COVID-19: Considerations in Corporate Mergers and Acquisitions
As the economic impact of COVID-19 (Coronavirus) deepens, companies that are engaged in or which are contemplating mergers or acquisitions are faced with unexpected and unprecedented challenges. This briefing aims to provide information and guidance to companies on how to navigate these choppy waters.
COVID-19 and Legal Due Diligence
Companies that currently are engaged in, or are considering a potential merger or acquisition (“M&A”), a sale or divestment or an investment transaction, will need to consider the impact of COVID-19 on the business of the proposed target.
Alongside the usual due diligence process, in particular, there should be a renewed focus on:
- the impact that the COVID-19 crisis will have on revenues;
- considering whether to re-open discussions on purchase price;
- a review of key contracts to ascertain whether obligations under those contracts are still capable of being met in the current environment;
- a review of termination rights along with any force majeure provisions to establish whether the current crisis has a triggering effect;
- the implications of employees working remotely (if applicable);
- the likely impact of COVID-19 on the ability of key suppliers of the target to perform; and
- a review of all insurance policies of the target to ascertain whether any business interruption provisions apply and an evaluation as to whether there is a requirement to mitigate loss.
Material Adverse Change (“MAC”) Clauses and Force Majeure Clauses
As just highlighted, as a result of the ongoing COVID-19 crisis, there is a renewed focus by companies on the performance of certain key contracts. See our related briefings for more detail on the issues of commercial contracts and force majeure (here) and frustration (here).
Parties may look to rely on specific remedies in their contracts (or in law) to avoid liability where contractual obligations cannot be performed in accordance with their terms. As a result, there now is a renewed focus on MAC and force majeure clauses.
A party seeking to avail of a MAC should first consider if other remedies are available to it. Incorrectly invoking a MAC may result in significant liability for the relevant party and ought to therefore only be used where it is highly certain that the entitlement arises.
Many commercial agreements include an express force majeure clause and it is difficult to persuade a court to imply one into a contract if it has been omitted. A force majeure clause can apply where an event that is within the scope of the clause prevents a party (or both parties) to a contract performing a particular obligation under that contract.
The impact of COVID-19 on Warranties and Indemnities
A buyer in a current or potential M&A transaction should consider:
- seeking specific warranties on any COVID-19 business contingency plans or financial assessments prepared by the seller and provided during the course of due diligence;
- taking particular care in relation to financial warranties and any financial projections which have been warranted by the seller; and
- seeking specific indemnities where significant risks have been identified.
From the other perspective, a seller should carefully consider any COVID-19-related warranties that are being sought and should make appropriate COVID-19-related disclosures. Also, in certain circumstances and depending on the bargaining strength of a particular seller, it could seek to include a general exclusion of liability (or attempt to limit liability) for any COVID-19-related business risks.
Warranty and Indemnity (“W&I”) Insurance
In addition to a rigorous due diligence process and careful negotiation of warranties and indemnities, W&I insurance may also have a role to play as the COVID-19 crisis continues. However, as COVID-19 is now a known risk, it is expected that, into the future, underwriters will specifically exclude any virus- or pandemic-related business losses from W&I policies.
As part of their due diligence exercise, underwriters will require that the deal parties have proactively assessed all potential financial losses. In particular, it is expected that underwriters will place a renewed focus on:
- current business continuity plans and financial projections;
- any supply chain disruption;
- the ability to terminate or suspend material contracts without penalty; and
- the target’s insurance policies and the ability to recover for COVID-19 business losses.
Additionally, it is likely that underwriters will examine how the parties are addressing the risk of the situation worsening between signing and completion of the transaction and the parties’ ability to manage such a situation.
COVID-19 and the Potential for Hostile Bids for Undervalued Companies
The on-set of COVID-19 may also have an impact on the public M&A sphere.
History has shown that there may be an increase in hostile M&A as opportunistic acquirers take advantage of depressed stock prices and short-term liquidity issues.
Companies that are incorporated in Ireland may be more vulnerable to such hostile approaches than those in the US, for example, as Ireland is an open and non-protectionist market.
Takeovers are regulated by the Irish Takeover Rules (the “Rules”). The Rules are designed to protect the interests of the target shareholders and, for example, allow a bidder to take its offer direct to the shareholders, bypassing the target board.
‘Poison pills’ and defensive litigation are uncommon in Ireland.
The Rules effectively prohibit targets from taking any “frustrating action” to inhibit an unwelcome bid, so that US-style bid defences (such as buying or selling stock to interfere with a bid or selling material assets) that would have the effect of impeding a target shareholder’s ability to decide on the merits of the bid are prohibited.
Ireland has no generally applicable CFIUS-type regime regulating acquisitions in sensitive industries by foreign investors on the grounds of security or public interest or protecting ‘national champions’.
In Ireland, regulatory consent will be required for many acquisitions of ownership interests in the licensed financial services sector and in the media sector and transactions may be blocked on anti-trust grounds.
How we can help?
McCann FitzGerald is ready and willing to assist clients in addressing all of their concerns in respect of legal and/or taxation issues business may face in responding to COVID-19. Please contact any member of McCann FitzGerald to assist.
Also contributed by Gillian Boyle.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.
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