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Editor's Note: This is an emerging pandemic-tailored variation of an otherwise standard pre-closing covenant that may be included in a merger and acquisition agreement. It deals with the operation of the target business during the interim period between signing and closing. This version allows for the target to take certain actions to address the Covid-19 pandemic as an exception to the ordinary course of business.
[X] Conduct of Business of the Company.
During the Pre-Closing Period, except as expressly permitted or expressly required by this Agreement, required by applicable Law [or as expressly set forth in Section [X] of the Company Disclosure Letter] or otherwise consented to by Parent in writing (which consent shall not be unreasonably withheld, conditioned or delayed), the Company shall, and shall cause each of its Subsidiaries to, operate the business of the Company and such Subsidiaries, as the case may be, in the ordinary course of business in all material respects and use its commercially reasonable efforts to (i) preserve intact in all material respects its present business organization, beneficial business relationships (including with its customers, lenders, suppliers and others having material relationships with it), Contracts, assets and properties, (ii) maintain in effect all of its material Permits and (iii) continue to make capital expenditures consistent with the Company's business plan and budget. Notwithstanding anything to the contrary contained herein, any reasonable action taken, or omitted to be taken, by the Company or any of its Subsidiaries in response to COVID-19 or any COVID-19 Measure shall not be deemed to be a breach of this Section [X], require the consent of Parent, or serve as a basis for Parent to terminate this Agreement or assert that any of the conditions to the Closing contained herein have not been satisfied to the extent that such action is reasonable and necessary to protect the health and safety of individuals who are officers, directors, employees or other service providers to the Company or any of its Subsidiaries (or individuals who interact with any of the foregoing in connection with the business of the Company and its Subsidiaries) or otherwise reasonably required to protect the business, operations, assets and financial condition of the Company and its Subsidiaries; [provided that, prior to taking, or omitting to take, any such action, to the extent practicable, the Company shall notify Parent of such action (or omission) and consider in good faith any suggestions of Parent with respect to such action (or failure to act).]
Comment: An emerging Covid-19 provision in M&A contracts is an exception to the pre-closing target covenant to operate the target business “in the ordinary course” during the period between signing and closing, which is typically titled “Conduct of Business” or “Interim Operations.” This exception, as set forth in the sample language above, allows targets to take Covid-19-related measures during the period between signing and closing without being in breach of the requirement that they operate the business within the ordinary course of business. The bracketed language is an optional pro-buyer inclusion requiring that the target provide prior notice to the buyer and consider in good faith suggestions made by the buyer with regards to the actions or omissions proposed. In some instances, as in the sample language above, this type of provision takes the form of a statement that pandemic-related measures shall not constitute a breach of the ordinary course provision. In other agreements, in order to achieve the same effect, Covid-19 is inserted into the definition of “ordinary course,” signifying that responding to the pandemic is considered the normal course of business and meaning that wherever the term “ordinary course” is mentioned in the agreement the meaning is the ordinary course during the pandemic. In some other agreements it is further specified that, in operating within the ordinary course, the target is required to respond to the pandemic in the same manner it had prior to the execution of the agreement. These may be considered as additional options for drafters.
Example Clause Search: Access our Transactional Precedent Database for “ordinary course of business” provisions referencing “Covid-19” in publicly filed M&A agreements.
Value/Risk Analysis: The inclusion of this type of provision in a conduct of business pre-closing covenant is important for a transaction taking place during the course of the pandemic because it allows the target to avoid breaching the pre-closing covenant if it is required to take actions in response to the pandemic. It is arguably in both parties’ best interest to include such language because the target's ability to respond to the pandemic essentially means that it is able to better protect the target from losing value as the result of the pandemic, which is a result both the target and buyer want. The risk of not including such a provision is that the target may not properly address pandemic-related problems for fear of ending up in breach of the covenant.
⇒ Pro Seller/Pro Target. The target will wish to have the most freedom and discretion possible to respond to pandemic-related problems during the period between signing and closing. As such, a target would rather not include any notice or consultation requirements vis-à-vis the buyer.
⇒ Pro Purchaser. While a buyer would benefit from such a provision for the reasons discussed above, namely value protection, they would support qualifications of the exception by standards such as the reasonableness standard included in the sample language above. A buyer would also support requirements that the target notify and/or consult with the buyer regarding such actions.
Affected Clauses: Certain defined terms, such as Law, Covid-19, and Covid-19 Measures (as indicated in bracketed language above), may need to be adjusted or added to the Definitions section of the agreement as a result of the inclusion of this type of covenant.