What Does Positive Covenant Mean?
A positive covenant is a promise or contract that requires a party to do something. It obligates the buyer/purchaser to take certain actions prior to closing, such as filing necessary documents and obtaining required consents, or drafting proxy materials. Positive covenants for sellers require them to give the purchaser access to their books, financial accounts, etc. A positive covenant may stipulate that the seller may carry on business, pending closing, in the best interests of the firm. Covenants may be subject to "reasonable efforts" qualifications.
A positive covenant is also known as an affirmative covenant.
Divestopedia Explains Positive Covenant
There is a time lag between signing an acquisition agreement and closing due to the time-consuming procedures of obtaining consents and approvals. During the intervening time period, both the buyer and seller have certain obligations toward each other. Even after closing, they agree to do or not to do certain things for a specified period of time.
A negative covenant restricts performance of a specific action. These covenants are written directly into the agreement between the two parties. They may be in the form of financial ratios that must be maintained by the firms, such as debt-asset ratio, dividend payout, working capital and key employees.