and the Closing Date, the Company shall conduct its business in the ordinary course consistent with past practice. The Company shall not, without the prior written consent of the Purchaser, (i) incur any material liabilities, (ii) enter into any new material contracts, or (iii) make any significant changes to its business operations that could adversely affect the Merger.”
Conclusion
The conduct of business pending the merger ensures that both parties involved in a merger or acquisition continue to operate their businesses in a way that preserves value and avoids complicating the transaction. By following agreed-upon guidelines, companies can ensure that their operations remain stable and that the merger process moves forward smoothly. This period is critical for maintaining business continuity and minimizing any risks that could negatively impact the merger's success.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.