This article is written by Prince Pathak, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

Introduction

There is no uncertainty that Covid-19 has had an adverse impact on economic growth and it influenced the (Merger and Acquisition) exchanges all through the world. Coronavirus has changed the scene of business totally. It has delayed the M&A exchange, and the continuous M&A exchange requires variety because of the pandemic instability. Like the rest of the world, the pandemic has additionally influenced the M&A exchanges in India, and because of stricter lockdowns, shut fringes, and travel boycotts has made such an alternate circumstance for M&A due determination. Due diligence is a sine qua non for M&A exchanges; it is an inferred essential obligation prior to going into an M&A exchange. In this article, the writer attempted to decode the unpredictability of M&A due to ingenuity around the globe because of Covid-19 and furthermore gave the route forward methodology while making an M&A due diligence.

What is due diligence and its importance

Due diligence is a method of reviewing, examining, and evaluating a possible investment option undertaken by investors. It should be completed before the deal closes, and it generally commences when the Letter of Intent is signed. In other words, due diligence is an indispensable part of M&A transactions that confirm that all details exist while entering into a financial contract or arrangement with another party.

Whenever there are mergers and acquisitions, the buyer would be more interested in getting much more information than the available public information. So, due diligence provides the relevant details from the buyer perspective and confirms the information brought up by the seller. Whereas from the target perspective, it describes the actual market value of the target’s company, and with the help of due diligence, targets can identify its potential and hidden liabilities. Due to the covid-19 pandemic outbreak, it has created numerous challenges for parties to perform due diligence. Challenges like travel bans, inability to perform on-site visits, and health issues have introduced a difficult task for them. Hence, there should be a clear understanding of the status quo while doing the due diligence process is indispensable. Let’s look on the deals that have concluded amid the pandemic.

An overview of M&A deals amid the pandemic

Covid-19 has disrupted all the businesses throughout the world; it also brings M&A activity to a halt. India has also witnessed a major hit, and it limited the M&A deals up to $48 billion, resulting in an overall decrease of 14% from last year’s figure. Nevertheless, many deals have taken place on online platforms such as google meet, zoom, and Skype amid the pandemic crisis. Undoubtedly due to this reason, buyers and sellers were able to perform their duties. Whether it was the acquisition of whitehat Jr or Facebook’s investment of 5.7 billion dollars in the jio platform, despite the lockdown M&A transactions in 2020, still able to cross the mark of 32$ billion. These transactions explain that if deals are with an effective strategy, it is possible to perform despite the ongoing hurdles.

Key considerations for buyers and sellers

As we know, some deals are somehow complex to understand, and due to reason of negligence and misevaluation, many deals have failed. Buyers and sellers must focus on some key considerations while undertaking the M&A due diligence exercise during the covid-19 pandemic, which are as follows.

• Compliance with national and international laws relating to covid-19- Buyers must ensure that the target’s ongoing activities comply with the laws relating to covid-19. Buyers should also assess the target’s compliance with employer safety, privacy (health-related information), employee benefits, and time to time new orders and regulation relating to covid-19. 
• Supply chain– Buyers must know the impact if any have occurred on the Target Company’s supply chain due to the covid-19. Whether the target company has an alternative supplier? this question should be asked to be prepared for any unforeseen situation.
• Material contracts- Invocation of force majeure or material adverse change clause by the target parties may not be surprising given the inability to fulfill obligations in such scenarios. In this situation, buyers must clearly scrutinize the seller’s attempts to avoid the contractual performance. The buyer must ask, following questions regarding material contracts.

1. Whether the target company has provided or obtained any force majeure notices to excuse non-compliance with contractual obligations due to business delays caused by COVID-19. 
2. Have any material contracts been cancelled, changed, extended, or have any material provisions in any such agreements been revoked?

• Workforce and employee impact- Undoubtedly covid-19 has created a humanitarian crisis, and it affected the health condition of every employee of any industry. The target must have to give priority to the health of employees in the wake of a pandemic. Buyers must ascertain the health condition of target employees and ensure whether the employee of Target Company was diagnosed with the possible covid-19 symptom. The following pertinent questions can also be asked from the buyer’s perspective.

1. What is the status quo of the company’s workforce? And what are the plans that have been implemented for the safety of workers? 
2. Whether there is any impact on the salaries of workers due to covid-19 and how many employees or workers have been laid off due to the pandemic. 
3. Buyers should also know about the number of workers physically present at the office and the number of workers working remotely. 
4. Whether the target company has received any complaints due to the non-fulfillment of any safety measure at the office? If the target company has resolved any, how many complaints.
5. Has the target company been able to provide the facilities to the workers who are working remotely, and whether the employees have faced any technological glitches? 
6. Last but not least, buyers must ensure that the target company has enough with the funds for their employees. 

• Financial and solvency- Buyers must have to perform the financial due diligence on a target company and finalize the target company’s status quo. Therefore, the buyer must involve the financial advisers in a due diligence team to find whether the target company has become insolvent or on the brink of insolvency due to covid-19. Also, due to the liquidity crunch, it is necessary to concentrate on target funding strategies and associated agreements to detect possible problems. Insolvency of a target can require the board of directors to take specific measures to reduce liability or to concentrate on some issues related to the discharge of its fiduciary duties. 
• Logistics or management– The outbreak of covid-19 has changed the communication medium due to travel restriction and social distancing. In these situations, the credibility of information is a significant concern for buyers. Buyers should explore whether due diligence operations that have traditionally included meetings or site inspections can be carried out remotely. Nevertheless, buyers and sellers must find a way possible such as holding online meetings or video conferencing.
• Insurance– Insurance policies of Target Company should also be a critical focus in the due diligence process.  Buyers should analyze the terms and conditions of any insurance the target company manages that might be applicable to COVID-19. The buyer should also closely examine the unemployment insurance plans of the target to determine whether any reductions in the target’s labor or workforce force could lead to new financial obligations in accordance with its unemployment insurance scheme (e.g., the rise in unemployment claimants may lead to a significant decrease in employer premiums). 
• Data privacy and cybersecurity- One of the significant concerns amid the covid-19 pandemic is data privacy. The buyer must ensure that Target Company is complying with the data protection safety; it is also pertinent to review the information collected by the target. The following questions can be asked.

1. Poor cybersecurity or failures can create severe impacts such as reputational loss and financial loss. Hence, whether the employees have received proper cybersecurity training or not is a big question to ask.
2. Whether the target company has any cybersecurity team, if yes, whether they have the updated cybersecurity system? 

• Other aspects- It is vital to ascertain target’s preparedness by evaluating the improvements made in their corporate governance in response to the pandemic. Buyers should evaluate the possible effect of COVID-19 on employee benefit plans – particularly any schemes, such as pension plans, that have financial and/or liability consequences. Further, the assessment of the Target Company’s organizational structure, Human resources policies, and compensation policies are equally important to consider. 

The way forward 

When there is a sudden conversion from a physical to a virtual business environment, it is crucial to conjecture the due diligence’s confidential issues. The due-diligence process is very case sensitive and requires the handling of confidential data. Hence, proper coordination among the team is indispensable. It is crucial to look for an effective management policy that guarantees the remarkable performance and distribution of roles/activities, and preliminary alignment on activities is a must. It is also necessary for the target and buyer to be prepared for the post covid situation. Developing the perfect strategy, target screening, updating the due diligence list, and adapting to the new scenario can benefit the parties. 

Conclusion and key takeaways

While carrying out the due diligence consideration on the target, the purchasers ought to look at the effect of COVID-19 on the target’s company, activities, financial situations, possibilities, and staff. Organizing the due diligence measure so as to adjust to the current bind would make it simpler for the negotiating parties to proceed with the M&A deal. Unquestionably, the target company has a huge task to carry out in its responsibility to agree in these requesting periods by providing the purchaser or speculator with a genuine and reasonable record of all future market changes emerging from COVID-19. Nonetheless, the purchaser and buyer must follow the conventions or rules actualized by the administrations. The business must utilize the Coronavirus pandemic as an occasion to develop; parties can use the consideration mentioned above in their due diligence process to finalize the M&A transactions.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: