Restrictive Covenant

Thou shalt not murder. That was a restrictive covenant from you-know-who.

And who knew you couldn't? Like...was that a sign posted on roads, like that whole 55 mph thing, or "yield"? No. So it had to be added as an extra warning, or a covenant. (And no, this term does not refer to the thing that came out of the ark and melted off the faces of the Nazis.)

Anyway, a restrictive covenant in a business deal or investment is one that doesn't allow company management or the board to operate with complete fiat. That is, there are certain things they must do before doing...other things. Or at least consider before doing other things.

Example:

A large distributor bought 5% of the equity of a company as part of a partnership deal to get drones on shelves of store chains. The covenant: as long as the investing company owned at least 5% of the stock of the drone company, that investor got a board seat, and if the company was ever sold, the distributor got a last-look bid, meaning that whatever was bid to buy the drone company from an outside party, that 5% stakeholder could bid one dollar more and become the proud new owner of a drone company. That was a restrictive covenant, because other buyers would be a lot less interested in buying if they knew that their last, best, and final offer could always be topped by an insider paying 95% of what they were...for a dollar.

Tough deal. Tough restrictive covenant.