COVID-19 impact on M&A transactions
For many transactions, where the seller is responsible for delivering the target business in a particular state, this will be a very significant (or even impossible) challenge. From the buyer’s perspective, it will want to ensure that it understands the risks associated with the target business it is acquiring and that, in certain circumstances, it is not obliged to complete the transaction. The implications will also vary depending on the stage of the transaction.
COVID-19 will inevitably be a complicating factor at each stage of an M&A transaction. Where an agreement has already been signed, parties should look at whether some provisions in the agreement could be triggered or affected by the impact of the virus. Where a transaction is at an earlier stage in the process, parties should consider how they want to limit, or define, the risk allocation between them or indeed proceed at all until the impact becomes clearer.
We consider its potential impact on M&A and other corporate transactions below and see here for our flowchart summary of this potential impact.
See our Coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.
M&A transactions
Due diligence
Buyers will want to understand and evaluate how the virus might affect the target company and should consider more extensive/specific due diligence. For example, it might need to understand the virus’ impact on the target company’s financial condition and prospects, supply chains, key customer/supply contracts, banking agreements, joint venture agreements, insurance policies, company policies (e.g. employees), what contingency planning has been done, and other key risks.
In addition, the solvency of the target business should also be reviewed (this will also have an impact on the covenants included in any credit facility) to see if the business is in a position to withstand any liquidity issues in the aftermath of the outbreak (especially in sectors most obviously hit such as hospitality, aviation, retail, etc.).
A review of potential changes in laws or practice, anticipated to arise due to the outbreak, such as changes to work place leave policies, and how this will impact ongoing operations and compliance matters, should also be considered.
Pre-closing undertakings
Where there is a gap between signing and completion a seller will normally give various undertakings about how the business will be operated during that period (taking into account any restrictions pursuant to applicable competition law). This usually includes an undertaking to continue to operate the business “in the ordinary course”. A seller may want some right to operate outside the ordinary course without the buyer’s consent where necessary to deal with the virus – for example, if it was forced to suspend a substantial part of its business due to the impact of the coronavirus.
Representations / warranties
If representations and warranties have already been given, the seller needs to check that it has not inadvertently breached any of them or that they can still be repeated at closing, if applicable, without any additional disclosures being made.
If the agreement is still being negotiated, a buyer needs to consider whether it should include some COVID-19 specific warranties as a way of eliciting more information about any risks and potential impacts of the virus on the target business.
For a seller, disclosures against the warranties need to be considered carefully to ensure that all potential implications of this virus have been addressed. Where there is warranty and indemnity insurance (which provides cover for losses arising from a breach of warranty or in certain cases under an indemnity) known issues are unlikely to be covered by the W&I policies (and certain providers are already looking at including specific exclusions).
There may also be a rise in demand for key person insurance policies for business succession or business protection purposes.
Completed deals
Circumstances arising from the outbreak may shine a light on issues giving rise to potential claims for breach of warranties and indemnities in respect of deals already completed and where contractual or statutory limitation periods have not yet expired. An example might be in relation to the efficacy of crisis management procedures or plans. Completed transactions should, where appropriate, be reviewed in this context.
Termination rights
Material adverse change (MAC) clauses – these clauses usually give the buyer the ability to terminate the agreement if there is a material adverse change or effect with respect to the target’s business after the signing date but before completion. What constitutes a material adverse change or effect is negotiated between the parties and is often subject to several exclusions (which may themselves be subject to further exclusions) and every MAC clause is therefore fact-specific.
If the parties choose to include a MAC clause, they will need to decide how any adverse consequences of the virus are allocated between them. In general, parties have already started considering the inclusion of specific references to COVID-19, epidemics and pandemics as an exclusion from the circumstances which would cause or have a material adverse effect – or specifying that, for there to be a MAC, the impact of COVID-19 on the applicable party must be disproportionate by comparison with others.
In respect of deals that have already been entered into, a party seeking to rely on the MAC in question will need to carefully consider whether the MAC can be invoked in light of the virus (generally speaking, courts have historically been reluctant to invoke MAC clauses).
Force majeure clause – this is a clause that relieves a party from its obligations to perform the contract in certain extreme circumstances. Force majeure is a statutory defence for a breach of contract pursuant to Dutch law and, as such, a specific force majeure provision would not necessarily need to be included in an agreement to allow a party to rely on it. However, parties could exclude or restrict the rights to this statutory defence, which – in practice – they often do. Please note that the force majeure defence is unavailable when a party terminates the agreement (pursuant to a contractual or statutory termination right).
Whether the coronavirus outbreak and / or the resulting government restrictions are covered will mainly be determined by the contract, in general, and, more specific, the definition of force majeure. Many contracts define what constitutes a force majeure event by reference to events “beyond the reasonable control of a party” and contain a non-exhaustive list of the type of events covered. Parties will need to consider the wording of such clauses carefully to see whether they can rely on them or want to challenge them.
Timings
Regulatory approvals – the time taken to obtain regulatory approvals could be affected if government or regulatory bodies are forced to close due to the outbreak. This in turn could impact any long stop date for completion of the transaction, lengthen the period during which the seller has to operate in the ordinary course and may give the buyer a greater ability to terminate for a material adverse change.
Long-stop dates – a typical long-stop date clause gives a party the right to terminate an agreement if the completion has not occurred by a particular date. If a long-stop date is already in place and completion is now unlikely to occur as a result of the virus, a party should consider whether (i) a party can terminate the agreement as a result; and (ii) the long-stop date should, if possible, be extended with the agreement of the other party (depending on the circumstances, this might even be part of a wider re-negotiation of the deal.)
Where the long-stop date has not yet been agreed, consider whether it is possible to actually include one or if it should be further in the future than it otherwise might have been, to allow for these challenging circumstances.
Financing
The virus could impact the availability of acquisition financing, including bridge facilities and permanent/takeout financing, and the terms of that financing; as well as what due diligence the finance provider wants to carry out on the target and, in some cases, the buyer.
Target companies are likely to be active in trying to obtain covenant waivers where they expect defaults of relevant financial covenants.
Earnouts
If there is an earnout in the acquisition agreement, parties need to consider whether this pandemic is a factor that can be taken into account or will be ignored when calculating the earnout.
Locked box
It is possible that deals that were otherwise planned to have locked box mechanisms will move to more completion-accounts-style working capital adjustments to account for the uncertainties and fluctuations around performance and receivables.
Project management
Careful consideration will have to be given to the practical implications of progressing a transaction in the current environment. For example, many dealmakers have also suspended travel and are having to work from home, which makes pursuing and agreeing deals far more difficult. In addition to the challenges of remote working, the availability of dealmakers/advisers/key players should also be taken into account and contingency plans put into place to cover illness and other foreseeable consequences of the virus (there will inevitably need to be even more conference/video calls if a deal is to be agreed.)
General corporate transactions
General meetings
Companies will need to consider how they can hold general meetings as part of their contingency planning. With the 2020 AGM season commencing this will apply to AGMs and the need for companies to approve routine business such as the approval of final dividends as well as the convening of general meetings to approve specific corporate actions.
For certain specific resolutions to be taken at the AGM, Dutch law or the relevant articles of association of Dutch listed companies may prescribe that a minimum percentage of the issued share capital must be represented at the AGM in order to validly resolve on the specific matter. Government policy discouraging social gatherings and therefore physical attendance at meetings, securing a means of attendance and shareholder engagement will present some challenge in this respect. However, there are several measures that can be implemented to resolve this complication:
• Shareholders can be actively informed that – due to the current circumstances – they are discouraged from attending the AGM, but can issue a proxy to a representative or proxy collector to represent them at the AGM;
• If the articles of association so permit, shareholders can be invited to vote electronically or by regular mail prior to the AGM;
• If articles of association so permit, virtual attendance online or by other means of electronic communication can be facilitated.
It will be necessary for companies to evaluate these provisions and logistical arrangements with their lawyers, registrars and auditors in order to determine the best option in all the circumstances.
Financial reporting
Companies will need to consider what disclosures they make about the virus in their annual report and accounts. An important element of financial reporting remains the provision of insight into the (financial) risks that the company experiences. As such companies will need to monitor developments and ensure they are providing up-to-date and meaningful disclosures in their annual reports.
In connection with issues arising from COVID-19 companies should take into account that, in the current circumstances, additional time may be required to complete audits. At this stage it is unclear whether leniency will be granted with respect to the (otherwise) strict statutory reporting deadlines.
Disclosure obligations
Publicly traded companies need to be mindful of their responsibilities to disclose inside information under the EU Market Abuse Regulation.
Relevant inside information could include adverse changes in a company’s trading performance (or expectations of performance) arising from the impacts of the virus (for example, disruption to supply chains or reduced customer demand), even where the root cause of the issue is publicly known. For example, a number of listed airlines have updated the market on the impact of the outbreak on passenger numbers. Companies will also need to consider the inclusion of specific risk factors arising from the outbreak in public circulars/prospectuses.
