Having impacted nearly every area of the world economy, it’s no surprise that the COVID-19 pandemic has had severe effects on Mergers & Acquisitions (“M&A”) activity and deal-making. When approaching a potential new M&A transaction in the face of the volatility and unpredictability created by COVID-19, negotiators should consider a range of topics in order to determine how to best protect their interests while still making the deal happen.
The COVID-19 Pandemic has given rise to new challenges in deal-making
The first six months of 2020 has observed a massive decline in M&A activity with the total value of deals announced in H1 being US$901.7 billion. This is 53% below the same period last year and the lowest total in a half-year since H1 2010. Moreover, the average time to close a deal in H1 2020 increased by 8% to 156 days compared with 144 days in the same period in 2019—a trend that is likely to persist as companies try to wait out the worst of the recession.
Notably, in March, Xerox Holdings Corp. walked away from its $35 billion hostile cash-and-stock bid for HP Inc. after concerns of uncertainty brought on by the pandemic. Luxury giant LVMH considered renegotiating its deal to acquire jeweler Tiffany & Co., in part because it was concerned with the pandemic’s impact on Tiffany’s business. While the transaction is moving forward, its closing has been pushed back three months after Tiffany exercised an option.
Companies face additional uncertainty from trade disputes, the threat of a global recession, protests and political unrest, and a presidential election on the horizon. In the face of these challenges, attorneys and companies should take measures to protect their interests and avoid litigation.
Actions companies may take to avoid the risk of deal breakups and litigation during the Pandemic
Companies and attorneys must consider the impact of COVID-19 throughout every process of crafting an agreement. These considerations include:
Letters of intent: To avoid surprises and confirm expectations early on, parties may wish to negotiate a binding letter of intent that includes substantive terms of the transaction that the parties agree on early in the process. Additionally, parties may choose to include situation in which the deal will not move forward.
Due diligence: due diligence must focus on the acquired company’s contingency plans and the impact of COVID-19 on its operations and workforce; its customers and existing contracts; its financial wellbeing; and it’s compliance with federal, state and local laws and regulations. Companies should also examine information relating to the companies anti-discrimination and diversity-related policies as issues in this area may endanger a company’s image and subject it to lawsuits and other legal issues.
Representations and warranties: Parties typically provide certain representations and warranties, which are statements by the acquired party that certain facts about it are true. COVID-19 may have impacted the acquired party in a way that renders many commonly-used representations and warranties untrue. Parties should consider inserting representations and warranties that specifically cover COVID-19’s impact on different parts of the acquired company and its business.
Pre-closing covenants: It is not unusual for the target company to agree for the period of time between signing and closing to “operate in the ordinary course of business consistent with past practice” and to avoid certain actions. However, COVID-19 has lead companies to lay off or furlough employees, close locations, take actions necessary for public health, and add to or retract their product offerings. Parties should ensure that they are able to comply with such covenants. Consider inserting a clause whereby the parties agree to cooperate between signing and closing to seek to mitigate the potential implications of the pandemic on the transaction.
Financing: To avoid needless expenditures of time and money if a loan is not available, sellers should require a bank commitment letter from buyers early in the transaction process.
Termination Provisions: Consider an extended time frame for the “drop-dead” date of the transaction—the date on which the agreement may be terminated for any reason if the transaction has not closed. This makes room for delays due to travel restrictions, virtual meetings with employees, public health precautions, and more.
Breakup Fees: Breakup fees may be advantageous in this time of increased uncertainty. The parties may wish to negotiate for payment of a fee or of attorneys’ fees in the event that one party decides not to move forward with the transaction.
The COVID-19 pandemic could warrant inclusion of a specific indemnity (i.e., a hold harmless provision) for potential liabilities arising from the pandemic. The seller would compensate the buyer if such events were to occur. Sellers should attempt to focus a COVID-19 indemnification clause so that claims arising as a result of COVID-19 are only made under certain representations and warranties.
COVID-19 has changed the landscape of M&A transactions and without a proper treatment or vaccine to combat the novel coronavirus, these challenges are not expected to go away in the near future. Companies and lawyers must take additional measures to ensure that agreements foresee and plan for this uncertainty.