How COVID-19 is Affecting M&A Deals
There are three key consequences this crisis may have for joint ventures, mergers, and acquisitions. Local rules, judicial precedent, and individual industry factors may further complicate things.
The COVID-19 pandemic is truly unprecedented, generating serious legal challenges. Labor and health are witnessing significant legal issues because of how the pandemic is affecting long-term contracts. There are three key consequences this crisis may have for joint ventures, mergers, and acquisitions. Local rules, judicial precedent, and individual industry factors may further complicate things.
M&As Currently in Negotiation
The parties must first assess whether they have any obligation to move forward with negotiations. A memorandum of understanding, letter of intent, or other instrument may govern the shape of negotiations. Normally these contracts indicate whether they are binding or non-binding.
The parties must evaluate whether they should cleanly exit the deal or try to move forward. If negotiations end, the parties must agree to adequate terms for the confidentiality or non-disclosure agreement. If one party receives confidential information, they must return physical materials, destroy files, and take other actions to comply. It’s similarly important to terminate service agreements of various expert advisors and to pay them according to their contracts.
When the parties elect to move forward, it’s important to expand legal, financial, and due diligence investigations to assess the effects of the pandemic on the business. Both parties must work together to mitigate these effects and to develop a negotiation strategy that is mindful of COVID.
Signed Mergers That Have Not Been Closed
When deals have not yet closed, it’s important to evaluate whether the parties intend to move forward as planned, or to seek an amendment to the commercial or legal conditions to which they initially agreed. In either scenario, a re-analysis of the conditions for closing the transaction is critical, particularly if COVID makes it impossible to fulfill certain conditions. Pay close attention to representations and warranties that the crisis may render impossible to fulfill.
The parties must also assess whether the changing climate constitutes a material adverse change. These clauses give the parties a chance to withdraw or request a modification in certain circumstances. The parties will also need to assess for the presence of a force majeure, which may enable either party to excuse itself from its obligations under the original deal terms.
If there is a dispute about whether a transaction must be closed or about the deal condition that must be met, both parties must assess their liability.
Closed Deals With Outstanding Obligations
Recently closed deals may suffer the most during this crisis. Outstanding obligations may be breached due to substantial economic changes wrought by the pandemic. For instance, a buyer’s ability to acquire an additional stake in the business at a fixed price might come under challenge due to a MAC or force majeure clause. This is likewise true of additional payments based on company performance. Both parties must review in detail the remaining obligations, and may need to assess possible effects of the crisis. Be willing to re-negotiate, especially when the effects of not doing so could tank the business or mean that no one gets paid. These are unprecedented times, and parties must proceed accordingly, in good faith.