Purchase agreement part three: what must happen before closing?
Covenants and conditions govern the business between signing and closing.
Some transactions sign and close on the same day. Others have an interim period for regulatory approvals, third-party consents, financing, or other conditions. During that period, the purchase agreement governs how the business must operate.
Interim covenants often require operation in the ordinary course and buyer consent for specified actions. Review the consent list carefully. The company still needs to serve customers, manage employees, enter contracts, make capital expenditures, and respond to unexpected events. A covenant that is too restrictive can impair the business the buyer agreed to acquire.
Closing conditions deserve equal attention. Which representations must remain accurate, and to what standard? Must the company obtain named consents? Is financing a condition? What regulatory approvals are required? How is a material adverse effect defined? What happens if a condition remains unsatisfied by the outside date?
Also review termination rights, fees, and remedies. If the buyer fails to close despite satisfied conditions, is specific performance available? Does a reverse termination fee apply? The answers depend on the transaction and governing law.
Post-closing covenants may address restrictive covenants, employee matters, access to records, tax cooperation, insurance, use of names, and the seller’s ongoing role. Those obligations should be feasible and consistent with the rest of the deal.
Transaction counsel should advise on legal effect. From an owner’s perspective, the practical test is simple: can the company comply without damaging operations or surrendering control before the buyer has paid?