Post-closing covenants and monitoring after a company takeover

When acquiring a company, many entrepreneurs focus primarily on conducting due diligence, negotiations, and concluding the purchase agreement. However, these purchase agreements often also contain agreements regarding rights and obligations after the acquisition. This is also referred to as the “post-closing” phase. In this article, I will discuss what post-closing covenants are, why they are important, and provide an example.

What are post-closing covenants?

Post-closing covenants are agreements made by the parties for the period after the transfer of a company. These agreements are intended to manage certain risks and safeguard the interests of the buyer and seller. Examples include:

• Non-competition clauses: these prohibit the seller from engaging in competitive activities for a certain period of time;
• Guarantees: the seller guarantees certain things for an agreed period, such as the financial position of the company; and
• Earn-out obligations: if an earn-out provision is included, further post-closing obligations may be attached to this.
  

These agreements are usually included in the purchase agreement, but can of course also be laid down in separate agreements.

Importance of post-closing covenants

The importance of post-closing covenants should not be underestimated. After the transfer of a company, situations may arise that cannot be fully anticipated during the negotiations. By making clear agreements about the period after closing, parties can limit risks and prevent disputes. For the buyer, post-closing covenants offer additional certainty about the continuity and value of the company. For the seller, these agreements provide clarity about the obligations that remain after the transfer.

Such covenants are also important in the case of, for example, a vendor loan or an earn-out. In such cases, it will be necessary to specify very precisely how payments are to be handled: when are they to be made? Under what conditions are they to be made or not made?

Example

Suppose an entrepreneur sells his business to a competitor. The purchase agreement includes a non-competition clause, stating that the seller may not engage in any competitive activities within the Netherlands for a period of two years. In addition, it is agreed that the seller is responsible for the accuracy of the annual figures for a period of two years. If it transpires that the seller is nevertheless engaging in competitive activities or that the annual figures are incorrect, the buyer can hold the seller accountable and, if necessary, claim damages.

Conclusion

In takeover practice, it is not unusual to make post-closing agreements. In some cases, such agreements are essential to manage risks and protect interests (on both sides). Are you involved in a company takeover and also post-closing agreements? We are happy to advise you on this, so that your interests are safeguarded!

Questions?

Do you have any questions regarding this article or other legal questions about Mergers and acquisitions? Our specialized attorneys are happy to assist you. You can contact them by phone and / or e-mail.