COVID-19 and its effects arrived very quickly meaning there was very little time for those planning or currently engaged in M&A transactions to plan for the likely consequences of the virus.
In this article, we look at some of the implications of COVID-19 on M&A transactions (whether currently in the planning stage, being executed, or completed).
Planning an M&A transaction during COVID-19
If you are currently planning an M&A transaction it is likely you may now experience some delay for a number of reasons:
“Any delay can be put to good use. Spend the time going through sample buyer due-diligence questionnaires and perform as much “house-keeping” as possible, review and update statutory books and registers, employment contracts, review and check insurance arrangements as well as business continuity and disaster recovery plans.”
The detail will become clearer over time but it is likely that the M&A data (Experian MarketIQ, Bureau Van Dijk, ONS and others) will show materially reduced M&A transaction volumes for Q1 and Q2 2020 and possibly stretching into Q3 2020. Whilst the outlook for a recovery is difficult to forecast, it is likely that when it does return, there will be a considerable uptick due to the large cash reserves (“dry powder”) within both PE and corporate buyers.
Live M&A transactions during COVID-19
There is likely to be an increased focus by Buyers on certain areas of due diligence:
Traditional “on site” due diligence and financial due diligence is also going to become harder if not impossible in the next few months as social distancing continues. Consider if much of this work can be completed remotely, i.e. providing access to key systems (subject to non disclosure and confidentiality agreements).
From a Seller’s perspective, potential areas to review:
Ultimately a Seller’s ability to renege on an agreed deal may be limited. Review the heads of terms and speak with advisors if in doubt.
Existing M&A transactions which have finished the due diligence stage but have not yet completed may continue through to completion or exchange, may be aborted by the buyer or seller or could be renegotiated. There will often be little a seller can do if a buyer simply walks away from a transaction but refer back to the heads of terms to see if this scenario is addressed.
For those transactions which are structured with a split exchange completion where exchange has taken place both the buyer and the seller will be checking the share sale and purchase agreement to see what post exchange termination rights there are. This should be defined tightly but may include the material adverse change (often known as a MAC clause) clause allowing a buyer to walk away in certain circumstances. This can be a technical process so if in doubt on this point seek advice from the advisor who advised you on your transaction.
Completed M&A transactions since COVID-19
M&A transactions which have completed may still feel the effect of COVID-19, especially those transactions which have any element of deferred, contingent or earn-out consideration. If work levels in the target business reduce as a result of COVID-19 it could be that earn-out levels cannot be met. Sellers who have agreed to unconditional but deferred consideration should be asking for financial updates from their buyer, how is their cash flow, are they within their banking covenants etc. Deferred consideration clauses should allow a seller access to this sort of financial information.
There may also be an increase in post-completion warranty or indemnity claims. Those claims could result from a target company’s disaster recovery plan or business continuity plan failing, or perhaps even IT issues. There could also be claims for insurance-related matters if the sellers have warranted that the business would be covered by business interruption insurance which fails to pay out.
If you have any questions on any of the above please don’t hesitate to contact;
*The information set out in this article is correct at the date of publication (06 April, 2020). The effect of coronavirus on businesses is a fast-changing area and so it is important to obtain legal advice to ensure you are properly protected.
If you have any questions regarding the impact of the Coronavirus upon your business or are seeking up-to-date legal advice on M&A transactions or buying and selling a business, contact Nick Davies on 01202 294 566 or email NickDavies@steeleraymond.co.uk.
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