Financing & Verifying M&A Transactions During the Coronavirus Pandemic

The coronavirus pandemic is undoubtedly creating major difficulties for concluding M&A deals worldwide. So, let’s have a closer look at the factors capable of adversely affecting the conclusion of M&A transactions during the ongoing pandemic of the coronavirus disease.

Acquisition Financing

Given the uncertainty reigning in the credit markets, acquisition financing (including interim financing) will have a major impact on conducting M&A transaction during the coronavirus pandemic & in the post-pandemic period. Therefore, a more indepth legal examination of the purpose of a  transaction, as well as the seller & buyer, will be required.

Adding clauses protecting the lender, including MAC & the termination right, in the sale agreement helps avoid the risk of being left without financing. Financing M&A transactions during the coronavirus pandemic also implies that sellers may insist on being paid fees or deposits in case of funding failure. The usual “flexible provisions” in letters of financial obligations (especially those that have direct investment sponsors) need to be carefully studied by lenders who seek to use their rights to change conditions (including pricing). Lenders may also require prolongation of the reporting period.

Buyers who want to conduct financial transactions in Europe using borrowed funds should contribute more capital to conclude deals in the short & medium term.

DD of M&A Transactions During the Coronavirus Pandemic

In some countries, inspections, including on-site visits & physical asset inspections, can be impossible or strictly limited. Sellers may encounter difficulties in the timely preparation & processing of data, which is why DD of international mergers & acquisitions can be conducted remotely. Under such circumstances, buyers will no longer be able to rely on personal meetings with managers. Depending on the type of an asset, customers may opt for remote DD as a temporary measure aimed at strengthening contractual protection & bridging the gaps in the prudence process.

Paradoxically, the COVID-19 pandemic has helped companies to check their preparedness for the crisis. It has also helped them determine what factors can affect price adjustments or specific compensation. Here’s what they can do:

Buyers can undertake a focused analysis that may include, for example, supply chain resiliency, business continuity planning, IT infrastructure, insurance, terms of major commercial agreements, and the relationships with suppliers & clients. It also makes sense to check whether operational measures aimed at ensuring liquidity are legally feasible. Buyers should also keep in mind that registering private equity funds in the EU, for example, may require reviewing a number of DD procedures.

The COVID-19 pandemic is continuing to have a huge impact on employees as well. It is, therefore, necessary to assess whether the regulatory requirements regarding workers’ safety have been met.

In the short & mid-term perspective, enterprises’ ability to withstand liquidity problems is going to be a decisive factor in the purchaser's assessment of their solvency. Given the new criteria for evaluating commercial contracts that have emerged due to an increase in the number of majeure circumstances & claims for damages, seeking legal advice on reviewing contractual terms of M&A transactions can make a major difference.

MAC

Given the ongoing coronavirus pandemic, parties to a transaction may consider developing a joint response plan in which all permitted actions will be agreed upon. Parties are also going to be paying more attention to MAC. Defining MAC has always been a subject of intense negotiation & careful study. Should parties agree on including MAC in their transaction, it will require developing an individual approach toward identifying vulnerabilities related to the accomplishment of their objectives. For instance, UK courts tend to be reluctant to refer to MAC provisions, so applying even the most elaborate paragraphs may be a problem. 

Conclusion

The coronavirus pandemic has negatively impacted & is continuing to adversely affect businesses worldwide. Therefore, business entities should take measures aimed at facilitating & optimizing their processes.