It is becoming more and more clear that the Covid-19 epidemic that has spread across the world is already producing a major shock on the M&A market
, and it is no less evident that this will continue for several months ahead, depending on how economies are being reopened. However, this reopening could be a source of strategic opportunities for flexible and cash-rich investors. The purpose of this article is to give such investors an insight into the main developments to be anticipated during this period
. In fact, besides a necessary realignment between investors' and sellers' expectations, especially in terms of valorization, this crisis will lead to substantial changes in the different phases of M&A transactions and the legal issues that players will be called on to negotiate. This article deals with a selection of these points and is divided into three parts covering (i) the due diligence phase and representations and warranties, (ii) certain major terms of the transaction (MAC clause, price, interim period) and (iii) the process and timetable. It is stressed here that this is a synthesis, that these different issues are interdependent and that, in any event, the answer to them will depend on the specificities of each transaction and of the business sector concerned. More than ever, the assistance of expert advice will be indispensable for the successful completion of such an operation.
1. The due diligence phase and the representations and warranties
Audits become increasingly crucial in this context, as the financial and operational implications of the crisis on the target will need to be assessed and, no doubt even more significantly, its ability to bounce back in the short and medium term. From a legal standpoint, the due diligence exercise will need to be adapted to reassure buyers on the specific issues related to the Covid-19 pandemic, examples of which can be cited:
- Which crisis plan has been put in place by the target company to mitigate the consequences of the pandemic, and to anticipate a possible "second wave"?
- Has the company taken the appropriate measures to protect its employees, contractors and customers? Has the company complied with the health measures put in place by the public authorities?
- Has the target company suspended or terminated its contracts with third parties (customers, suppliers, partners)? Is there a risk that this could happen if the pandemic resumes? Conversely, can the company invoke a legal provision, force majeure or an adverse material change clause to release itself from its obligations, and has this occurred when it was appropriate and under what conditions?
- Do the target company's insurance policies allow, in certain situations, to obtain compensation, notably in terms of business interruption?
- Has the company qualified for public financial support measures? Have the conditions attached to this support been complied with (e.g. commitment not to distribute dividends)?
- Are any legislative changes expected and could they have an impact on the business?
- Is the target company secured or insured against the insolvency of a debtor?
The first lockdown lift plans implemented by a number of affected countries (China, Italy, France, etc.) suggest that the "return to normal" will not be immediate or complete. It will therefore be prudent to anticipate additional delays in carrying out due diligence. Indeed, even if remote communication solutions and artificial intelligence do offer substantial time savings, certain elements of this exercise, such as the digitization of documents or site visits, still require on-site due diligence, which should be organized in compliance with health precautions. Likewise, the health context will necessarily lead to an alignment and strengthening of the representations and warranties negotiated in the purchase agreement: the acquirer will accordingly seek to negotiate for specific indemnities, covering the risks identified in the due diligence process, and more generally to be guaranteed against the potential risks related to the pandemic (see questions above). In this particular context, it will be in the seller's interest to disclose as widely as possible any risks he is aware of, even if it means negotiating the terms of the specific indemnities referred to above. He will furthermore seek to be allowed to update his declarations in the period after signing and before closing, should a new event occur, a point that is usually hard to negotiate, but which will be even harder in this case.
2. Major points of negotiation: MAC clause, price clause, interim period MAC Clause
As a reminder, a "MAC clause" ("material adverse change
") enables the acquirer not to proceed with the transaction in the case of an event significantly (and negatively) affecting the business, assets or results of the target company prior to closing. Legally, it comes in the form of a condition precedent. Such clauses, customary in the United States, are relatively rare in European transactions, particularly in France, and are often limited, where they exist, to state a general principle without defining in detail the nature and extent of the negative event. The Covid-19 pandemic could, however, see the generalization and further development of such clauses in future transactions. Indeed, it is acknowledged that the possibility of invoking force majeure to escape from contracts concluded before the epidemic remains controversial
- and is likely to be even more delicate for those to be concluded, given the presently known, and therefore predictable, nature of this event (particularly in the case of a "second wave"). An additional, legal basis for disengaging from a contract is the principle of unforeseeability, which is set out in Article 1195 of the Civil Code, but its application is almost systematically ruled out in sale and purchase agreements. This reinforces the purchaser's interest in negotiating an appropriate MAC clause. In this respect, such a clause will take into account multiple factors, varying according to the size and sector of activity of the target as well as the context of the pandemic. The following are, once again, examples to be adapted or enriched:
- The nature of this negative event: a possible resumption of the pandemic? an extension of the state of health emergency? more specifically, a reduction in the turnover, and/or an increase in costs resulting from the pandemic? the closure of one or production, R&D or distribution sites as a result of the pandemic?
- Its duration and extent: from what duration, and in what amounts (or percentages) will the event be considered significant? should it be measured according to the overall targeted group, or entity by entity (or specifically for some of them)?
- Exclusions to be envisaged: generally, events beyond the seller's control (economic crisis, war, changes in the law, etc.) are excluded from MAC clauses. In the specific case of the Covid-19 pandemic, this principle might be difficult for sellers to apply, since its practical effect is to deprive the clause of its essential scope; one solution might be to provide for exceptions to this exclusion, for example in the event that the target has not taken appropriate measures to deal with the pandemic.
The M&A market, particularly in France, has recently seen an increasing proportion of "locked box" schemes in the clauses relating to the price in purchase agreements. This mechanism, which results in the economic risk being passed on to the buyer with effect from an agreed reference date, is likely to bear the consequences of the major uncertainties created by the Covid-19 pandemic. Clearly, acquirers will be interested in favoring price computation clauses based on the value of the company (adjusted both for net debt and WCR) at the closing date. In the same perspective, recourse to an earn out mechanism will help to secure the buyer at a time of uncertainty by conditioning the amount and/or the payment of one or more portions of the price to the achievement of certain milestones, either financial and/or specifically defined (for example, the recovery of significant debts or the adoption of predefined safety measures). In this case, the risk for the seller is that the buyer's management may prevent or degrade the achievement of these milestones; the seller will therefore attempt to negotiate obligations on the part of the buyer (e.g. information for the seller, joint decisions, "mitigation" requirements, etc.). Interim period
Another important issue, in the current scenario, concerns the seller's obligations in the so-called interim period running between signing and closing. The seller's obligation to keep the acquirer informed of any event liable to significantly affect the target company's results or its financial situation, as well as its commitments not to take any major structuring decisions without the acquirer's consent, are particularly concerned. Financial investors and strategic buyers will be seeking additional security by significantly strengthening these obligations, specifically targeted to the risks resulting from the Covid-19 pandemic. In a general view, the above suggests that the parties involved in these transactions will not only need to rely on their own expertise, but also demonstrate creativity and a solid practice in the relevant business sector - with the result that the next few months will undoubtedly see the completion of important strategic transactions.
3. Effects on the operation's process and timing
As noted above, additional time will be needed to complete due diligences, as
the lockdown lift plans that will be implemented (and regularly adapted to the evolution of the pandemic) will include travel and meeting restrictions that may complicate site visits. Similarly, with respect to the deadlines for the fulfilment of condition precedents, it will be advisable to provide for longer than usual long stop dates, in particular:
- if the transaction is subject to an information/consultation procedure with the employees' representative bodies, since the organization of these meetings by telecommunication, if possible, may prove difficult to implement in practice;
- in the event of a loan facility; the banks are currently mobilized by the implementation of support loans (state-guaranteed loans or “PGEs”), which, combined with the constraints linked to the lockdown which will be maintained at least in part, may lead to longer delays in the implementation of a senior loan;
- in the event that administrative authorizations (permits, licenses, merger control, etc.) must be obtained, given the disruptions created by the lockdown on the functioning of public authorities. In this respect, depending on the nature of the authorizations to be obtained, the parties' counsels will look to verify if the deadlines fixed for the administration to process the requests are affected by the Government's measures concerning the suspension of deadlines.
Over and above the simple question of deadlines, it should be pointed out that some countries, including France, are strengthening governmental control over foreign investments in the wake of the pandemic, with the aim of preventing opportunistic takeovers by international predators of national assets weakened by the crisis. The health situation does not, of course, favor physical signing and closing operations, and it is not possible to hold physical signing meetings and handshake exchanges. Nevertheless, solutions do exist to avoid postponing the conclusion of a transaction. Both European and French legislation allow the use of electronic signatures under security conditions equivalent to handwritten signatures (advanced or qualified signatures). In some countries where the use of a notary is mandatory for company deeds (e.g. Germany or Spain), alternatives are available to compensate for the impossibility of physical meetings. It is therefore in the interest of all parties to ensure, when choosing their counsels, that they are equipped with the technological means that will enable them not only to work remotely, both for due diligence and negotiations (via desktop virtualization, the use of videoconferencing and artificial intelligence tools), but also to sign and finalize through electronic signature - and to do so, on platforms ensuring an adequate level of security, reliability, robustness and ease of use. If the closing operations require a shareholders' meeting to be held, for example to decide on a change of management or to approve a capital increase, recently amended legislation and regulations, enacted in the context of the health crisis, make it possible to do so either by video or teleconference, or even in camera, without the physical presence of the shareholders and other persons authorized to attend, even if the articles of association do not provide for such a possibility
. Lastly, all the formalities required to make such decisions binding on third parties may also be carried out by dematerialized means, with the registration offices and commercial court registries organized accordingly.
* * Dear investors, dear entrepreneurs, dear players in the world of M&A, we are of course at your disposal to exchange on these issues and to discuss the various strategies you can adopt on these topics in an effort to implement together secure transactions in line with everyone's interests.
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See also: https://www.degaullefleurance.com/video-covid19-quelles-consequences-sur-les-fusions-acquisitons/ 
See for example : https://www.lesechos.fr/finance-marches/ma/coronavirus-onde-de-choc-sur-les-fusions-acquisitions-mondiales-1185686 
On this point, see : https://www.degaullefleurance.com/force-majeure-et-epidemie-de-covid-19/ 
Order n°2020-306 of 25 March 2020