A founder I represented through signing last spring called me about three weeks after the LOI had hardened into a definitive agreement. His largest customer — the kind of customer that shows up as a line item in the data room and is referenced by name in the lender’s memo — had heard, somehow, that he was selling. The customer’s procurement lead had sent over a one-page letter asking to renegotiate pricing and to insert a change-of-control termination right into the master services agreement. My founder wanted to know whether he could sign it. He had a closing condition that required the customer to consent to the transaction, and he wanted to get ahead of the conversation by giving the customer something to feel good about.
I had to tell him no. Or, more precisely, I had to tell him that the buyer’s consent was required under the material contracts covenant and that the buyer would probably not give it, and that if he signed the amendment without the buyer’s consent he would breach his interim operating covenant and arm the buyer with a walk right just as the deal was closing in on the diligence finish line.
He was upset. He was upset in the particular way founders get upset when they realize that the signing of an LOI did not simplify their life — it complicated it — and that the merger agreement they had signed contained a clause that operated, in practice, as a buyer veto over precisely the customer conversations that he needed to have during the period when those conversations were most urgent. The clause was the material contracts covenant. It is, in deal practice, one of the most under-discussed sources of friction between signing and closing, and founders are typically not warned about it before they sign.
What the covenant actually says, and what it actually does
The interim operating covenant in a private-target acquisition agreement does two things. It requires the seller to operate the business in the ordinary course consistent with past practice, and it lists out a series of specific restricted actions the seller may not take without the buyer’s consent. The restricted-action list is usually three to five pages of single-spaced provisions and covers everything from issuing equity, to incurring indebtedness, to hiring or firing executives above a defined threshold, to capital expenditures over a dollar limit. Embedded in that list, almost without exception, is a restriction on amending, modifying, terminating, or entering into any “Material Contract.”
The “Material Contract” defined term reaches back to the representations and warranties section, where it is defined by reference to a schedule. The schedule is generated by counsel out of diligence. It captures customer agreements over a revenue threshold, supplier agreements over a spend threshold, real estate leases, IP licenses both in and out, distribution arrangements, joint ventures, and a residual catch-all for any contract not in the ordinary course or having a term over some period. In a typical middle-market deal the schedule has between twenty and eighty contracts on it. Every one of them is now subject to a covenant that prevents the seller from touching them without going to the buyer for sign-off.
The buyer’s drafting move is to add the magic words “in any material respect.” The seller’s drafting move is to add “such consent not to be unreasonably withheld, conditioned, or delayed.” These two phrases — whether they appear, and how they are scoped — are most of the negotiation, but they do not change the underlying reality. The seller has handed the buyer a veto.
Why customers ask for amendments in exactly this window
The signing of a private-target acquisition agreement is rarely a public event in the formal sense, but it is rarely truly secret either. Lenders find out. Investment bankers’ phones light up. A handful of customers and a handful of suppliers learn through the grapevine, and a smaller number of counterparties calculate that this is the moment to ask for something. The asks come in three flavors and they tend to arrive on a predictable schedule.
First, the change-of-control termination right. Customers who do not currently have one will ask for one. Customers who already have one will ask to amend its trigger language to capture the specific transaction structure. The procurement teams running these asks are not being cynical; they have been trained that an acquisition is a moment of contract risk, and the in-house counsel they consult will tell them that this is the cleanest moment to negotiate.
Second, pricing. A customer who has been thinking about pushing for a price reset will pick up the phone now, because the seller’s perceived bargaining strength is lower than usual and the seller’s perceived urgency to close is high. A founder under closing-week pressure will tend to concede things at the negotiating table that the founder would have flatly refused six months earlier. The customer’s negotiator knows this.
Third, term and exclusivity. A customer who has been reluctant to commit to a long-term volume floor may suddenly become interested in a renewal that locks in current pricing through the post-closing integration window. Customers ask for this in exchange for waiving their change-of-control termination right. The trade is rational on both sides — but it is a trade the seller cannot make unilaterally once the merger agreement is signed.
The covenant catches all three of these conversations. Every one of them is “amending a Material Contract,” and every one of them requires buyer consent.
What AB Stable says, and what it implies for the material contracts covenant
The doctrinal backbone for taking the interim operating covenant seriously is the Delaware Court of Chancery’s 2020 decision in AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, affirmed by the Delaware Supreme Court the following year. The target there was a luxury-hotel platform; the buyer walked when the seller responded to the pandemic by closing two hotels ahead of schedule, reducing staffing at the others, and pausing non-essential capital spending. The seller’s argument was that its operational changes were — and had to be — the “ordinary course” for the circumstances. Vice Chancellor Laster disagreed. “Ordinary course of business consistent with past practice” means what it says: the comparator is the target’s own past practice, not a reasonable response to changed conditions. The covenant is read against the party seeking to escape it.
The Harvard Corporate Governance Forum’s contemporaneous analysis walks through the reasoning, and the takeaway for deal lawyers is that a court applying ordinary contract-interpretation principles to the standard interim covenant language will not credit a seller’s argument that “the customer asked me to amend the contract” is itself ordinary course. The asks come in ordinarily enough — but acceding to them is not ordinary. Acceding to them in the way an unhurried seller would accede to them, after a longer negotiation and with a different counter-position, is the comparator the covenant points to. The covenant does not say “ordinary course for a seller under deal pressure.” It says “ordinary course.”
What that means in operating terms is that the seller who signs a material contract amendment without buyer consent during the interim period is taking on real breach risk. The buyer may not walk — most buyers are too far along the runway to want to walk — but the buyer now has leverage. The standard repricing of that leverage is a purchase-price adjustment, an enhanced indemnity, or a new closing condition, and the same dynamic shows up in the way interim-breach exclusions get negotiated in rep & warranty insurance. Founders who do not understand the covenant tend to find out that they have given the buyer a free option to repaper terms that were closed at signing — including, in Delaware, under the anti-sandbagging default that lets a buyer enforce breaches it knew about.
The drafting fixes that actually move the needle
The covenant is not going away. No sophisticated buyer signs a definitive agreement without it, and the buy-side counsel who tried to give it up would be doing the buyer a disservice. But there are three drafting moves that change the practical operation of the covenant substantially, and the seller-side negotiation belongs in the term sheet, not in the agreement turns.
First, scope the material contracts list to revenue or spend thresholds that actually reflect commercial significance. The standard buyer ask is “all contracts not in the ordinary course” plus a dollar threshold of $250,000. The seller-side push is for a higher threshold and the deletion of the not-ordinary-course catch-all. A material contracts list of fifteen instead of fifty changes the daily operation of the covenant materially, because most customer-amendment asks come from second-tier accounts that the seller will be running through the buyer consent process week after week. The seller-friendly versus buyer-friendly framing applies to the schedule, not just the covenant itself, and it interacts directly with how the rep & warranty insurance program will treat interim-period activity.
Second, push the “in any material respect” qualifier into the restricted action. The covenant should restrain amendments “in any material respect,” not all amendments. A pricing-trivial amendment to update the bill-to address should not require buyer consent. A change-of-control amendment to a top-ten customer plainly should. The qualifier is what distinguishes ministerial activity from substantive activity, and a seller without it ends up routing notarial-grade paperwork through the buyer’s office during a period when the buyer’s deal team is bandwidth-constrained.
Third, build in a specific consent standard. “Such consent not to be unreasonably withheld, conditioned, or delayed” is the baseline; a seller with leverage should push for an outside response window (five business days, ten business days, deemed consent if no response) and for a specific carve-out permitting amendments that are reactive to customer-initiated change-of-control termination notices. The carve-out is the cleanest fix for the founder’s problem in the opening of this post: if the customer initiates a change-of-control conversation under an existing termination right, the seller has a defined safe harbor to respond.
What sellers should do in the room, not on the page
The drafting fixes only get the seller part of the way. The other part is operational and it belongs in the deal-team kickoff conversation with the buyer’s M&A counterparts during the first week after signing. The seller should disclose, at signing, the list of customers and suppliers the seller realistically expects to ask for amendments during the interim period. The disclosure puts the buyer on notice, ratchets down later arguments about “ordinary course” comparators, and gives the buyer a chance to pre-approve a consent posture for the accounts the seller can name. Buyers appreciate this. Buyers’ deal teams hate surprises during the interim period and would generally rather work out a defined consent matrix at the start.
The seller should also propose a standing weekly call between sell-side legal and buy-side legal during the interim period to clear consent items at a defined cadence. The call is mundane. Five minutes, agenda emailed Monday, items resolved Wednesday. It avoids the situation in which a seller is sitting on a customer’s open amendment ask for two weeks while waiting for buyer-side response, with the customer growing colder by the day.
And the seller should treat the material contracts covenant as one piece of a broader interim-period playbook. The M&A practice page and the founder M&A forms library are entry points for the more comprehensive framing, but the substantive point is that the merger agreement does not close the deal; it begins a ninety-to-one-hundred-eighty-day period of dual control during which the seller is operating the business as a fiduciary for the buyer’s economic interest. The covenant is the legal expression of that dual control. Sellers who understand it can use the interim period productively. Sellers who do not understand it tend to learn about it during a customer call they cannot finish without a phone call to their lawyer.
The honest summary
The material contracts covenant is not a routine clause. It is the buyer’s pre-closing veto over the seller’s most important commercial relationships, exercised at exactly the moment those relationships are under stress. The seller-side response is partly drafting — scope the list, scope the action, scope the consent — and partly operational, in the form of a defined consent process and a candid pre-disclosure of expected interim-period activity. Founders who walk into signing without thinking about the covenant tend to walk out of the interim period having quietly handed the buyer something the buyer did not pay for at the term-sheet table.
If you are a founder approaching signing on a sale and want a second read on the interim operating covenant before you sign — or one already in the interim period and getting customer-amendment asks you do not know how to handle — feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
