Coronavirus Impact On M&A Transactions: A Legal Explainer
The outbreak and the rapid spread of Covid-19 has sent shock waves across global markets. It has disrupted supply chains, leading to closure of several manufacturing facilities globally; serious disruption of air and sea traffic and closure of vital air routes, like the one between the U.S. and Europe. This is turn has led to the collapse of stock markets around the world, leading to the loss of billions of dollars, which got wiped out in a matter of days.
A combination of all these factors has led to a decline in the overall volume of global economic activity, forcing the world economy towards a possible recession. It is forcing Boards across the globe to confront a host of difficult questions on how business should be conducted during a global public health crisis.
Among the many legal questions that need answering is the impact on mergers and acquisitions. This guide below has been excerpted from a report published by law firm Cyril Amarchand Mangaldas.
Would Covid-19 Pandemic Amount To “Material Adverse Change”?
Whether a MAC has or has not been triggered would need to be assessed on a case by case basis, depending on the impact of the event on the target company and would depend heavily on the specific wording of the MAC clause.
Factors to be considered to assess whether a MAC has been triggered would include:
- the sector and market within which an entity is operating, since the Covid-19 pandemic may not have the same effect across industries/companies/ geographies;
- the governing law of a MAC clause, to assess enforceability.
- whether any outbreak, pandemic or other similar events is specifically excluded from the applicable MAC definition (which is likely in a seller-favorable MAC definition). Such language could imply that Covid-19 will not constitute a MAC.
- other typical exclusions in the MAC definition (e.g. general economic conditions, force majeure) that could arguably exclude the outbreak, even if pandemics are not specifically excluded. However, many MAC definitions contain an exception to the exclusions to account for situations where the event in question has a disproportionate effect on the target company compared to others in its industry, and in such cases, the specific circumstances of the target company in question will be relevant to the analysis.
All in all, unless the Covid-19 pandemic clearly fits into an exception to the applicable MAC definition, it will be based on the judgment of the courts/tribunal as to whether a MAC has occurred. While Indian courts have historically been reluctant to excuse buyers from their obligations to consummate a transaction on the basis that a MAC has occurred, it will be interesting to watch how the jurisprudence evolves given the current situation.
What Aspects Should Be Considered While Negotiating A MAC Clause In Light Of Covid–19?
With respect to M&A transactions that are currently under negotiation, parties should consider specifically addressing how the Covid-19 pandemic should be treated in the agreement. This will provide clarity about the risk that could impact the transaction. Sellers are likely to suggest that any negative effects from the Covid-19 pandemic cannot impact the transaction. Buyers may not be willing to take risks arising from the Covid-19 pandemic. Given the courts’ approach to strictly interpret MAC clauses, buyers should not rely on general terms and they should negotiate a specific closing condition, if commercially required, regarding the spread of the Covid-19 outbreak. Sellers are unlikely to take deal execution risks relating to Covid-19 and are likely to push back on the buyers seeking specific closing conditions or pause the transaction to allow the Covid-19 pandemic and its consequences to play out. As in any other case of a known risk, parties will need to find a mutually agreeable position and document the same clearly.
What Could Be The Impact Of Covid-19 On The Due Diligence Process?
The Covid-19 pandemic may significantly reduce accessibility, communication and physical meetings. Sellers should consider including information in the virtual data room about the possible impact of the pandemic on the target including, relevant, appropriate mitigation and contingency plans. Buyers should consider conducting due diligence on the level of risk to business continuity and on the target’s scenario planning.
Further, Covid-19 pandemic may cause delays to due diligence activities, including the impossibility to conduct on-site audits and inspections, and exercising the relevant access rights. For all these reasons, the opportunity to negotiate a later long-stop date, allowing extra time to complete the due diligence, should also be explored.
From the buyers’ perspective, the following aspects should be considered while conducting due diligence:
- The ability of the target to perform under the existing material agreements.
- Whether any legal or contractual protections have been provided for non-performance or non-compliance of contractual obligations. Buyers should also check under what circumstances can material agreements be terminated and whether any force majeure clauses may be invoked.
- Possible impact of supply chain disruption, impact on the target’s revenues or risk of insolvency.
- Change in law risk (impact of travel restrictions, quarantine measures, and government mandated closures).
- Target’s existing insurance and need for any future insurance for business and employees.
- Target’s capability to ensure precautionary measures and crisis management capabilities.
Would Compliance Of Condition Precedents And Standstill Related Covenants Be Affected?
Sellers should consider whether standstill covenants – i.e. obligation to operate the business of the target in the ordinary course of the business and to refrain from taking certain actions without buyer’s approval – may conflict with a target’s need to respond to the Covid-19 pandemic, and whether any carve outs are required. Sellers should assess ways to limit interactions or potential exposure to Covid-19 across their supply chains. They will also have to look at how it might be construed and whether a buyer’s consent would be needed to undertake such actions. Parties should also evaluate whether to extend closing deadlines where delay is likely to be caused by the Covid-19 outbreak. Additionally, if a possible impact of Covid-19 on the target is identified during due diligence, buyers should consider including a condition precedent to protect themselves from its impact.
What Warranties Should Buyers Consider? What Considerations Should Sellers Keep In Mind In This Context?
Buyers should consider requesting warranties around risk assessments, scenario planning, adequate insurance and adverse impact of COVID-19.
Sellers conceding these should seek knowledge and materiality qualifiers.
Sellers should consider a general Covid-19-related exclusion of liability. Ring-fencing of such clauses may be explored such that Covid-19-related claims can only be made under specific warranties and not under general warranties. Buyer’s knowledge, changes in law and other limitations may also be relevant in this context. Where warranty insurance is being considered, the Covid-19 outbreak could also impact exclusions in the policy.
What Disclosures Should Be Considered?
Sellers should carefully evaluate the need for Covid-19-related disclosures (for example against material contracts warranties), being as specific as possible to satisfy any requirement for fair disclosure.
Could Covid-19 Pandemic Result In Any Breach Of Representations And Warranties?
The disruption brought by the Covid-19 outbreak may also result in certain representations and warranties given by a seller and target no longer being true when repeated at closing. All parties should conduct a comprehensive assessment of the impact that the Covid-19 outbreak may have on the representations and warranties.
Could Covid-19 Outbreak Result In Delayed Closing Or Termination Event?
The challenges posed by the Covid-19 outbreak may cause delays in closing of M&A transactions – for instance, if conditions precedent require a court order or regulatory approval to be obtained, the same may be delayed on account of various emergency measures, which have been put in place. The parties required to satisfy any closing conditions that may be delayed should consult with their counterparties to manage expectations and negotiate the appropriate waivers. Parties may consider moving certain closing conditions to the post-completion covenants or extending the long-stop date. The persistence of the Covid-19 pandemic may also lead to the occurrence of a range of termination events. The parties should evaluate carefully if a termination event has occurred or is likely to occur, due to the present Covid-19 situation and its foreseeable impact.
Would The Ability To Hold Physical Meetings Be Hampered?
With exceptional travel restrictions and safety measures being imposed by various governments, it may not be possible (or advisable) for in-person meetings to be held, which may impact negotiations, signing and internal management of both parties. Parties should consider re-arranging their schedules accordingly and ensuring a secure access to support remote and virtual communications.
This has been excerpted from a Covid-19 report authored by Cyril Amarchand Mangaldas partner Bharat Vasani and associates Molla Hasan, Samiksha Pednekar and Esha Himadri.
The views expressed here are those of the authors, and do not necessarily represent the views of BloombergQuint or its editorial team.