We have prepared this article to outline the key considerations at each of the stages of an M&A transaction that are most affected by Covid-19.
1. Considering an M&A transaction
Due Diligence
It is essential for buyers to carry out careful due diligence on how Covid-19 has impacted the target company.
Covid-19 specific concerns to look out for include:
- the impact of travel restrictions and social distancing
- compliance with all government regulations
- reviewing the terms of material contracts such as material adverse change and force majeure
- business continuity and disaster recovery plans
- data protection and privacy policies
- use of emergency funds
- can additional government funding can be utilised after completion?
Insurance policies may include protection for businesses that suffer losses due to mandatory closures. This should be considered along with any obligation on the target to mitigate losses.
2. Between negotiation and signing
Indemnities and warranties
Sellers should be frank in disclosing all Covid-19 related risks and financial projections. Buyers should obtain specific warranties to provide comfort against such risks and insist that warranties are repeated at completion.
Specific warranties about force majeure usage in contracts, government funding, and the use of the Furlough or Job Support schemes should be sought by Buyers. Any company considering selling over the next few years should keep diligent records of any decisions made during this time.
Buyers should ask sellers to provide indemnities to cover Covid-19 related liabilities.
If either party wishes to obtain warranty and indemnity insurance, they should be aware that if a deal has not yet signed, Covid-19 is now a ‘known risk’ and related issues may not be covered.
Pricing
Deals post Covid-19 might adapt to new pricing structures in line with market volatility, but if the deal was already announced parties may be stuck with the pre-coronavirus terms.
Buyers could insist on re-opening locked box or fixed pricing mechanisms and include earn out provisions or post-closing price adjustments. Sellers should try to cap the amount by which the price can be reduced.
Buyers may find it useful to defer payment of consideration to a later date and to take advantage of retentions. Sellers may be uncomfortable with this, but they can request that funds are held in escrow.
Buyers should be aware of all funding conditions and the fact that a change in long term stop dates could affect financing.
3. Between signing and completion
Interim covenants
Due to Covid-19, the period between signing and completion could be considerably longer than expected, therefore Sellers should be aware of interim covenants. Sellers should communicate with Buyers at an early stage if there is a chance that a covenant will be breached. If a breach does occur without the Buyer’s consent, it may give them a right to terminate.
What’s next?
In a pre Covid-19 world, share sale transactions might have been viewed as less risky than asset sales, but we could now see an increase in asset sales. The reduction of entrepreneurs’ relief from £10million to £1million has made share sales less attractive for sellers. This, alongside a buyer’s ability to ring fence liabilities in asset purchases, could see an increase in asset sales.
Instead of M&A, companies might consider alternative transactions such as investing in hybrid instruments such as convertible or preference shares, or other transactions which will allow them to buy shares later.
Many deals have been aborted to allow businesses to focus on survival and to preserve cash. Covid-19 has undoubtedly slowed down the economy and changed our approach to M&A transactions.
If you require any advice in relation to commercial dealings please contact us on 028 9043 4015.
