M&A transactions in the face of the coronavirus
M&A deals are one of the tools for pursuing business. For some they are a method for expanding their scale of operations or generating synergies, and for others allow them to exit investments or raise capital. Thus the turbulence now felt by businesses is impacting their activity in the M&A market.
While refraining from evaluating the economic impacts of the current situation, we focus on analysing selected legal aspects.
Transactions in progress
In the classic M&A model, after agreeing on the terms of the transaction, the parties sign a contract (preliminary or final) and enter into an interim period leading up to closing of the transaction.
During the interim period, the parties are required to take certain actions specified in the contract (e.g. obtaining approvals from competent authorities or third parties, concluding certain contracts, taking remedial measures to cure issues disclosed during due diligence, and the like). Meanwhile, the subject of the transaction (company, enterprise or collection of assets) should continue to pursue business as usual.
The occurrence of the coronavirus pandemic and the resulting practical consequences (such as illness of employees) and legal consequences (in extreme instances, resulting in a restriction or temporary shutdown of activity) may impact the economic assumptions underlying the contract signed by the parties. This primarily concerns the valuation of the target and the mechanisms for setting the final price (whether based on a closing-accounts model or a locked-box model).
Limitations on the work of courts, state offices, banks and other institutions may also lead at least to delay in fulfilling conditions for closing the transaction (e.g. obtaining approval from competition authorities) or in carrying out activities foreseen by the parties during the interim period (e.g. corporate changes requiring entry in the National Court Register, deletion of pledges or mortgages, and the like).
This presents the risk that the transaction cannot be closed by the long-stop date set by the parties, which in turns gives rise to a risk of automatic dissolution of the contract or termination by one of the parties.
The situation connected with the coronavirus pandemic may also result in occurrence of circumstances expressly provided for in the contract, particularly a material adverse change or effect, typically giving the parties (or one of them) the ability to terminate the contract due a worsening situation of the target (e.g. a certain decline in turnover, increased indebtedness, etc).
Finally, although it cannot be assumed that it will automatically apply to all transactions, the pandemic and its consequences may in certain instances provide grounds for either of the parties to rely on an extraordinary change in circumstances (rebus sic stantibus) or force majeure. Here much will depend on whether in the contract the parties have modified the statutory construction of these institutions.
Categorical, universal conclusions cannot be drawn for either of these aspects of M&A projects. Just as the transaction agreement is drafted through a process of bilateral or multilateral negotiations, and thus greatly individualised, so the measures which the parties should pursue in the current situation must be determined on a case-by-case basis.
Obviously, in certain instances unilateral action may be considered aimed at renouncing the contract (e.g. if the transaction has entirely lost its purpose for one of the parties) or modifying the contract due to a change in circumstances. But it seems that most often the solution will be dialogue between the parties, seeking solutions through good-faith negotiations.
A consequence of the coronavirus epidemic that is understandable and can already be observed is a reduction in activity connected with new M&A deals.
Of course in an age of progressive digitalisation there is no barrier to continuing due diligence already begun, or even beginning new due diligence projects. Such processes may be conducted successively on an entirely remote basis. But the review must appropriately reflect circumstances related to the pandemic and their impact on the current and future condition of the target.
From the perspective of negotiation and drafting of the terms of transactional agreements (which can also be conducted remotely), it should nonetheless be borne in mind that concluding new contracts during a pandemic may in certain circumstances be regarded as imprudent and deprive the parties of protection in the future (as we write here). Thus it cannot be excluded that the other party will allege that a rational undertaking concluding a contract during a pandemic must foresee difficulties related to the current situation and take them into account when incurring new obligations, to ensure that they can be performed.
Thus in contracts currently being negotiated, provisions should be included addressing potential inability to perform contractual obligations due to the coronavirus pandemic. This may involve in particular appropriate framing of provisions on force majeure or circumstances excluding the parties’ liability.
Obviously, both the scope and wording of specific provisions must be tailored in each case to the peculiarities and conditions of the particular transaction.
The long-term legal consequences of the coronavirus pandemic can hardly be predicted at this point, as the situation is highly dynamic and depends on too many factors.
It may be anticipated, however, that the parties may suddenly take a new approach to standard “boilerplate” clauses in M&A contracts. In the past, parties often paid little attention to such clauses, in particular concerning force majeure and its consequences, regarding them as relatively unimportant—incorrectly, as we now know.
Maciej A. Szewczyk, attorney-at-law, Izabela Zielińska-Barłożek, attorney-at-law, Anna Dąbrowska, attorney-at-law, M&A and Corporate practice, Wardyński & Partners