What Does
Covenant Mean?
A covenant is a binding agreement or written contract in which damages are liable to be paid, if broken. A covenant is a solemn promise to perform or refrain from performing a specific action. This type of contract is enforceable, even in the absence of consideration.
Divestopedia Explains Covenant
There is a time lag between signing an acquisition agreement and closing due to time-consuming procedures like obtaining consents and approvals. During the intervening time period, both the buyer and the seller have certain obligations toward each other. Even after closing, they agree to do or to not do certain things for a specified period of time. These pre- and post-closing agreements between the buyer and the seller are called covenants and are extensively negotiated by the parties involved. Covenants may be subject to “reasonable efforts” qualification, and may be in the form of financial ratios that must be maintained by the firms, such as debt-asset ratio, dividend payout, working capital or key employees.
If a particular matter is classified only as a covenant, the only remedy for a purchaser would be monetary damage. If, however, it is a condition to closing, the buyer can walk away from the transaction or renegotiate terms.