Permitted acquisitions: Overview, definition, and example
What are permitted acquisitions?
Permitted acquisitions refer to the acquisitions or purchases that are explicitly allowed under the terms of a contract, often in a merger and acquisition (M&A) or financing agreement. These acquisitions are typically subject to specific conditions and limitations defined within the agreement, such as the type of business, geographic location, or financial thresholds that must be met. The term "permitted acquisitions" is commonly used in loan agreements, shareholder agreements, or corporate governance documents to outline which types of acquisitions a company can make without violating the agreement or breaching specific covenants.
For example, a company might be allowed to acquire other businesses as long as the target company meets certain financial criteria or does not exceed a specified percentage of the acquiring company’s total assets.
Why are permitted acquisitions important?
Permitted acquisitions are important because they provide clarity and protect all parties involved by setting clear boundaries on what types of acquisitions are allowed. For lenders, investors, or stakeholders, these provisions help manage risk by ensuring that acquisitions do not strain the acquiring company’s financial position or alter the company’s business strategy in ways that were not agreed upon. For companies, having clear guidelines on permitted acquisitions provides the flexibility to grow and expand within an acceptable framework without violating their contractual obligations.
These provisions also help maintain a company’s financial stability, reduce legal risk, and ensure compliance with the conditions of financing or investment agreements. By defining what is permissible, companies can pursue growth opportunities while avoiding conflicts with creditors, investors, or other stakeholders.
Understanding permitted acquisitions through an example
Let’s say a company has a debt agreement with a lender that includes a "permitted acquisitions" clause. The clause states that the company is allowed to acquire businesses in the same industry as long as the acquisition does not exceed 25% of the company’s total assets and does not significantly increase the company’s debt level. If the company decides to acquire a smaller competitor within these limits, it is in compliance with the permitted acquisitions clause and can proceed without seeking further approval from the lender.
In another example, a company might have an agreement with investors that permits acquisitions only if the acquired company generates a certain level of revenue or profitability. If the company identifies a target that fits this profile, it can move forward with the acquisition without breaching the terms of the investment agreement.
An example of a permitted acquisitions clause
Here’s how a clause like this might appear in a financing agreement or corporate governance document:
“The Borrower shall be permitted to make acquisitions of other businesses, provided that the total consideration for such acquisitions does not exceed $X million, and the Borrower’s total debt does not exceed the thresholds set forth in this Agreement. Any acquisition outside these limits requires prior written approval from the Lender.”
Conclusion
Permitted acquisitions are an important contractual mechanism that helps define the scope and conditions under which a company can acquire other businesses. These provisions protect stakeholders by ensuring that acquisitions do not disrupt the company’s financial health, violate covenants, or lead to unanticipated risks. By clearly outlining what is permissible, companies are able to pursue strategic growth opportunities while staying compliant with their financial obligations and agreements.
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.