New M&A Challenges in the Wake of COVID

Companies with M&A deals in the pipeline, as well as those who hope to embark on one in the next year, must now navigate dealmaking in an unprecedented climate. Dealmakers must pay special attention to these aspects of the transaction now that COVID-19 has spread across the globe.

Due Diligence

Buyers must undertake an enhanced due diligence process with a risk-based approach informed by norms and trends in their specific industry. Pay attention to related industries that may be affected, especially when those industries might affect the supply chain. Review all agreements and legal documents, and assess how COVID has affected the business so far. Sellers can prepare for this process by preparing relevant information and being responsive to buyer requests. This builds trust and confidence and may ultimately build business value.

Pre-Signing Clauses

Transactions that are in the pre-signing stage may need to negotiate specific clauses, including good faith limitations. Identify available remedies if either party walks away, and clearly identify that the transaction is subject to agreement on all transaction documents. Boards on both sides of the deal must be mindful of their legal obligations and be prepared to oversee the deal.

Timelines and Conditions

Sellers face an environment of less certainty, while buyers may be able to find more sellers interested in a transaction. Buyers should consider whether to include specific provisions addressing issues such as:

• force majeure
• termination rights
• MAC/MAE
• conditions related to business performance
• appraisal conditions
• non-performance or delayed performance by important suppliers
• COVID-19-related aid and taxes

Pre-Completion Covenants

Between signing and closing, interim operating covenants mandate that the seller maintain the ordinary course of business. This can be difficult in the midst of a pandemic, since surviving may require significant changes to how the business is run. The buyer and seller should devote time to hammering out the specific meaning of these covenants.

Representations and Warranties Insurance

The parties must discuss and examine representations and warranties in exhaustive detail. The buyer may demand additional representations in light of COVID, particularly regarding contingency planning. The buyer may also ask for additional disclosures.

Purchase Price

COVID may cause the parties to revisit the purchase price. The effect of the outbreak is uncertain, so a locked box mechanism may no longer be appropriate. Instead, buyers may want to continue discussing the price based on an adjustment mechanism, such as net debt/working capital or net asset value.

The Mechanics of Closing

Once-overlooked closing actions may become critical, and parties should consider how the need for distance-based closing might affect the process. If you opt for in-person closing, consider strategies for mitigating risk, and ensure all original documents are available to reduce the need for additional attendees and more public exposure.

Transactions Between Signing and Closing

Transactions that have already been signed and have not yet closed face an additional set of hurdles. The parties may need to manage a number of issues, including:

• renegotiating termination rights
• buyer attempts to renegotiate the purchase price
• changing closing timeline
• longer government approvals shifting deadlines back
• W&I insurance coverage
• changes in the company’s operations due to COVID