Information covenants: Overview, definition, and example
What are information covenants?
Information covenants are clauses in a contract or agreement that require one party to provide certain information to another party, typically for the purpose of transparency, monitoring, or compliance. These covenants are commonly found in loan agreements, shareholder agreements, and other financial or business contracts, where one party agrees to disclose specific data or reports at regular intervals. Information covenants ensure that the receiving party has access to important information to assess the ongoing performance, financial status, or compliance of the party providing the information.
For example, a lender may require a borrower to provide quarterly financial statements as part of an information covenant in a loan agreement.
Why are information covenants important?
Information covenants are important because they promote transparency and accountability between parties. By requiring regular disclosure of specific information, these covenants help reduce risks, ensure compliance with contractual obligations, and allow parties to make informed decisions based on up-to-date data.
For businesses, information covenants ensure that investors, creditors, or other stakeholders have the necessary information to assess the performance and financial health of the company. They help prevent surprises and provide a clear understanding of the risks and obligations involved in an agreement.
Understanding information covenants through an example
Imagine a private equity firm investing in a startup. As part of the investment agreement, the startup is required to provide quarterly financial reports, annual audits, and updates on major business developments to the private equity firm. This is an example of an information covenant, where the startup agrees to provide the investor with specific information to monitor the company's performance.
In another example, a supplier enters into a contract with a retailer that includes an information covenant requiring the supplier to disclose details about their production capabilities, inventory levels, and any supply chain disruptions. This allows the retailer to assess potential risks and plan accordingly.
Example of an information covenant clause
Here’s how an information covenant clause might appear in a contract:
"The Borrower shall provide the Lender with quarterly financial statements, including balance sheets, income statements, and cash flow reports, within 30 days of the end of each fiscal quarter. Additionally, the Borrower shall notify the Lender of any material changes to its business operations or financial condition within 10 business days of such changes."
Conclusion
Information covenants are contractual obligations that require the disclosure of specific data or reports to ensure transparency, compliance, and proper decision-making. These covenants help build trust between parties, reduce risks, and ensure that stakeholders have the necessary information to monitor the performance and financial health of an entity.For businesses, including information covenants in contracts can improve relationships with investors, creditors, or customers, and help ensure smooth and informed operations.
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.