A founder I worked with closed a sale to a strategic buyer in late 2025. The interval between signing and closing was four months — long enough for HSR clearance, the buyer’s regulatory work in two non-U.S. jurisdictions, and the final consents from three of the seller’s customers. The deal was clean on paper. The closing conditions were standard. The merger agreement’s interim-operating covenant — the section that requires the seller to operate the business in the ordinary course between signing and closing — looked like boilerplate.
Six weeks before closing, the buyer sent a letter alleging interim breach. The seller had, during the interregnum, terminated a small underperforming product line, hired three engineers on retention packages that had not been pre-cleared with the buyer, and signed a one-year extension of a key vendor contract at a higher rate than the prior year. Each of those actions had been a routine operational decision in the seller’s business for a decade. None of them had seemed to require buyer consent. The buyer’s letter argued that each was an interim breach, that the breaches were collectively material, and that the buyer was preserving its right to terminate.
The seller’s counsel and the buyer’s counsel spent the next month negotiating what those allegations meant. The deal closed, but only after a meaningful price reduction and the seller’s agreement to indemnify the buyer for the asserted breach. The founder’s net proceeds were two million dollars below what the deal would have produced if the interim-operating covenant had been negotiated harder at signing.
This pattern — the buyer using interim-breach allegations as leverage in the run-up to closing — has become more common in 2024-2026 than in any prior period in the post-financial-crisis era. The doctrine is not new, but the willingness of buyers to use it is, and the cases that gave them confidence to use it are part of the recent Chancery record.
What the covenant actually requires
The interim-operating covenant in a typical 2026 merger agreement has three elements. A general obligation to operate in the ordinary course of business consistent with past practice. A list of specifically prohibited actions during the interim period (selling material assets, incurring debt above a threshold, entering into material contracts, hiring or terminating senior executives, declaring dividends, amending organizational documents). And a list of carve-outs from the general obligation — typically actions taken with the buyer’s consent, actions required by law, actions taken under contracts existing at signing.
The general obligation is the part that does the most work in litigation. “Ordinary course of business consistent with past practice” is not a defined term. Its meaning has to be filled in by reference to what the seller’s business has historically done. Where the seller’s business has been growing or changing — which is, in practice, every business that gets sold — the historical practice is moving, and the question of what counts as “consistent with” that moving practice gets harder.
The 2018 Akorn v. Fresenius opinion was the case that put interim-operating covenants on the map for the modern era. The Court of Chancery held that Akorn’s failures of data-integrity practices during the interim period constituted a material breach of the ordinary-course covenant, and that the buyer was entitled to terminate. The opinion has been litigated and distinguished in subsequent cases, but its core insight — that a seller’s operational decisions during the interregnum are reviewable under the covenant and can support a termination — has stuck. The Chancery opinions docket shows a steady line of interim-breach cases since, with rulings mostly going against sellers who could not document a clear ordinary-course basis for the actions they took.
The 2020 AB Stable v. MAPS Hotels decision was the second case that mattered. The Court held that AB Stable’s COVID-era operational changes — closing hotels, furloughing staff, cutting marketing — constituted a breach of the ordinary-course covenant because they departed from the seller’s pre-pandemic practice. The opinion was controversial, partly because the operational changes were a reasonable response to a pandemic, but the doctrinal point survived: “ordinary course” is read against the historical baseline, not against what a reasonable operator would do under changed conditions.
The line of cases since AB Stable has, on the seller’s side of the docket, been mixed. Sellers have prevailed where the operational decisions were documented as continuations of pre-existing initiatives, where the buyer’s consent had been sought and unreasonably withheld, or where the asserted breaches were not material individually or in the aggregate. Sellers have lost where the operational decisions were taken without seeking consent, where the documentation of historical practice was thin, or where the buyer could point to a course of dealing during the interregnum that the seller had not flagged.
How buyers use the covenant tactically
The covenant’s tactical value to buyers is that it provides a low-cost option to renegotiate price or walk away from a souring deal. A buyer that is having second thoughts during the interregnum — because the business is underperforming, because market conditions have shifted, because the buyer’s own circumstances have changed — does not have many termination tools. The closing conditions are typically narrow. The material-adverse-effect clause is hard to invoke. The reverse-termination-fee mechanism, where it exists, is expensive.
Interim-breach allegations are different. They are cheap to assert. They do not require the buyer to prove the kind of disproportionate, long-duration impact that an MAE requires. They put the burden on the seller to demonstrate that contested actions were ordinary course, which often requires the seller to produce documentary evidence going back years. They create negotiating leverage even if the underlying breach claims would ultimately fail on the merits, because the cost to the seller of litigating the question — in time, in discovery, in deal certainty — is substantial.
The result, in 2024-2026 practice, is that buyers send interim-breach letters in the run-up to closing more often than they used to. The letters often do not actually terminate the agreement; they assert breach, reserve rights, and open negotiation. The negotiation produces price reductions, expanded indemnities, or modified deal terms. In some fraction of cases the negotiation produces a termination — but the more common outcome is a closing on revised terms more favorable to the buyer than the original deal.
What sellers should fight for at signing
The covenant is part of the merger agreement that buyers’ counsel are inclined to wave through as boilerplate, and seller’s counsel often does the same. That mutual treatment is the source of the trap. The covenant deserves real drafting attention, and the drafting choices are specific.
First, the “ordinary course consistent with past practice” qualifier should be expanded to “ordinary course of business consistent with past practice or as reasonably necessary to operate the business in light of current circumstances.” This adds a sentence that future buyer’s counsel will cite to limit AB Stable’s reach. It is a small concession from the buyer’s perspective and a meaningful shift in the seller’s favor.
Second, the list of specifically prohibited actions should be tightened. Each item on the list should have a materiality threshold. “Entering into any material contract” should become “entering into any contract with annual revenue or expense above $X.” “Hiring or terminating any senior executive” should specify the title threshold. The threshold values are negotiable, but the principle is that the prohibited-action list should not sweep in routine operational decisions.
Third, the consent-request mechanism should be specific. The merger agreement should say what counts as a request for consent, how long the buyer has to respond, what happens if the buyer does not respond, and what standard the buyer must apply in deciding whether to consent. “Consent shall not be unreasonably withheld, conditioned, or delayed” is the baseline language; sellers should push for a specified response window (often three to five business days) after which silence is deemed consent, and should push for a list of specific reasons the buyer can withhold consent rather than allowing the buyer unbounded discretion.
Fourth, the carve-outs from the general obligation should be broadened to include actions disclosed in the seller’s interim operating plan delivered at signing. This is the most underused drafting move I see. The seller knows, at signing, what operational changes it intends to make in the next ninety days — hiring plans, vendor renewals, product-line decisions. Putting that plan in a schedule, and carving out actions taken consistent with the schedule, eliminates the buyer’s option to assert breach on the basis of changes the seller had already disclosed. Template-language work rarely includes this construction by default, but it is the cleanest seller-side answer to the interim-breach trap.
What sellers should do during the interregnum
Once the agreement is signed, the seller’s interim-period operating practice should be deliberate. Three habits matter.
First, document the ordinary-course basis for any operational decision that is at all out of the usual pattern. A memo to file describing the historical practice, the current decision, and the connection between them is cheap insurance against a later interim-breach allegation. The memo does not need to be elaborate; it needs to exist.
Second, route consent requests to the buyer in writing, with specificity about what is being asked and what the relevant historical practice is. Verbal consents from the deal team get lost when the deal goes sideways. Written consents with a thirty-day deemed-consent default are the procedural backbone of a clean interim period.
Third, treat the buyer’s diligence requests during the interim period as discovery, not as collaboration. The buyer’s questions about specific operational decisions are often the precursor to an interim-breach letter. The seller’s responses become evidence, and they should be prepared with the same care as the responses to a litigation document request would be. The M&A practice we run structures the interim-period communication channel through counsel for this reason, because the alternative — direct business-team communication — produces a record that is rarely as careful as the seller would want it to be three months later.
The pattern that is here to stay
The interim-breach playbook is not going away. The doctrine permits it, the recent Chancery cases reward it, and buyers’ counsel have been internalizing the playbook over the last several deal cycles. Sellers who treat the interim-operating covenant as boilerplate are signing an agreement whose most consequential operational provision is the one that gets the least attention at signing. The fix is at the drafting table. The covenant deserves the same negotiation rigor that the indemnity provisions and the closing conditions get. Sellers who give it that attention close deals on the terms they signed. Sellers who do not close on the terms the buyer is willing to revise to in the six weeks before closing.
If you are a founder, controlling stockholder, or general counsel running a business through a signed-but-not-yet-closed M&A transaction, 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.
