COVID-19 is already having a significant impact on current and pending mergers and acquisition (M&A) transactions.
For some companies, especially those experiencing substantial supply chain disruption, there may be strategic opportunities (or necessities) to become involved in accelerated funding or acquisition arrangements (for example with key/dependant suppliers) in order to protect their own businesses.
Other parties who had already contractually committed to transactions before the full impact of the pandemic became apparent may have conflicting priorities.
Key issues to consider in mergers and acquisition transactions
We have listed below some of the key issues to consider.
For transactions which have already completed:
Buyers will want to check if they have any recourse against sellers under warranties, indemnities or covenants provided in the transaction documents. For example, although warranties will probably only have been given by sellers in respect of matters arising up to completion (ie before the impact of COVID-19), some warranties may still be available for possible claims – such as warranties relating to the efficacy of the target businesses disaster recovery/business continuity plans.
For those sellers who have agreed to part of the purchase price being deferred, they may want to check acceleration triggers relating to such payments and in particular security arrangements in the event of possible default if the buyer suffers financial difficulties.
Buyers and sellers may wish to consider getting post transaction M&A insurance, although its availability and cost is likely to be much more restricted and expensive than had previously been the case.
For transactions which have already exchanged but not yet completed:
Buyers will want to check their ability to terminate the agreement or defer completion (and/or force a price renegotiation). This will depend in particular on whether contractual termination rights have been included in the transaction documentation, for example linked with material adverse events.
If the seller is required to repeat warranties at completion, it will want to check that it is also entitled to make disclosure at completion. The buyer will want to check that any such disclosure will not force it into a position of having to accept completion without recourse.
Both parties should check the provisions relating to conduct of business in the interim period between exchange and completion. The buyer is likely to want to have input into COVID-19 related communications to employees, customers and suppliers.
Both parties will want to check any relevant insurances that the target may have to assist with the business impact of COVID-19.
The commercial impact of the pandemic may have changed the relevance or parameters of previously agreed deal pricing arrangements, such as earn outs. If possible, a buyer may want to increase the element of the total price referable to future performance, in order to de-risk the transaction.
For transactions where the buyer did not have committed funding arrangements in place at the time of exchange, deal financing may be more expensive and it could risk being in breach if it fails to complete as a result.
For transaction processes which are continuing, possibly because they involve a target in a key sector which has critical advantages during a pandemic scenario, or a distressed target:
Cash buyers, and buyers who do not require regulatory approval, are likely to be even more attractive than usual.
W&I insurance is likely to be considered and reviewed for cost effectiveness.
Bespoke warranties relating to business continuity, supply chain risk and force majeure contractual/risks (and relating due diligence) are likely to become more significant.
If you have any questions regarding the impact of COVID-19 on an existing or pending transaction, please contact a member of the Paris Smith corporate team.
We have a page “Coronavirus – Legal advice and guidance” which is continually being updated as new/updated guidance comes through from the government and other regulatory bodies. Check back to the page regularly to keep abreast of current guidance.
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