Post-closing covenants: Overview, definition, and example
What are post-closing covenants?
Post-closing covenants are ongoing obligations or commitments that parties to an agreement must fulfill after the closing of a transaction. These covenants typically outline specific actions that need to be taken, such as transferring assets, filing required documents, or maintaining certain business operations to ensure the smooth execution and compliance of the deal. Post-closing covenants are often seen in mergers and acquisitions, financing agreements, or real estate transactions.
For example, in an acquisition, the seller might be required to assist the buyer in transferring key licenses or customer contracts post-closing.
Why are post-closing covenants important?
Post-closing covenants are important because they ensure that key tasks or obligations necessary for the successful completion of a transaction are addressed after the deal is finalized. These covenants help mitigate risks, ensure compliance with regulatory requirements, and address transitional or operational needs.
For buyers, these covenants provide assurance that the seller will assist with necessary post-closing activities. For sellers, they clarify their post-closing obligations and limit liability by defining the scope of their commitments.
Understanding post-closing covenants through an example
Imagine a company acquires a manufacturing business. The post-closing covenants require the seller to assist in transferring environmental permits to the buyer and to refrain from competing in the same market for a specified period. These covenants ensure a smooth transition and protect the buyer’s investment.
In another example, a loan agreement includes a post-closing covenant requiring the borrower to provide additional collateral documentation within 30 days of receiving the loan funds. This ensures that the lender’s security interests are properly documented and protected.
An example of a post-closing covenants clause
Here’s how a post-closing covenants clause might appear in an agreement:
“Following the Closing Date, the Seller agrees to (i) provide reasonable assistance to the Buyer in transferring all licenses and permits necessary for the operation of the Business; (ii) refrain from engaging in any competitive activities as defined in Section [X] for a period of [time]; and (iii) cooperate with the Buyer in finalizing the assignment of customer contracts listed in Exhibit A. These obligations shall survive the Closing and remain in effect for the periods specified herein.”
Conclusion
Post-closing covenants play a critical role in ensuring the successful execution and compliance of a transaction after the deal closes. For buyers, they provide assurance that key transitional and compliance-related activities will be addressed. For sellers, they help define and limit their post-closing obligations. Including detailed and clear post-closing covenants in agreements ensures accountability, mitigates risks, and fosters trust between the parties.
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.