As the COVID-19 pandemic wears on, “business as usual” looks very different than it did just a few weeks or months ago. For businesses involved in global mergers and acquisitions (M&A), disruptions due to the outbreak have affected these transactions.
While the full impact of the coronavirus will not be known for some time, as buyers and sellers continue to conduct due diligence on target businesses and negotiate international corporate transactions, their legal counsels must identify and mitigate new risks and challenges brought about by the current health crisis.
CT Corporation is aware of these challenges, and in this article, we highlight important considerations shared by legal counsels for global transactions during this unprecedented time.
1. Representations and warranties
During this crisis, legal counsels representing buyers in global transactions are considering seeking additional representations and warranties relating to the target business’ emergency protocols, contingency planning, business continuity processes, and other matters as they deem these critical to understand in this environment.
On the selling side, we’re hearing that attorneys are suggesting that their clients disclose as much information as possible about the impact or potential impact of the coronavirus on their business and its effects, or potential effects, to ensure adequate defenses in the event of a claim.
2. Material adverse change/material adverse effect
A material adverse change (MAC) or material adverse effect (MAE) clause is commonly found in most purchase agreements and can potentially impact a deal’s closing.
A MAC/MAE is commonly defined as any event, occurrence, fact, condition or change that can become materially adverse to a business’ operations, financial condition, assets, liabilities, or its ability to consummate the transaction itself. These clauses are sometimes used as a condition of closure. For example, if there has been a MAC/MAE to the target business, the buyer may have the ability to walk away from the transaction.
With that in mind, some legal counsels are reassessing these clauses to ensure they are considering the changes brought about by the coronavirus, how it impacts their client’s deals, and making the necessary adjustments. However, it is important to note that each jurisdiction differs in how they define a MAC/MAE and may or may not consider the current pandemic under those terms.
To address this uncertainty, we are observing that many legal counsels are working with their global compliance providers to understand the jurisdictional guidelines in order to then determine if this clause should be included in the agreement (if it isn’t already), what it specifically defines as a MAC/MAE, what current or future situation it constitutes, and given the global economic impact of the current COVID-19 pandemic, under what conditions. How this clause is defined within the agreement, may trigger additional due diligence searches to uncover any issues or risks arising from events like the COVID-19 disruptions.
3. Force majeure
A force majeure clause excuses a party’s obligation to perform under a contract in the event of extraordinary circumstances beyond the party’s control that prevent it from performing its obligations.
Whether an event such as the coronavirus pandemic can be excused under an existing force majeure clause, legal counsels are considering several factors:
- The language of the clause. Does the clause list events such as a pandemic, epidemic, disease crisis, or health crisis that the coronavirus may fall under? Attorneys say this may help advance a party’s argument that performance be excused.
- If the event was unanticipated and unforeseeable. Was the COVID-19 pandemic foreseeable in the countries involved in the transaction at the time of the M&A negotiations?
- If the subject matter of the contract or means of performance is impeded. Has the coronavirus outbreak made it impossible for both parties to perform under the agreement? In these cases, legal counsels are taking into account the local jurisdiction’s definition of legal impossibility, which can vary from country to country, and may apply differently to each case.
One thing is certain, legal counsels are realizing that the COVID-19 pandemic shines a light on the need for detailed force majeure clauses. Legal teams are now forced to further determine what does and does not constitute a force majeure within the agreement and what is accepted in the governing jurisdiction of the transaction. For example, in China, the coronavirus pandemic has been identified as a force majeure for contracting parties. However, for those U.S. businesses affected by COVID-19 whose contracts are governed by U.S. law, this determination by the Chinese authorities may not be of use.
If it arises that a party’s obligations have been impacted by COVID-19 in any way, some of the legal professionals we support share several measures for their peers involved in global M&A transactions:
- Keeping detailed records of the impact that the pandemic has had on their client’s or the target business’ core functions and its ability to perform its contractual duties.
- Assessing any impact on supply chains, such as if a vendor is unable to secure raw materials, parts, etc. or the vendor’s own supply chain is impacted.
- Staying informed of the latest developments relating to COVID-19 affecting the countries involved in the transaction. By keeping abreast of current events and government announcements, attorneys can quickly reassess their client’s obligations, liabilities, and seek the support of an experienced provider to address any compliance requirements in a timely manner.
Some attorneys have shared that force majeure clauses are often an afterthought during negotiations, but current events make it clear that these clauses can have substantive impacts. Many law firms are now proactively working to ascertain what steps they must take should an unforeseen situation such as this arise again.
4. Choice of governing law
Selecting the governing law applicable to agreements is an important consideration for buyers and sellers. The U.S. may interpret and enforce clauses such as MAC/MAE and force majeure differently than international jurisdictions such as China, Hong Kong, Singapore, and the UK.
Many of our clients say that under normal circumstances, no jurisdiction is more favorable to either buyers or sellers involved in international M&A transactions in the context of contractual issues that may arise from events such as the coronavirus outbreak. However, they are doing all they can to ensure that agreements protect and minimize risks for their clients.
5. Due diligence
During this period of uncertainty, legal counsels are finding the need to increase their due diligence efforts. This means understanding the effect of the pandemic on the target business’ operations, supply chain risks, logistical challenges, IT infrastructure, cyber risks, employee relations, regulatory environment, and compliance posture.
The challenge legal counsels are facing is that this process can be hard to do when transacting M&As in different countries. While due diligence meetings can be conducted virtually, document collection may not be as easy – a situation that may be exacerbated by the pandemic-enforced closure of government offices. Furthermore, local timelines and translation requirements can result in extended turnaround times and added complexity.
However, working with a provider with multi-jurisdictional experience can aid in navigating the alternatives available to fully perform due diligence work in each jurisdiction even in this environment, and provide key insight into changing governmental regulations affecting corporate transactions.
6. Deal timing
With the concept of “business as usual” changing for so many companies worldwide, it’s understandable that deal timing will be affected as well. While it remains uncertain how long the current pandemic and lockdowns will last, legal counsels are anticipating that it will take much longer than expected to get the details needed – internally and externally – to complete a deal. They are also anticipating delays in governmental and regulatory approvals in countries more widely by the COVID-19 outbreak and waiting longer than usual for change of approvals or third-party consent.
Considering this, legal counsels are suggesting the following best practices to actively address timing issues:
- Reviewing any deadline requirements and adjusting them accordingly.
- Checking whether the agreement includes a provision for a “drop-dead date,” “outside date,” or “long stop date”, which can enable the termination of the agreement if the M&A transaction has not closed by a certain date.
- Determining if a longer exclusivity period should be obtained to allow for unanticipated roadblocks to the agreement.
Conclusion
COVID-19 is an ongoing pandemic to which the extent of the effects that disruptions have caused to businesses and the global economy cannot be fully assessed at this point in time. However, this new reality is changing how we do business locally and around the world. Just as references to “terrorist events” became a common part of legal boilerplates after 9/11, provisions on pandemics will likely also become the norm.
CT Corporation is aware of the challenges that the coronavirus pandemic has brought to so many companies doing business around the world and the impact it has had on the activities of their legal counsels. Attorneys, paralegals, and other legal professionals we support are working hard to assess the situation and are considering various plans of action to protect their clients’ interests and their international transactions.
Whether at the beginning stages of due diligence – from document searches, translations, filings, etc. – to resolving any issues that may arise due to regulatory changes, CT Corporation’s team of global experts provides the necessary support legal counsels need to help guide their clients through the successful completion of an international transaction, and ensuring compliance is top of mind in each jurisdictions in which they do business.
To learn more about how CT Corporation’s Global Transactional Service can help support your client’s international deals, contact a representative.
Disclaimer: This article is intended for informational purposes only. It should not be used for legal advice.