February 6, 2020
Acquisition Agreements: The “Ordinary Course of Business” Covenant
Any acquisition agreement that doesn’t provide for a simultaneous sign & close is going to have some sort of covenant obligating the seller to conduct business in the ordinary course between signing and closing. This recent memo by Mintz’s Nick Perricone reviews market practice when it comes to the terms of the ordinary course of business covenant & how courts have interpreted those terms.
Here’s an excerpt addressing some of the considerations associated with using the “consistent with past practice” concept in the ordinary course of business covenant:
Unlike other features of the ordinary course covenant that are either target-favorable or buyer-favorable, the benefit of a past practice standard is largely dependent on the circumstances of the transaction and the interests of each party. If the target engaged in what may be viewed as unusual conduct in the past relative to peer companies in its industry, then using a past practice standard may provide the target with more latitude to operate without running afoul of the ordinary course covenant and triggering a termination right of the buyer.
On the other hand, if the target is interested in engaging in conduct that it did not typically perform prior to the signing date of the acquisition agreement (because, for example, its business is changing rapidly or it is experiencing problems that it never dealt with in the past), then the more vague standard of operating in the ordinary course of business without qualification may be preferable.
If the buyer has acquired a strong understanding of the target’s historical operations and is comfortable with this operating behavior, then a consistent with past practice standard may provide the buyer with more certainty than an objective industry-wide standard. The results of the ABA Study for the period of 2018–2019 seems to bear this out as 85% of acquisition agreements reviewed included this qualifying language.
The memo also addresses various other concepts often reflected in the covenant, including materiality qualifiers, efforts clauses, and “except as otherwise provided in the agreement” carve-outs.
– John Jenkins