The COVID-19 pandemic and the countermeasures put in place by governments around the world are having a huge impact on businesses. Due to the threat of the spread of the coronavirus, states are closing borders and introducing unprecedented security measures. led to a significant decrease in engagement in business processes in most sectors. This can affect:
- current M&A transactions;
- corporate transactions that have already been completed but contain provisions that remain in effect;
- future transactions.
To help you understand the impact of COVID-19 on global business, our experts have prepared this overview. For more information, we offer individual advice on the legal implications of M&A transactions during the Covid-19 period.
For your info
According to the Organization for Economic Co-operation and Development (OECD), the world's largest economy, the United States, fell 9.5 percent in the second quarter after falling 1.3 percent in the first quarter. US government statistics show 32.9% of GDP in the second quarter. The Canadian government last week complained of an unprecedented 38.7% drop in GDP in the spring.
The world’s 2nd largest economy China has avoided economic decline, curbing the epidemic. Its GDP bounced back by 11.5% in the second quarter, after falling by 10% in the first. The annual decline was 6.8% in the first quarter and a rebound of 3.2% in the second. At the same time, the growth rate remains much lower than that recorded by the Chinese government in recent decades. In neighboring Japan, the most difficult were three months: in the second quarter of its GDP from January to March fell by 7.8%. This was the largest drop in GDP since 1980.
EU countries as a whole recorded a decline in GDP in the spring of 12.1%., the most significant decline since 1995, according to Eurostat
Europe's largest economy, Germany, recorded a 9.7% decline in GDP in the second quarter after falling by 2% in the first. The impact of the pandemic on the German economy is expected to be less severe than economists had predicted. The government now forecasts a decline of 5.8% of GDP against - 6.3% in the previous forecast.
If the business does not perform as it should, it will affect the buyer's ability to service the deferred amount payments and the sellers' ability to meet the targets required for the accrued payments.
In light of the unprecedented circumstances created by the coronavirus, some buyers and sellers may consider adopting an alternative payment agreement. Unlike most commercial agreements, there are rarely "force majeure" clauses in sales and purchase agreements.
IQ Decision UK specialists advise on the legal basis for renegotiating the contract in unforeseen circumstances.
In times of uncertainty and change, the buyer may find that certain aspects of the business are not performing as expected, or the buyers were forced to verify this during the due diligence of the M&A transaction. As a result, the buyer can expect to receive a refund of payments that he has already made to the seller through a warranty breach claim.
Guarantees regarding the terms of contracts, settlement of debts, IT systems and data protection may be relevant if:
- customers / suppliers fail to comply with the terms of their contracts;
- debts are not paid;
- businesses will have to use remote work systems, which may not be as cyber secure as stipulated by the GDPR.
Most sales contracts will be made to order, therefore our lawyers advise the buyer to consider the agreement as a whole, as well as order legal advice regarding the use of warranty claims in M&A transactions.
Any seller who receives notice of a claim from a buyer should seek advice on the merits of such a claim, as warranties are usually provided upon completion and not prospectively. Hence, if the warranty was provided correctly at the time of completion, the buyer should not be able to make a claim simply because the coronavirus has affected the business.
Our law professionals provide our clients with legal assistance in concluding business sale and purchase agreements. We emphasize that the parties to a potential deal may agree on a period of exclusivity. Exclusivity is provided so that the buyer can decide whether to proceed with the transaction and agree on its terms, without threatening the seller to enter into negotiations with other potential parties. It is possible that current circumstances could suspend discussions or delay the deal, which means that the exclusivity period could expire before the agreement is finalized. We invite buyers to review any agreed exclusivity periods and, if possible, negotiate an extension. Sellers can use such delays to their advantage and seek to negotiate with other potential buyers.
Depending on the nature of the targeted business, the buyer may try to lower the purchase price. However, if the target business is in a niche market that is currently in demand (for example, it is a provider of remote IT tools), the seller may be in an advantageous position to raise the purchase price. There are many factors that affect the determination of the value of a business, and parties should seek the help of professional lawyers to obtain legal advice on regulating mergers and acquisitions during a pandemic.
What to expect
For those in the early stages of negotiating the terms of their sales contracts, the circumstances in which they entered into negotiations will change significantly.
The effects of the pandemic will be felt for many over a long period. Buyers will want to minimize the risks associated with buying a business in exchange for receiving reliable guarantees from the seller. Due diligence on M&A transactions is extremely important in ensuring that vulnerable aspects of the business affected by the coronavirus (such as ongoing employee layoffs or ongoing bank refinancing) are in compliance with the law.
If you decide to start an M&A transaction, do not hesitate to contact the experts at IQ Decision UK for advice on minimizing risks during the pandemic.