Pre-closing Covenants

Pre-closing covenants are obligations that a party to a purchase agreement must fulfill between the signing of the definitive agreement and the closing of the transaction. They govern the seller's conduct of the business during the interim period and establish what both parties must do to bring the transaction to a successful close. Pre-closing covenants are the mechanism for maintaining deal integrity from signing to closing — they ensure the seller doesn't take actions that would destroy value before the buyer takes ownership, and they create affirmative obligations that drive the deal toward closing.

The most important seller-side pre-closing covenants include: the obligation to operate the business in the ordinary course (maintaining existing contracts, not making unusual capital expenditures, not changing pricing or compensation structures materially); the obligation to obtain required third-party consents (landlord approvals, customer consents, regulatory notifications); the obligation to preserve the business's goodwill (maintaining customer and supplier relationships, not disparaging the business to employees or customers); and access covenants (allowing the buyer reasonable access to the business for due diligence, employee meetings, and integration planning).

The ordinary course covenant is the most litigated pre-closing covenant. Sellers must continue running the business as they normally would — but "normal" is ambiguous in practice. Can the seller make a large capital expenditure that was planned before signing? Accept a new long-term customer contract? Promote an employee? Replace a key vendor? The purchase agreement should define the specific thresholds and categories of actions that require buyer consent vs. those that fall within ordinary course discretion.

Buyer-side pre-closing covenants typically include: using best or commercially reasonable efforts to obtain financing commitments; using required efforts to obtain regulatory approvals; and refraining from taking actions that would prevent satisfaction of closing conditions. These buyer covenants are enforceable — a buyer who deliberately delays financing to manufacture an outside date termination right may be in breach of their pre-closing covenants.

Pre-closing covenants have financial teeth. A seller who violates ordinary course covenants by, for example, distributing an unusual dividend or cancelling a major customer contract may face a claim that a closing condition (absence of material adverse change) is not satisfied — giving the buyer a right to refuse to close. Conversely, a seller whose business experiences a genuine decline through no breach of covenants may still face a buyer attempt to invoke MAC or closing condition failures.