Everyone will agree that these are challenging times and it is therefore no surprise that statistics show M&A transactions have dropped significantly worldwide. Although, many deals have been delayed or fallen through as the Covid-19 virus continues to spread, even in the midst of a global pandemic, some deals are still continuing. We discuss a variety of ways that parties are navigating the deal making process during this period.
Due diligence and disclosure
Parties who are involved in deals during this time will need to give special consideration to the effects that the virus may have. The parties should consider:
- ensuring insurance policies are reviewed carefully - in particular any policies that relate to business interruption;
- sellers will need to consider whether there is a need to make any Covid-19 related disclosures;
- whether health and safety policies are in place that are safeguarding employees and complying with the government guidelines;
- whether any counterparties that have material contracts with the target are re-negotiating commercial terms or at risk of becoming insolvent. It would also be prudent to check if any non-performance by the target's counterparties due to the virus would result in the target breaching its obligations to other parties;
- the legal basis under the GDPR, to process health data on employees, visitors and customers and whether privacy notices cover processing for COVID-19 purposes and also to ensure that the licensing and data privacy implications have been considered as a result of staff working from home; and
- the financial solvency of the target and its ability to service its debt.
Warranties and indemnities
Buyers should consider seeking additional warranties relating to negative impacts of the virus on the target relating to business continuity processes and emergency protocols. If sellers are willing to grant these warranties, then sellers should resist forward-looking representations and repeating warranties.
Price consideration
Buyers will need to evaluate whether the impact of Covid-19 should be factored into the valuation of the target. It may be difficult to value the target at this time as some loss of revenue may only be temporary. Therefore, it may be necessary to consider mechanisms to offset the risks such as earn-out, locked-box, deferred consideration or post completion accounts adjustment.
Sellers will need to take into consideration the ability of the buyer to meet its payment obligations on completion. Escrow arrangements or parent company guarantees from the buyer could offset the potential risk that the buyer may not be able to meet its future payment obligations.
Material adverse change (MAC)
MAC clauses are a means of allocating the risks presented by adverse business or economic developments occurring. MAC clauses aim to give the buyer the ability to walk away from a deal before completion, if events occur that are detrimental to the target. For transactions structured with a split exchange and completion that are currently between exchange and completion, MAC clauses are being reviewed by the parties. Proving that an MAC clause has been triggered is a heavy burden to prove. Covid-19 has affected the market in general, and many MAC clauses will exclude the impact of macroeconomic events. Some parties have even specifically excluded coronavirus as a MAC event.
Timings
If regulatory approval from governing bodies such as the Financial Conduct Authority or the Competition and Markets Authority (CMA) is required this could take longer than anticipated as a result of the Covid-19. The CMA has stated that companies should expect delays between notification of a merger and the start of a formal investigation, and is encouraging parties to delay all new notifications. The CMA currently anticipates that it will be able to meet its statutory merger review deadlines once a merger notification is accepted.
Conclusion
Even in situations where deals are currently being delayed due to the impact of Covid-19, there is optimism among the investment community that deal-flow will bounce back fairly rapidly once the current stringent lockdown measures have been lifted. There is a lot of capital looking for a home and the investment community is using this period to identify new potential acquisition targets and to undertake due diligence on those targets, so they can move swiftly once overarching conditions allow.
We have published a series of insights into how Covid-19 is affecting businesses and our clients and all of these can be found on the dedicated portal on our website.
