The article is written by Abhishek Dubey, a law student from Indraprastha University. He is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.com. The article provides answers to what are the aspects to be evaluated, challenges to be faced and measures to be taken to counter the challenges under the M&A segment during & post COVID-19 crisis.

Introduction

Merger and acquisition are transactions in which ownership of the business gets transferred from one entity/entities to another entity/entities.

COVID-19 is an infectious disease caused by the newly discovered coronavirus.

The increase in COVID-19 cases has been shocking across global markets because every government has done the lockdown in its country or state, no commercial activities are happening in various countries. The COVID-19 has disturbed the supply chain, leading to the closure of the various manufacturing industries across the world. It is difficult to guess the impact of the global pandemic and long term lockdown on the business activities, the focus of the business owners and the manager is to manage the core business and its recovery due to COVID-19.

However, COVID-19 may propel the merger and acquisition activity as a business will seek to raise more capital and will do asset acquisition or business acquisition at a much-distressed value.

Will COVID-19 pandemic amount to a material adverse change?

Whether the COVID-19 pandemic will amount to the material adverse depends on various factors or circumstances.

The factor that has to be taken into account for saying that whether the particular things will be called for the material adverse change clause is:

Sectors and the market within which the company is operating. Because the COVID-19 will not have the same effect on every sector at every place etc. It will also depend upon the governing law of material adverse change, and also whether any sudden event is excluded from the definition of the material adverse change clause. Whether the COVID-19 will amount to the material adverse change and material adverse events will depend upon the various factors or determination, this will depend on the language of the contract and also the applicability of the law on that contract. In contract drafting, the seller would limit the wording of the contract by mentioning the change in the market such as economic, political or other changes.

What are the aspect to be evaluated for the material adverse clause in the light of the COVID-19

With respect to the merger and acquisition which is under the negotiation, parties should consider how the COVID-19 should be treated in the agreement. This will tell the result which will impact the transactions. The seller should be on the negotiation point that any negative effects arising from the COVID-19 should not impact the transaction at all. Buyer may not be willing to take the risk from the COVID-19 pandemic. A buyer should not focus on the general terms and conditions, the buyer should negotiate the specific closing condition precedent because the Central and the State government said that only essential services will be continued and the merger and acquisition are dependent on the government approval. If the transaction document requires that there is a long stop date needed in the agreement and the transaction is unlikely going to be close, then the Stakeholders must consider the long stop date and shall also opt for the consequences mentioned under the document.

Position of representation and warranties clause in the m&a transaction documents due to COVID-19

The representation and warranties clause will terminate due to COVID-19. Parties of the transaction documents will have to conduct the assessment with regards to the representation and warranties clause.

Stakeholders are advised to carefully see the wording of the representation and warranties, adding the COVID-19 special representation and warranties clause will be necessary with regards to the authorities given by the labour law and some other regulatory bodies.

Events between the execution and the closing date during COVID-19

Transaction document also contains the covenant clause for the target company, regarding the conduct of the business which is related to the day to day operations of the business. The common condition is to undertake the business. An exception should also be given to the target business. Some steps are also required which shall implement the necessary steps as required by the target.

Impact on meeting and other things

There will be a greater impact on the meeting and other things as there is a restriction imposed by various governments so the travel and other things are not possible. The option left for the communication is to communicate virtually or otherwise postpone it.

Impact on the due diligence

There can be a large impact on the due diligence process. The due diligence can be conducted through virtual data rooms if it’s a startup entity. However, If the entity is non-startup, then the online site will be useful. The logistical issue will have to be conducted and be kept in the mind while conducting the due diligence. The logistical issue will be challenging in the area where shutting down or closing down the premises; approval from the relevant authorities is necessary.

The key point while conducting the due diligence is:

• Whether the company has adopted the advisories issued by the Government of India, respective State government and local authorities. 
• Whether the data collected by the company is within the privacy mode because medical data related to employees are brought through the regulation of India. 
• There has to be the review of termination and material adverse effect clause.
• Target compliance on relevant employment and environmental law in India.
• The ability of the company to pay the debts.
• Company’s relevant license and material contracts with sector-specific.

Challenges and opportunities for the merger and transaction: Post COVID-19

Mergers and acquisitions are one of the best modes of business expansion. But coronavirus has spread all over the world and has impacted the world economy. However, many experts have predicted that 2020 would be a very strong deal for the merger and acquisition transaction like the year 2019. But so far this coronavirus has changed the world economy and has brought the unpredicted impact on all over the world.

The impact of this COVID-19 is complicated for the companies to evaluate. It is also being observed that many of the companies are going to have the survival problem, and some companies may close the business, so there would be a large impact on the merger and acquisition segment.

Companies with more cash reserves will acquire the stressed assets of the other companies at a more affordable cost. So the companies which want to grow may acquire the other companies along with the stressed asset. The key challenge for the companies would be opportunities for the companies and risk associated with the companies.

The acquirers will need to have a strong valuation of the business and should focus more on the due diligence, business structure, and legal documentation.

For example, due diligence can be like the assessment of revenue flow and performance of the business, materials contracts with a special condition related to the force majeure clause, cybersecurity and assessment of the company, liability associated with the companies.

Challenges involved in the due diligence process can be the choice of virtual and remote working as much as possible, challenges in procuring first-hand information, and etc. The aspect to be evaluated for the due diligence is the adjustment of due diligence timelines, adoption of the virtual working style etc.

Business valuations

Acquirers need to pay special attention to the valuation of the business. The valuation that needs to be done is the revenue assessment and projection during and after the COVID-19 crisis. And also another possible thing can be the comparative analysis of the success and failure of the merger and acquisition transactions.

The challenge involved in the business valuation i.e there is always economic uncertainty with the business, so forecasting the economy is really difficult.

This challenge can be overcome by the adjustment based on the market reality and the post-pandemic crisis.

Legal documentation

Key points to be evaluated or checked in the legal documentation are reasonable timelines for the approval from the government authorities, interim measures to mitigate the risk and loss associated with it. And also using force majeure clause to terminate some agreement which has a material adverse change in the business. The challenges in the legal documentation are the specific deal representation and warranties, identification of the material adverse impact on the transaction.

The legal provision to counter these challenges is the completion of the transaction on time, securing specific information rights till closure, and also securing the indemnity and mitigation. 

The measure to solve the economic risk is reducing the tax liability and also availing the tax benefits. And the consideration in the cashless form i.e shares swap arrangements.

Acquirers need to especially focus on the applicability of the transaction structure and also the regulatory and the other approval from the stakeholders to the third parties.

Conclusion

It is clear that the COVID-19 has an impact on the transactional activity at least for the short term for both the buyer and the seller across the range of industries.

If the parties move forward for the transaction they should be held on with their activity until and unless the market gets stabilized. There are many transactions in merger and acquisition which have to be carefully taken care of before going forward for the transactions, especially the agreement whether they have the material adverse clause or not.

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