A Guide to Acquisition Agreements - Covenants After Closing
As discussed in another post, “covenant” is fancy lawyerspeak for “promise.” The idea of promises after closing may seem counterintuitive. What could be more final that a closed purchase? Transferring a business is not as simple, however, as selling a bottle of milk. The buyer needs the seller's cooperation in making the transition successful and both parties need each other's cooperation with respect to taxes and handling outstanding liabilities and future litigation. So the parties usually make a variety of promises to each other with respect to the period after closing.
In general, it isn’t safe to ignore these provisions as “boilerplate,” even if your lawyer tells you that they are customary. As with covenants before closing, you need to make sure the promises are practical for you. For example, the seller should think through whether it will have the accounting and legal personnel needed to fulfill extensive obligations to help with tax and other matters long after closing. You also need to understand these promises to make sure that you take the necessary steps to fulfill them. For example, if you’re promising to provide certain records to the other side on request, you need to know you’re doing that so you can make sure to keep those records.