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Coronavirus - Managing the health of your M&A transactions - UK

  • United Kingdom
  • Coronavirus - Country overview
  • Mergers and acquisitions

05-03-2020

While companies are trying to find ways to ensure health and well-being of their work-force and align those measures with business continuity as usual, it is equally important that deal managers look out for risks associated with the spread of virus on their ongoing M&A transactions.

We have started to witness Coronavirus impact M&A transactions in a variety of different ways and our clients have been reaching out to us for advice on how they can manage their deals in light of the economic, commercial or practical implications of the outbreak. We have set out a list of common deal practice points to keep in mind in this context.

Key diligence considerations

Transactions that are in their diligence phase are likely to be most vulnerable in economically uncertain times. Increasingly, we are seeing potential buyers actively investigate the potential impact of the virus on target businesses.

While the key diligence considerations would vary from deal to deal, the common diligence points for buyers to consider are:

 

  • Impact on revenue and performance – whether the target is able to operate at levels as usual during the outbreak? Whether the sector the target business operates in, its key supply chains and customer relationships have been affected since the outbreak and what impact such disruptions have had (and are projected to have) on the revenues and profitability?
  • Business continuity planning, health and safety and insurance – what plans has the target put in place to operate business in disruption situations? How is the target looking after and managing risks associated with the absence of key personnel, suppliers or customers – consider if there are alternatives and whether these are easily accessible? To what extent (if any) do the target’s insurance policies cover any of the risks originating from such disruption? What health, safety and precautionary plans have been put in place and consider whether they remain in compliance with continually changing local laws, orders and practices as the outbreak evolves?
  • Insolvency risk and breach of contractual relationships – whether the target is able to sustain operations during a slowdown resulting from the outbreak or whether it needs immediate capital injection to do so? Whether a disruption could result in the inability of the target business to perform its key contractual obligations which could result in breach and counterparty enforcement risk?
  • Need for physical/site inspections – if physical or local site based inspection is required as part of the due diligence process and the asset/site is located in an effected geographic location, is such an inspection feasible and if not are there satisfactory alternatives to such an inspection?

 

Sellers should also give due consideration to the concerns set out above to ensure that they are actively managing and disclosing these risks to potential buyers (see also section on “warranties and disclosures” below). Some buyers may utilise the impact of the disruption to create narratives around price-chips or other favourable terms. A prepared seller is likely going to be able to counter/resist such narratives in a more effective way.

Deal timetable and management

It is also important for parties to re-consider their deal timetables in the light of the effects of the outbreak (though in distressed sale situations this may be difficult). The impact of lockdowns/quarantines, unavailability of key personnel/advisers and restrictions on travel may make existing transaction timetables unworkable.

Restrictive timetables in auction scenarios could also result in a sale on less commercially advantageous terms for the seller in the instance that some worthy bidders are unable to compete (for example, in consequence of their being based in a severely impacted geographic locations where there are staff shortages).

Deal managers should consider staffing deal teams in such a way that the risk of unavoidable and sudden absences is minimised (for example, consider maintaining a deal team with multiple members who are able to cover one another). To the extent possible, negotiations and other meetings should be conducted via video-teleconferences in order to avoid unnecessary travel and gatherings.

Deal certainty

Where signing and completion are not simultaneous and there is a risk that the target business could be materially impacted due to the outbreak during the intervening period, buyers may consider seeking specific condition precedents or termination rights providing the ability to walk-away (or bring parties back to the table to discuss price cuts/alternatives).

Sellers on the other hand should consider resisting such provisions to the extent their negotiation power allows them to do so. However, as had happened in the immediate aftermath of the financial crisis last decade, with reduced deal activity and competition, buyers may become confident in their ability to obtain such terms to protect their interest and sellers may have to become more willing to yield to such demands. If such rights are included, parties should aim to be specific about the situations triggering the walk-away rights (such as impact on key identified personnel, suppliers or specifically identified financial parameters).

Parties looking to rely on general material adverse change clauses should approach with caution. Carve-outs relating to effect on general market conditions and market events may rule out the availability of such recourse.

Payment protection

Sellers should also consider the impact of the outbreak on potential buyers. Sellers may consider obtaining an upfront deposit, a termination fee or appropriate payment security/guarantee in connection with the buyer’s obligations. This could assist in the event that the buyer walks away or its ability to finance the deal is impacted due to the outbreak.

Warranties and disclosures

Buyers who are worried about specific Coronavirus related risks should seek warranties around those risks in order to establish full disclosure from the sellers. For example, warranties around impact on material suppliers, customers and personnel could be requested.

Sellers should look to disclose all relevant risks and describe the target’s risk mitigation strategies/plans to avoid claims around warranties. Sellers should also consider obtaining insurance cover in respect of such risks and any claims from the buyers. However, warranty and indemnity insurers’ approach to claims resulting as a consequence of the Coronavirus outbreak remains to be seen.

Sellers should consider the risk on repetition of warranties. For example, a warranty that business has been conducted in the ordinary course since the last accounts date may be true at signing but may not be true on completion if the outbreak severely impacts the business between signing and completion. If repetition of warranties is agreed, sellers should either seek to bring down the disclosures on completion (at least in the context of the warranties that may be impacted by the outbreak) or carve-out breaches relating to a Coronavirus outbreak.

Period between signing and completion

Parties should be cautious in agreeing the pre-completion obligations in light of practical restrictions they may face due to the outbreak. For example, consider whether it is feasible to agree to a covenant that business is operated in the ordinary course?

Sellers who agree to not undertake specific actions without buyer’s consent should consider including a carve-out to carry out contingency measures needed to control the impact of the outbreak on the target business (including, for example, any health and safety, quarantine or lock-down actions that may be required) and ensure that acquisition agreement provides that the buyer has to act reasonably at all times when considering matters where the buyer’s consent is required.

Parties should also agree (and, in connection with already signed but not yet completed acquisition agreements, may consider revisiting) the long stop dates and obligations in connection with satisfaction of the conditions precedent keeping in mind the stretch on resources/operations that may occur due to the outbreak. As the effect of the outbreak starts to take grip, it may be impossible to adhere to specifically agreed time scales that would normally be achievable in ordinary course. For example, where completion is subject to local authority approvals, there may be staff shortages and revised working patterns at such local authority level which may negatively impact the timing of the approvals.

Post-completion matters

The outbreak could also impact post-completion matters. For example, deferred consideration or earn-outs that are contingent or linked to agreed financial performance or other parameters (such as availability of key personnel) could be affected by the outbreak.

Additionally, post-completion filings, preparation of completion accounts or transition plans could be impacted due to staff shortages or temporary shutdowns. Consider avoiding aggressive timelines in respect of such obligations.

Conclusion

It is expected that the impact of the outbreak is likely going to affect M&A transactions globally. However, if buyers and sellers proactively take account of the concerns and recommendations noted above, it will hopefully allow the transactions to be managed and concluded in a way that is satisfactory to both sides.