Pre-closing covenants

Pre-closing covenants are the obligations imposed on the target company and/or the seller between the signing date and the closing date of a transaction. They restrict the target from taking certain actions without the buyer's prior consent — actions that could materially alter the business between signing and closing. Standard pre-closing covenants cover: prohibition on dividends, major asset disposals, new material contracts, changes in key personnel employment terms, acquisitions, incurrence of new debt, capital expenditures above a threshold, and changes to the capital structure.

The pre-closing covenants serve two purposes: (1) they protect the buyer from value destruction between signing and closing by freezing the business in its signed state; (2) they provide a basis for refusing to close (invoking a condition precedent breach) if the seller has fundamentally altered the business. In practice, the covenants must be carefully calibrated — too restrictive and they impair normal business operations; too permissive and they fail to protect the acquirer against adverse changes.

In a Franco-Swiss context, pre-closing covenants must be compatible with employment law constraints (particularly French labor law's restrictions on pre-close integration planning), competition law (gun-jumping rules prohibiting pre-close coordination between competitors), and the company's corporate governance obligations. The covenant package is typically negotiated alongside the MAC clause and the Long Stop Date.

At Hectelion, we advise on pre-closing covenant packages in our M&A advisory mandates, balancing buyer protection with operational continuity requirements.