Conduct of business prior to the closing: Overview, definition, and example
What is the conduct of business prior to the closing?
The conduct of business prior to the closing refers to the actions and operations a party (usually the seller in a transaction) is expected to take or avoid before the formal closing of a business deal, such as a merger, acquisition, or sale of assets. This is typically outlined in a contract or agreement and sets forth guidelines to ensure that the business continues operating normally while the deal is being finalized. It often includes provisions that limit certain activities (like entering into new contracts or making significant changes to operations) to preserve the value of the business for the buyer.
In other words, this provision ensures that the business is not materially altered or harmed before the deal officially closes, allowing the buyer to take ownership of the business in essentially the same condition it was in when the agreement was made.
Why is the conduct of business prior to the closing important?
The conduct of business prior to the closing is important because it helps protect both parties involved in the transaction, particularly the buyer, by ensuring that the business is not altered in ways that could negatively impact its value. It prevents the seller from making decisions or changes that could jeopardize the deal or lead to disputes later on.
For the seller, agreeing to conduct business in a certain way ensures they fulfill their obligations in good faith while keeping the deal intact. For the buyer, this provision provides assurance that the business will remain stable and that the conditions of the sale will be met.
Understanding conduct of business prior to the closing through an example
Imagine a company is selling its business to another company. As part of the agreement, the seller is required to continue operating the business in the ordinary course, meaning they must continue their usual business activities (e.g., paying bills, servicing existing contracts) and cannot take major actions like selling assets, changing key personnel, or taking on new debt without the buyer’s consent.
For instance, if the seller intends to sell off part of the company’s property, this would be prohibited unless the buyer agrees to it in writing, as such a sale could affect the overall value of the business.
In another example, if a company is in the process of acquiring a competitor, the buyer may require the target company to maintain its operations and business conditions as they are, such as not entering into new material contracts or making significant investments that could affect its financial status.
An example of a conduct of business prior to the closing clause
Here’s how a conduct of business prior to the closing clause might appear in a purchase agreement:
“The Seller agrees that, between the date of this Agreement and the Closing, the Business shall be conducted in the ordinary course consistent with past practice. The Seller shall not make any material changes to its operations, assets, or liabilities without the Buyer’s prior written consent. Specifically, the Seller shall not (i) enter into any material contract, (ii) dispose of any assets, or (iii) take any actions outside the ordinary course of business that would negatively affect the Business without the Buyer’s approval.”
Conclusion
The conduct of business prior to the closing ensures that a business transaction proceeds smoothly and that the buyer acquires the business in a consistent and predictable condition. This provision protects both parties by outlining clear guidelines for the seller’s actions before the deal officially closes, minimizing the risk of any disruptive or detrimental changes.
For businesses involved in transactions, understanding and following these guidelines is crucial for ensuring the deal's success, preserving the value of the business, and avoiding complications or disputes during the closing process.
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.