M&A Series Part 8: Operational covenants

Top 10 negotiated points in a bank transaction: Operational Covenants

Editor’s note: This month, BankBeat takes a magnifying glass to the merger and acquisition activity underway in the community banking industry. Anton J Moch and Erik Didrikson, attorneys working in the community banking group of Winthrop & Weinstine P.A., Minneapolis, have created a 10-part series for BankBeat, to unpack the considerations bankers must take into account when negotiating a bank deal. Previous installments covered purchase pricepayment termsthe financial condition of the bankpost-closing liability, earnest money and break-up feesnoncompetition provisions, and representations and warranties. Here is the eighth installment.

Day 8. Operational covenants.  For the last three days of our discussion we will cover covenants or other special contract provisions that require the parties to take, or not take, certain actions prior to and following the close of the transaction. Special covenants are always at the heart of the deal, but certain operating covenants set an expectation between buyer and seller on the operation of the organization from the date of the agreement through closing. Operational covenants can include commitments to operate in the ordinary course, to conservatively manage the investment portfolio, and to restrict capital expenditures until the closing date.  Generally, the covenants will seek to prevent the seller from staking out risky positions or not undertaking expensive or long-term activities that the buyer would inherent at closing.

Bank regulators do not want to see buyers exercise undue control over an organization prior to consummation of the deal. Neither party wants to force the seller to commit to take, or not take, an action that will cause the bank to perform poorly or inconsistently from its current operations.  As a result, negotiations often spur important conversations between parties related to management expectations for the period between signing and closing. While often heavily negotiated, these covenants more often than not settle into a practical middle ground that both parties agree upon.

Anton J Moch
Erik J. Didrikson

Anton Moch and Erik Didrikson are members of the Winthrop & Weinstine, P.A., community banking group, and are some of the most active and experienced bank transaction legal advisors in the nation. Since 2014, Winthrop has served as chief legal counsel to parties completing the purchase, sale or merger of over 30 banks, bank holding companies and bank branches. Winthrop’s dedicated team of transaction attorneys is annually recognized as tier-one legal advisors to banks on bank transactions as well as corporate governance issues, capital issues, regulatory issues and a wide range of senior management legal issues. Contact Tony at [email protected] or 612-604-6671, or Erik at [email protected] or 612-604-6536.

Attend Anton’s upcoming presentation titled, “Soft” Factors to Consider When Selecting an Acquisition Candidateon Mon., Oct. 1 at the Bank Holding Company Association Fall Seminar, “Buy, Sell or Hold: More Strategies for Success,” in Minneapolis. Winthrop & Weinstine, P.A., is also proud to be a Diamond Level Sponsor at this event. To learn more or to register, visit theBHCA.org.