A single health pandemic has affected the economic sector and the day-to-day business operations globally in an unprecedented manner. The impact of the pandemic is not only felt in the financial sector but in every sphere affecting deals relating to mergers and acquisitions. Some of the difficulties that might be encountered by a seller and a buyer involved in a mergers and acquisition transaction due to the crisis can be;
- Delay in due diligence and changes in the manner in which the due diligence is conducted.
- Third-party (customers, landlords, etc.) approval will take longer than usual.
- Negotiations will take longer.
- Buyers will think twice before they get into a transaction and will have concerns about their ability to value a seller in such a crisis.
In such an instance, it is important for both parties, to have sound knowledge of the impact COVID -19 can have on such transactions and evaluate counter mechanisms to evade such difficulties and risks.
Factors that the parties should consider when engaging in a mergers and acquisition transaction.
It must be pointed out that the impact of COVID -19 in relation to mergers and acquisition transactions should be assessed based on the current status of the transaction that the parties are in. That is whether the parties are in the initial stage of the transaction or in the negotiation stage or at the final stage of closing the transaction.
The parties are advised to reconsider the time frames, for instance, due diligence dates, etc. agreed under a memorandum of understanding, non-disclosure agreements at the initial stage, as the process could be different from what it was. If the parties are at the negotiation stage, the parties could introduce and include new terms regarding representations, warranties, and indemnities to the share purchase agreement.
The parties must also be cautious about financial arrangements, solvency risks, insurance policies, etc. when engaging in a mergers and acquisition transaction. Further, parties are strongly advised to reevaluate and recalculate the valuation of the target prior to confirming the previous valuation which was agreed by the parties prior to the crisis, since now there may be changes in the pricing mechanism which could affect the transaction tremendously.
Buyers may face additional hurdles in obtaining acquisition financing given the uncertainty in the credit markets that exist today, and those complexities may develop as the effects of COVID-19 on the global economy continue to evolve. With this in mind, parties should carefully consider applicable termination rights in the event of a failure to obtain acquisition financing. Buyers may be more likely to request a ‘financing out’ where one may not have been required previously, to address an increase in financing uncertainty. Sellers in turn may require additional protection through reverse break fees for financing failures, secured by guarantees or deposits at signing, which would be forfeited in the event of a financing failure. Lenders will continue to be focused on the terms of acquisition agreements, including how COVID-19 can have an impact on them and how well they are addressed.
Therefore, parties must be aware of the impact the pandemic can have on the transactions entered into by them with financial institutions, and post-acquisition funding must also be planned wisely.
Further, buyers experiencing the effects of COVID-19 in their own industries or businesses may seek to revisit signed deals and either refuse to close or seek to renegotiate the price or terms, despite closing conditions have been satisfied. In this scenario – depending on the governing law of the agreement – sellers may seek specific performance to force buyers to consummate the transaction where specific performance is expressly contemplated by the sale agreement. In the absence of an express provision in the sale agreement, specific performance is an equitable remedy and thus (depending on the governing law of the agreement) could be awarded by the courts where damages would be inadequate. Parties should consider carefully available remedies if a transaction fails as a result of COVID-19-related impacts on the parties.
The articles of association of the companies could be changed to effect that electronic signatures/electronic meetings are accepted when closing the transaction.
The parties should also have sound knowledge of the rules and regulations imposed by the government authorities in relation to safety measures, workplace health, data privacy rules, and changes in the employment law. It is advised for the parties to have knowledge on force majeure clauses in their contracts and on the clauses relating to their termination rights.
Will transactional risk insurance provide sufficient recourse to buyers so that a buy-side policy can serve as a replacement for or supplement to a traditional warranty and indemnity package?
Insurers are evaluating the risk of COVID-19 in underwriting policies and may seek to include broad exclusions for the effects of COVID-19 from coverage under the policy, or alternatively to exclude losses related to COVID-19 from coverage of particular representations and warranties. Parties will need to consider carefully the availability of transactional insurance coverage and any additional carve-outs that may be requested by insurers. Buyers should work with their brokers pre-signing in order to address the scope of any COVID-19-related exclusions. Insurers are also requiring that a robust due diligence exercise has been undertaken in light of the pandemic, especially in relation to the financial and operational aspects of the target business and the steps the target has taken to address the impacts of COVID-19. Insurers may request further exclusions from coverage as a result of COVID-19-related gaps in a buyer’s diligence process. Parties will also need to consider the allocation of ‘interim breach’ risks, which generally are not covered by transactional insurance, particularly in the context of COVID-19.
In this unpredictable, complex, and ambiguous time, life and business continuity in what is being called the ‘new normal’, but, in truth, the current economic environment is far from normal. In Mergers & Acquisitions transactions, as discussed above, special efforts must be taken to address and safeguard against unpredictability.
LL.B (London), Attorney-at-Law,
Commissioner for Oaths