COVID-19 nervous breakdown. The swiftly spreading coronavirus has greatly disrupted the M&A market. Nevertheless, observe attorneys Mark Director, John Pollack, George Stamas, and Pavel Shaitanoff, strategy, opportunity, and urgency are still driving deals, albeit with many new concerns. Purchasers and sellers should carefully negotiate material-adverse effect or material-adverse change (MAE/MAC) clauses that expressly allocate COVID-19 risks. The clauses could exclude those risks altogether or state quantitative or qualitative impacts of the disease—monetary, operational, or both—that would constitute an MAE/MAC.
Pre-pandemic clauses, which would naturally be silent on COVID-19, might generate serious disputes. Termination rights and fees have always been—and now should be even more—intensely negotiated. A termination provision with an “outside date” ceases to be routine, since such closing conditions as consents from third parties, agreements with lenders, and approvals by government agencies (particularly the SEC) could be much harder or take much longer to obtain than before the pandemic. For example, the early-termination alternative for antitrust review under the Hart-Scott-Rodino Act is on hold. The parties must decide who assumes the risk of delay and for how long.
You can’t always vet what you want. COVID-19 has also made due diligence problematic. Some data that purchasers look for, including how the target has withstood comparable past troubles, might not exist. Projections have invariably been hard to make and evaluate, and they are now even more difficult. With coronavirus precautions, the authors warn, on-site visits and face-to-face meetings, particularly in cross-border deals, might be imprudent or illegal. Pandemic-specific representations and warranties could provide more certainty but would be difficult to draft in such an unstable atmosphere, as would remedies for violations. Purchasers usually demand covenants requiring that sellers operate the target in the
“ordinary course” from signing to closing so as to protect its value, although not to preserve its financial condition. The covenants should spell out the seller’s obligations to maintain liquidity, refinance loans, and manage working capital during the pandemic. The parties should, however, be aware that the seller’s fiduciary duties might compel the violation of covenants to deal with emergencies that the pandemic creates.
No satisfaction with insurance. Either party could shop for post-deal indemnification in the form of representation-and warranty insurance, note the authors, but they should anticipate that carriers will refuse coverage of losses related to COVID-19, now a known risk. For unconsummated deals signed before the pandemic, carriers will exclude COVID-19’s effects when the parties bring down to the closing date those representations and warranties they made as of the signing date. While insurance for “business interruptions,” if affordable, might be worthwhile too, a satisfactory definition of that term is crucial. The pandemic might force the parties to diverge from the usual adjustments to the purchase price. Sellers who fear having to take drastic steps to preserve the target’s liquidity will try to sidestep excessive penalties by limiting adjustment clauses, while purchasers will naturally want to be comfortable with the liquidity parameters.
To read the full article in Dimensions Vol. 2020, No. 4, click here.
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