What Is Ordinary Course of Business?
The ordinary course of business covenant is a contractual obligation in M&A definitive agreements requiring the target company to conduct its operations in the normal, day-to-day manner between signing and closing. The covenant protects the buyer by ensuring the business it negotiated to acquire remains substantially unchanged during the interim period — no unusual contracts, no extraordinary expenditures, no material changes to the workforce, and no actions outside the company’s regular operating patterns.
The ordinary course covenant is the buyer’s primary protection against interim value erosion. Without it, the seller could take actions between signing and closing that diminish the business — distributing excess cash, taking on unusual liabilities, or entering into unfavourable contracts — while the buyer is locked into the agreed purchase price.
Standard Covenant Structure
General Covenant
The agreement typically contains a broad general covenant:
“From signing until closing, the Company shall conduct its business in the ordinary course consistent with past practice in all material respects.”
Specific Restrictions
The general covenant is supplemented by a list of specific actions that require buyer consent:
| Category | Restricted Actions |
|---|---|
| Capital | Issuing shares, declaring dividends, redeeming stock |
| Debt | Borrowing money, granting security interests, assuming guarantees |
| Assets | Selling, leasing, or disposing of material assets outside the ordinary course |
| Employees | Hiring senior personnel, increasing compensation, granting bonuses, amending benefit plans |
| Contracts | Entering into, amending, or terminating material contracts |
| Capital expenditure | Making expenditures above an agreed threshold |
| Litigation | Settling material claims or proceedings |
| Tax | Making or changing tax elections, filing amended returns |
| IP | Licensing, transferring, or encumbering intellectual property |
| Acquisitions | Making acquisitions or investments |
Consent Mechanisms
The buyer’s consent to restricted actions is typically:
- Required in writing
- “Not to be unreasonably withheld, conditioned, or delayed” (from the seller’s perspective)
- Subject to a deemed consent if the buyer does not respond within a specified period (e.g., 5 business days)
Negotiation Dynamics
Seller’s Concerns
The ordinary course covenant constrains the seller’s ability to manage the business actively during the interim period. Sellers negotiate for:
- Materiality qualifiers — only “material” deviations from ordinary course are restricted
- Specific carve-outs — actions that the seller knows it will need to take (seasonal inventory purchases, planned capital projects, contract renewals)
- Reasonable consent standard — buyer cannot unreasonably withhold consent
- Emergency exceptions — actions required to respond to competitive threats, regulatory requirements, or emergencies
Buyer’s Concerns
Buyers seek broad ordinary course covenants to preserve the business in its current state:
- No materiality qualifier — even small changes can cumulatively erode value
- Specific prohibitions — enumerate every category of restricted action
- Sole discretion consent — buyer has absolute discretion to approve or deny
- Information rights — regular reporting on business operations during the interim period
COVID-19 and Ordinary Course
The pandemic forced a re-examination of ordinary course covenants. Targets operating under COVID restrictions took extraordinary actions — furloughing employees, closing facilities, renegotiating leases, drawing down credit facilities — that arguably violated their ordinary course obligations. Key lessons:
- Pandemic carve-outs are now standard in interim operating covenants
- Courts have interpreted “ordinary course” with reference to what is reasonable under prevailing conditions, not just historical norms
- The AB Stable VIII v. Maps Hotels & Resorts (2020) Delaware Court of Chancery decision found that pandemic-related actions could constitute an ordinary course breach, highlighting the importance of specific carve-outs
According to the American Bar Association’s Private Target M&A Deal Points Study, virtually all US private M&A agreements (98%+) include ordinary course of business covenants, with an average of 15-25 specifically enumerated restrictions.
APAC Context
Australia — ordinary course covenants in Australian M&A follow UK-influenced patterns. In schemes of arrangement, the scheme implementation deed includes conduct of business covenants that restrict the target’s operations between signing and the scheme meeting. The Takeovers Panel provides guidance on the reasonableness of interim restrictions.
Hong Kong — the Takeovers Code contains general principles requiring the target board not to take frustrating actions during an offer, which overlaps with (but is distinct from) contractual ordinary course covenants. In private M&A, Hong Kong agreements include detailed ordinary course provisions modelled on UK and US practice.
Japan — ordinary course covenants in Japanese M&A may be less detailed than in Western practice, reflecting the cultural norm of business continuity and the expectation that the target’s management will act responsibly during the interim period. However, as deal documentation becomes more internationalised, Japanese agreements increasingly include US-style enumerated restrictions.
“The ordinary course covenant is the buyer’s insurance policy against interim value destruction,” observes Daniel Bae, founder of Amafi. “In APAC deals, the specific restrictions must be calibrated to the target’s business — a one-size-fits-all covenant can either over-constrain operations or leave gaps that allow value leakage.”
Managing M&A deal execution across Asia Pacific? Amafi helps structure transaction terms and interim protections. Learn more.
Related Terms
Closing
The final step in an M&A transaction where ownership transfers, consideration is paid, and the deal becomes legally effective after all conditions precedent are satisfied.
Closing Conditions
Contractual requirements in an M&A agreement that must be satisfied or waived before a transaction can be completed, including regulatory approvals, financing, and compliance certifications.