How an Ordinary Course Covenant Works
In a typical transaction, the covenant applies between signing and closing. The seller or borrower agrees to continue running the business in a manner consistent with its established practices. This helps preserve the business condition that the other party evaluated when entering the transaction.
An agreement may require the business to use commercially reasonable efforts to operate in the ordinary course, or it may use a more specific standard such as operating in the ordinary course consistent with past practice. The latter can create a more detailed comparison between proposed actions and the company's historical conduct.
Transactions commonly include negotiated exceptions. These may permit actions specifically required by the agreement, changes required by law, emergency measures, or other matters expressly approved by the relevant parties.
What the Covenant Can Cover
The scope varies by agreement, but an ordinary course covenant may address decisions that could materially change the business before closing. Typical provisions can concern:
- Operations: Maintaining ordinary operating practices, customer relationships, and supplier arrangements.
- Contracts: Entering, terminating, or materially amending significant agreements outside established practices.
- Employees: Changes to compensation, benefits, hiring, termination, or incentive arrangements.
- Assets: Acquiring, selling, leasing, or otherwise transferring material assets.
- Financing: Incurring new debt, granting liens, or making material changes to existing financial arrangements.
- Corporate actions: Issuing securities, making distributions, or changing organizational structure.
Ordinary Course Covenant in M&A Transactions
In an acquisition, the buyer typically performs due diligence before signing the purchase agreement. The ordinary course covenant helps preserve the operating and financial condition reviewed during that process until closing.
For example, suppose a company historically approves capital expenditures through an established annual budget. If management wants to make a major unbudgeted acquisition of equipment between signing and closing, the purchase agreement may require buyer consent if that action falls outside the company's ordinary course or exceeds a negotiated threshold.
This covenant therefore works alongside representations, warranties, closing conditions, and specific interim operating restrictions. It does not necessarily prohibit every unusual action; the contractual language determines whether an action requires consent or falls within an agreed exception.
Relationship With Financial and Debt Covenants
An ordinary course covenant differs from a Financial Covenant, which generally establishes financial requirements or restrictions that a company must satisfy, such as leverage, liquidity, or coverage measures.
It also differs from a Debt Covenant, which governs obligations connected with borrowing arrangements and can restrict activities such as additional borrowing, asset transfers, or distributions. An ordinary course covenant is primarily concerned with maintaining the agreed manner of business operations during a specified contractual period.
Interpreting the Ordinary Course Standard
Determining whether an action is ordinary usually requires examining the agreement together with the company's historical practices. A transaction that is routine for one business may be unusual for another. Frequency, size, purpose, timing, established policies, and past transactions can all provide useful context.
The parties may also negotiate objective thresholds to make the covenant more predictable. For example, an agreement could permit capital expenditures below a specified amount without additional consent while requiring approval for expenditures above that threshold.
The phrase “ordinary course” should therefore be read together with defined terms, schedules, exceptions, materiality thresholds, and consent provisions. The surrounding contract can materially affect how the covenant operates in practice.
Ordinary Course Covenant and Finance Planning
Maintaining operations within an agreed ordinary course standard requires finance and management teams to understand which decisions require additional review. This can be particularly important during an acquisition period, when budgets, working capital, hiring plans, capital expenditures, and contractual commitments may receive greater scrutiny.
The concept also connects with Course Management Finance, where financial activities and business processes are considered together to support consistent financial management. In an ordinary course covenant, this broader perspective helps teams distinguish routine decisions from actions that could materially change the business before a transaction closes.
Summary
An ordinary course covenant requires a business to maintain substantially consistent operations during a defined contractual period, particularly between signing and closing in an M&A transaction. Its practical effect depends on historical business practices, negotiated exceptions, consent requirements, thresholds, and the exact language of the agreement. Understanding these elements helps management identify which decisions can proceed normally and which require contractual review.