Mergers & Acquisitions amid COVID-19
The whole planet is witnessing a crisis due to novel coronavirus and so is the global economy. It is not a lesser known fact anymore that these exceptional circumstances are having a major effect on the worldwide business transactions. Quite similar is the scenario for merger and acquisition (M&A) transactions.
Due to this crisis, the buyers and sellers have been thrown in at the deep end. Undoubtedly, it is a hard time for them as they are now required to gear up to deal with the new risks and uncertainties posed by coronavirus (COVID-19).
While the buyers and sellers are busy grappling with these challenges in the deal-making process, keeping a heads up on the following considerations will help them:
Price Mechanism and Valuation
The pandemic has disrupted the supply chain, the companies are experiencing unusual inventory levels and businesses are facing a lot of hardships. Considering this situation, the investors should assume that the financial position of the company may differ post COVID-19. Many businesses may be affected due to the pandemic and the pricing risk may be an issue in the deal-making process too. Both the buyers and sellers shall seek to minimize their risks by buying at low valuations and selling on the historical financial valuations. Therefore, the assessment/ reassessment and adjustments in the valuations and the pricing mechanisms may be required.
Legal Due Diligence
Not that Virtual Data Rooms (VDRs) are new to the M&A world, but with restrictions on travel and movement during COVID-19, for the completion of legal due diligence and in order to adhere to the transaction timelines, their use alongwith other technological facilities is expected to increase over the use of manual records. However, in cases where the targets have maintained only manual records and no electronic record, the buyers and sellers may face delay until the lockdown in their jurisdictions is lifted.
To mitigate the risks and uncertainties posed by COVID-19, the buyers and sellers may have to exhaustively draft certain essential clauses of their agreements. The following clauses must be mindfully drafted:
Material adverse change
The “material adverse change” (MAC) provision in an agreement allocates the risk of adverse events in the target business between signing and closing between the deal-making parties. The parties will have to vigilantly consider what constitutes MAC and whether COVID-19 risks are to be included or not in this provision.
Like MAC, the force majeure clauses are drafted with an intent to include specific events. The parties to a deal must ensure that the transaction agreements specifically include COVID-19 as a force majeure event so as to cover the uncertainties caused due to the pandemic. The governing law and the circumstances that trigger the force majeure event must also be considered carefully by the parties.
The deal-making parties must understand that clauses like MAC and force majeure are to be tailor-made considering the circumstances the target business will have to go through due to the epidemic. In the current scenario, incorporating standard clauses might set them back.
Conditions Precedent, Representations & Warranties and other Covenants
In addition to the above, the buyers and sellers may have to closely negotiate these clauses under the transaction agreements. Incase of breach of any condition, the buyer may terminate the transactions and considering the uncertainties due to COVID-19, the sellers might not afford to refrain from specifically mentioning COVID-19-related risks in the transaction agreements.
During these exceptional times, some businesses may experience a downfall, whereas, others may even propel. If the businesses follow the correct approach by assessing risks, proactive planning and thinking beyond the conventional approaches of deal-making, this crisis can definitely be turned into opportunities