June 22, 2020

M&A Agreements: Defining “Ordinary Course” in Extraordinary Times

Many buyers attempting to terminate acquisitions during the Covid-19 crisis have alleged not only that the agreement’s MAE clause has been triggered by the pandemic’s impact, but also that the seller has violated interim operating covenants obligating it to conduct its business in the ordinary course.  In the past, most acquisition agreements haven’t defined what “ordinary course of business” means, but this Katten memo suggests that this practice may be changing as a result of the pandemic.

In a survey that the memo characterizes as unscientific but potentially telling, the firm looked at 18 private company M&A agreements entered into after March 1, 2020 that were either publicly available or in which the firm served as counsel. In “stark contrast” to pre-Covid-19 crisis practice, a total of 11 of those agreements specifically defined the phrase “ordinary course of business.”

Not surprisingly, the memo says that in negotiating the definition, sellers appear to push for the flexibility to take whatever actions are required in response to the crisis & Covid-19 governmental directives, while buyers push for notice & consent rights with respect to many of these same matters. Here’s an excerpt addressing the specifics of the definition:

While the definitions of “ordinary course of business” we reviewed vary in complexity, they generally include some of the elements depicted in the following illustrative definition:

“‘Ordinary Course of Business’ means actions taken by the Company that are consistent with the past usual day-to-day customs and practices of the Company in the ordinary course of operations of the business during the period from [ ] to [ ] ; provided, however, that (a) seller-friendly: actions or inactions [that the Company reasonably believes are] required to comply with applicable law, directive, guidelines or recommendations of any governmental authority in connection with or in response to the COVID-19 pandemic shall be considered to have been taken in the Ordinary Course of Business . . . and (b) buyer clawbacks: notwithstanding the foregoing, (i) the foregoing clause (a) shall be excluded from the meaning of “Ordinary Course of Business” as such term is used in Section [specify interim operating covenants] [specify particular representations and warranties] and (ii) the following actions shall be excluded from the meaning of “Ordinary Course of Business”: [specify actions unique to the business being acquired about which buyer seeks information] . ”

In addition to defining the term “ordinary course of business,” the memo says that buyers are requiring sellers to disclose actions relating to the pandemic that they have taken (or not taken) prior to signing, such as those relating to PPP loans & workforce reductions.  Buyers are also negotiating for more extensive notice obligations from sellers that allow them to more closely monitor the seller’s financial condition & operations between signing and closing.

John Jenkins