Covenants relating to conduct of business: Overview, definition, and example
What are covenants relating to conduct of business?
Covenants relating to conduct of business are promises a company makes about how it will operate during a specific period—often during a pending deal, loan, or investment. These covenants are usually designed to keep the business running “as usual” and prevent significant changes that could impact the deal or the value of the business.
Why are covenants relating to conduct of business important?
These covenants help protect the interests of investors, lenders, or buyers during a transitional period. They ensure that the company doesn’t take on risky debts, sell off key assets, change operations drastically, or make major business decisions without approval. This stability helps the other party assess and finalize the deal with confidence.
Understanding covenants relating to conduct of business through an example
Imagine a company is in the middle of being acquired. If it suddenly takes on $500,000 in new debt or fires its executive team without the buyer's knowledge, it could derail the transaction. With conduct of business covenants in place, the company would need to continue operating in its usual course and avoid major decisions without the buyer’s written consent.
Example of a covenants relating to conduct of business clause
Here’s how a covenants relating to conduct of business clause may appear in a contract:
"From the date of this Agreement until the Closing Date, the Company shall operate its business in the ordinary course consistent with past practices and shall not, without the prior written consent of the Buyer, incur any indebtedness, enter into any material contracts, or make any significant changes to its operations or management."
Conclusion
Covenants relating to conduct of business provide guardrails during sensitive periods like acquisitions or financings. They help preserve the value of the business and ensure that key decisions aren’t made without the other party’s knowledge or approval. Businesses should pay close attention to these covenants, as breaching them can lead to deal termination or legal consequences.
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.