The COVID-19 outbreak serves as an additional test of the resilience of businesses. The pandemic has had a significant impact on M&A activity globally. Economic uncertainty exposes and exacerbates financial vulnerabilities. If the economic contraction lasts longer or deeper than expected, these factors could exacerbate the resulting tightening of financial conditions, leading to even greater instability.
To date, funding concerns have forced many businesses to postpone transactions that have already begun to focus on mitigating the impact of the virus on their day-to-day business operations.
If you intend to start an M&A deal in the United States or conclude an M&A deal in Europe in the context of Covid-19, then it is vital to consider the impact of the pandemic on contract protection and risks.
The impact of the pandemic will lead to increased use of price adjustment mechanisms, such as those related to the profit calculation formula:
- buyers are likely to insist on using a post-purchase price adjustment mechanism;
- significant unfavorable changes in the working capital and debt situation may occur;
- if a transaction uses a post-closing purchase price adjustment mechanism, then the policies and rules governing the preparation of closing invoices will be carefully discussed.
To understand how the situation with COVID-19 affects M&A transactions, we offer advice on the legal implications of mergers and acquisitions in the United States and Europe in a pandemic.
Buying a company in America or acquiring assets of a European company implies that buyers should consider including additional COVID-19-related preconditions in the purchase agreement.
In any M&A transaction in the United States or EU countries, there is a tension between the seller's desire to ensure certainty of the transaction by limiting the buyer's ability to terminate the transaction, and the buyer's desire to remain flexible to withdraw from an acquisition in an unfavorable environment. An M&A deal in the United Kingdom or the United States may be terminated if there is a material adverse change in business.
Buyers should seek additional assurances and guarantees regarding the impact of COVID-19 on the target business, including income and solvency; fulfillment of material contracts; supply chain risks; employee and managerial benefits; insurance cover; planning and risk assessment. It is also necessary in these conditions to conduct due diligence procedures in M&A transactions.
Where specific COVID-19 issues are identified through due diligence by the purchaser, the purchaser should exercise caution and demand that the relevant issues be resolved at the expense of the vendor through a separate refund or purchase price adjustment.
Buyers will not be able to conduct on-site visits in jurisdictions where restrictions remain, and any interactions with target management and staff for due diligence must be done electronically. The purchase of company assets in European countries involves some practical difficulties due to the collective consultation requirement of targeted employees in accordance with the European Directive on acquired rights.
Updated ways of communication
If the purchase of shares in a target European company or a US company requires approval from the Board of Directors, the incorporation documents of the respective company should be checked to ensure that meetings are permitted by telephone or videoconference.
While employees continue to work from home, companies should consider using electronic signatures to execute purchase agreements and supporting documentation, provided that this is permitted by the company's articles of association and related agreement.
In our company, you can order legal advice on the regulation of contractual obligations under European law in connection with COVID-19 or request legal advice on the revision/suspension of agreements in M&A transactions in the US during the coronavirus pandemic.