The World Health Organization (WHO) declared the spread of the COVID-19 virus a global pandemic, and national governments declare emergency situations after one another. It is needless to say that uncertainty has taken its toll on the global economy.
The foregoing is expressly true to cross-border and domestic M&A transactions where within a very short period of time, sellers, purchasers and targets have suddenly found themselves and the other parties in considerably changed circumstances. With the outbreak of the coronavirus, planned and ongoing deals have been put into a significantly different perspective. In the following, we undertake to consider the main issues and focal points that need to be particularly considered within the course of a transaction process, in light of the current circumstances.
Due Diligence procedure
In addition to applying the set of review criteria generally applicable during due diligence procedures, it is important in the current situation to evaluate all risks associated with the economic impacts triggered by COVID-19. In consequence of the current crisis, several specific issues must be addressed in the course of the due diligence investigation: the company’s financial condition and the expectable prospects in light of COVID-19, its impact on supply chains, on customer contracts and employment relationships are only a few of the several issues that a potential buyer should specifically account with preliminarily when it comes to entering into a transaction during the current situation.
In case of transactions when the signing date and the effective date are different, it is generally declared in share purchase agreements that the seller shall ensure the ‘ordinary course of business’ in the company until the change in ownership takes effect and the company is taken over by the new owner. In the current situation it is safe to say that in most cases the ‘ordinary course of business’ is hard, or if not impossible to be maintained. Therefore, when it comes to drafting a share purchase agreement, the parties should cooperate in providing some comfort to seller by declaring that seller is allowed to take action to manage the impact of COVID-19 on the company. When transition is ongoing, it may be in the interest of all parties to consider modifying the agreement with joint understanding, and to provide seller the freedom to manage the setbacks triggered by COVID-19.
If the share purchase agreement has already been signed and representations and warranties have already been stipulated, the seller may check whether any of the warranties have been breached incidentally, in connection with the changed circumstances due to the coronavirus crisis. As the reps and warranties shall be repeated in most cases upon closing, the sudden changes may put seller in breach, which situation should be handled sooner than later.
In case if the deal is still in negotiation phase, purchasers may consider to address specific COVID-19 related issues in the form of warranties. As far as sellers are concerned, it may be expedient to disclose as much information regarding coronavirus-related setbacks as possible to avoid responsibility in the form of warranty breaches.
In case if a deal has been completed, buyer side may review the agreement and check whether the outbreak has triggered any warranty or indemnity obligations, e.g. in relation to the efficiency of crisis management at the company prior the takeover.
Material Adverse Change
As it is widely known, material adverse change (MAC) clauses are commonly used securing tools in corporate transactions. Typically, if a MAC occurs until closing, purchaser will be entitled to withdraw from the transaction without further consequences and therefore, the nonexistence of material adverse changes is a condition of the successful closing of a transaction. It is understandable that in the current situation, emphasis will be put on MAC clauses and purchasers will pay close attention on whether the impacts of COVID-19 caused a material adverse change at the company.
If the parties are in negotiation phase and they decide to insert a MAC clause in the share purchase agreement, they should decide on how they allocate between themselves the adverse effects caused by the virus. If the transaction is conducted in knowledge of the COVID-19 crisis from the start of the due diligence process, the parties may consider to exclude the impacts of the coronavirus-crisis from the circumstances which may serve as basis of material adverse changes.
Timing – Regulatory approvals and long stop date
Please note that the authorities of European Union member states are also heavily affected by the coronavirus-outbreak, and therefore, if the transaction is conditional to any regulatory approval (e.g. approval of the competition authority) regular deadlines for obtaining such approvals may no longer be applicable, as case handling deadlines may be much longer as usual.
The foregoing can obviously contribute to several further issues that have to be kept in mind: a longer deadline may affect the long stop date determined for closing the transaction, the period the ordinary course of business has to be ensured by seller, and may give to purchaser a greater margin of discretion to terminate the agreement based on material adverse change. If a long stop date is already in place and it is foreseeable that the date cannot be kept in consequence of the crisis, the parties should consider whether the agreement can be terminated on the foregoing basis, or to postpone the long stop date to a later point in time with joint understanding.
If the parties have not yet agreed in a long stop date, it may be expedient to consider whether to even determine an exact date in light of the coronavirus outbreak, or long stop date should rather be linked to e.g. the termination of the emergency situation declared by the government of the respective jurisdiction.
Dr. Gábor Márky is a Senior Associate at Jádi Németh Attorneys at Law