In the face of the unprecedented COVID-19 pandemic and its impact on the world economy, M&A activity has been understandably impacted. M&A participants are adjusting to the changed circumstances while still moving deals forward by addressing risks and changes to the business environment through certain provisions of their definitive transaction agreements. A brief summary of some of the impacted provisions is provided below. A specific approach for any individual transaction will depend on the facts and circumstances of the deal. We encourage you to reach out to a Wyrick Robbins attorney to discuss any specific questions or issues you have.
- MAE/MAC provisions– Sellers are requesting a carveout from “Material Adverse Effect” and “Material Adverse Change” definitions for epidemics and pandemics. Buyers, where they are agreeing to this, are trying to include a “disproportionate impact” exception to the carveout.
- Representations regarding customers and suppliers– To backstop buyer’s diligence on COVID-19-related impacts on the target’s business, buyers are seeking to add or expand customer and supplier representations, e.g. to add statements that such business partners have not delayed deliveries, declared a force majeure, declared default or declared bankruptcy, etc. Sellers of course are resisting these or trying to limit these representations to their knowledge or receipt of written notice.
- Other representations – Buyers are considering other representations that may need special consideration in light of the circumstance of the particular business being acquired, such as employee matters, inventory, compliance with laws, accounts receivable, etc.
- “Interim Operations” covenant – Sellers are attempting to revise the customary covenant that they operate their business in the ordinary course during the interim period between signing a purchase agreement and closing the deal. For example, sellers are trying to limit this obligation to a requirement to use “commercially reasonable efforts” and deleting the requirement that operations be “consistent with past practice.” Sellers are also carefully considering covenants regarding specific prohibited actions (e.g. not drawing on a line of credit) to be sure they can comply with these under current conditions and perhaps for a longer interim period than usual. Buyers may want to consider adding a requirement that any material changes in operations taken to address the COVID-19 pandemic be taken in cooperation with the buyer.
- Regulatory approvals – Because regulatory approvals may be slower to obtain, parties are considering the length of the interim period and implications thereof (e.g. interim operating covenants as noted above, disclosure and reporting, etc.). Also, parties are considering impacts on the termination date used in their agreement, perhaps consider a tolling construct for waiting for regulatory approvals.