The coronavirus (COVID-19) pandemic is having a profound effect on mergers & acquisitions. Some transactions are on hold until market conditions stabilize, while others are proceeding forward cautiously on both the buy and sell side.
Given the uncertainty surrounding the pandemic, it is reasonable that many entities have put deals on hold while the dust settles. At the same time, there are ways to move forward with M&A transactions, while protecting your legal interests. Below are several key issues that parties will likely have to address:
- Price renegotiations: Buyers who are concerned that the target company may no longer be worth the agreed upon price may seek to reopen negotiations. The use of earns outs — where the purchase price is contingent on the “future performance” of the target company — may help address buyer concerns that the transaction has become more risky. Other tools that can be used to bridge valuation gaps may depend on the type of transaction. If the deal involves someone along your production/supply/distribution chain, sellers may be able to make product sale with deferred payment bank financed or equity payment transactions. If the transaction is with employees, family members, or friends, it may be possible to use a combination equity, promissory notes, receivable assignments, transfer of certain assets (such as intellectual party) to a new holding company with rights retained by present owner and assignment to new owners contingent on payment.
- Enhanced due diligence: Buyers may often need to conduct further due diligence to determine the overall economic impact of COVID-19 on the target business. Issues that may be examined include the impact of quarantines/travel restrictions, supply chain disruptions, contract enforcement (i.e. contract terminations, breaches, and force majeure notices), the availability of insurance coverage for COVID-19 related losses, and the availability of sufficient staff.
- Material Adverse Effect: The parties will likely revisit how their agreement defines “material adverse effect” or “material adverse change” in light of COVID-19. For sellers, it is advantageous to include a carve-out to the definition to exclude pandemics or other government-mandated business closures. Meanwhile, buyers may want to limit the scope of such a request by clarifying that any such event impacts the greater U.S. or global economy but does not have a material disproportionate adverse effect on the seller.
- PPP considerations. For sellers which have taken PPP loans, Buyers will need to consider how to address, including how the sale will impact the conversion to a grant (if available) and how the PPP funds have been spent.
- Representation and warranties insurance: For transactions involving the use of representation and warranties insurance, it is important to understand that underwriters are increasingly requiring that COVID-19 claims be expressly excluded from coverage. Accordingly, buyers and sellers will need to consider the ramifications of this exclusion and determine how risk will be reallocated between the parties.
Prior to COVID-19, mergers and acquisitions required careful consideration of numerous business and legal issues. The ongoing pandemic and resulting economic volatility has only made the process more complex. Scarinci Hollenbeck’s experienced business attorneys remain committed to helping businesses successfully navigate these uncertain times.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Jeff Cassin, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.