Class 6 - Readings - Class 6: Covenants I. Covenants (or...

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[[[NYCORP:2569798v8:4434W:09/26/08--05:42 p]] Class 6: Covenants I. Covenants (or “Receiving what you are paying for” ) f Nature. Whereas representations and warranties are assurances regarding a party and its relation with the rest of the world at one moment in time, covenants govern the relationship of the parties over a certain period of time. Covenants can be agreements either to do something (an “affirmative covenant”) or to refrain from doing something (a “negative covenant”). ± The parties typically determine that it is advantageous to sign the acquisition agreement before they are prepared to “close” the transaction. The complexities of transferring many assets will typically cause the closing of an asset purchase to be delayed. Governmental or shareholder approvals can also create delay. When a closing must be delayed, parties may decide to commit to the transaction before the closing by signing the acquisition agreement and then later proceeding with the asset transfer, approval or disclosure process that is the cause of the delay. The covenants are particularly important if a period of time will occur between the signing of the acquisition agreement and the closing the acquisition. (Of course, acquisitions could involve a simultaneous signing and closing.) ± In the context of a private company acquisition, the most important covenants are: the “conduct of business” covenant; the “get the deal done” covenant; the post-closing “protect the business” covenants; the employee covenants; and “break-up fees”. f “Conduct of Business”. When a deferred closing is agreed to, Buyer needs covenants in order to assure that the general condition of Target is not changed by Seller during the time between the signing and the closing. Typically, Seller or Target will be bound by negative covenants preventing Target from taking actions other than in the ordinary course of business, declaring extraordinary dividends, impairing or making unusual dispositions of Target’s assets, incurring significant amounts of debt or doing anything else that would cause the representations and warranties made at the time of signing no longer to be true or otherwise detract from the value of Target that existed (or that Buyer believed existed) at the time of signing. If Seller is receiving stock in exchange for Target, Buyer may be bound by similar agreements with regard to the conduct of its business. The reason Buyer would be bound by similar agreements is because if Buyer were to conduct its business other than in the ordinary course, such
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[[[NYCORP:2569798v8:4434W:09/26/08--05:42 p]] actions may negatively affect the value of its stock, and consequently the value of the consideration Buyer would be paying Seller for Target. f
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This note was uploaded on 11/28/2009 for the course LAW 7591 at Cornell University (Engineering School).

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Class 6 - Readings - Class 6: Covenants I. Covenants (or...

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