COVID-19 on M&A Transactions
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This article is co-authored by Archita Satsangi and Yash Singhal. The article is based on the impact of COVID-19 on M&A transactions while explaining the legality of these transactions in India. 


In the last few months, there has been a situation of panic in the whole world due to the transmission of a new disease, COVID-19 or coronavirus disease. It has been so much talked about in the news channels all around the world that they have not reported any other news than the statistics of the transmission of coronavirus. The World Health Organization has issued an advisory report on the virus stating it as a non-deadly disease that spreads on human interaction while stressing upon precautions to be taken to prevent it.

The presumptions surrounding the virus has developed a bias in the general public regarding their perspective on China. It is contended that it all started with a human being consuming a bat in China which was infected with such a virus. The individual further transmits the virus by coming in contact with other human beings. Some have argued that China conspired the spread of this virus to wipe out other countries, by developing the virus in their laboratories. 

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The Chinese city of Wuhan, where it originated, is the worst affected area. The virus later spreads in around 170 countries to send the whole world into a shutdown. The world economy has been at standstill with healthcare facilities overburdened with work. The people have been advised to stay within their homes and avoid any sort of human contact. In case of an emergency, the people should wear masks and carry alcohol sanitisers with them while going out of their houses. 

According to WHO, infected people will experience mild respiratory illness, while the old people who are suffering from any problem such as diabetes, respiratory issue, cardiovascular disease would be likely to develop serious illness. It has not been labelled as a deadly disease yet the treatment of the virus is still not achieved by any medical practitioner. 

The best way to counter the transmission of the disease is to be well informed of the symptoms, prevention methods, and its causes. Every individual should have access to sources providing relevant information on the virus to make the public aware of all necessary steps required to prevent it from spreading. 

The virus has been identified as a pandemic with its effects being observed in almost every country which makes it a global issue. This pandemic has impacted all spheres of life everywhere. The social distancing concept to maintain distance in a social setting to avoid contact, all businesses at a standstill with share markets recording great losses, the underprivileged being the worst sufferers with no option to save themselves from this virus. 

Economic impact of COVID-19 on India

The Coronavirus disease since its detection has sent shockwaves everywhere around the world. The government of every country has devised certain strategies to tackle the transmission of the virus. They have made the general public aware of the situation by posting regular updates on social media platforms along with news channels reporting all the major developments on the issue 24*7. 

The economic impact of COVID-19 on India has been significant with all the sectors of the economy incurring losses due to lack of consumers. 

Manufacturing Sector

The manufacturing sector would be suffering with most of its raw materials procured from China. China has already witnessed a slowdown in its economy since the discovery of the first case of the virus. The Indian manufacturing sector would have to find any other source to get their raw materials from. The market has also observed low demand with national lockdown announced in India and all public places have been shut down including markets. The export business of these manufacturing companies has been on a downfall with international movement restricted owing to the lockdown. The air travel along with sea shipment has been held back and this resulted in the time-lapse clause of the contract and leading to cancellation of orders on the part of the international buyers.

Service sector

The service sector which is entrusted with its services to the nation has also seen a significant slowdown. The professionals are experiencing lack of work with the local population restricted movement during the lockdown period and the international contracts lapsing on the shutdown of international travel. 

The medical practitioners are working overtime to treat the infected persons in hospitals who are more prone to mental breakdown than any economic loss as such. The legal professionals are working from home over digital means, conducting court proceedings over video conferences. They are not approached with new cases as courts are shut and taking extremely urgent cases over video conferences. 

The airlines authority will be paying maintenance charges and parking charges of the aeroplanes from their own pocket with no operational profit earned due to mass shutdown of all services. This period is the highest profit earning period for airlines as summer vacations are provided in schools/colleges and families plan long trips within & outside India. Most of the aeroplanes are purchased on a lease with the interest rate, which is paid out of the operating profit of airlines authorities. During COVID-19, the airlines would have to bear such costs without government concession. 

Non-operation of industries all over India would decrease the energy consumption substantially which will adversely affect the earnings of the energy-providing companies.

What are M&A transactions?

Mergers and Acquisition (M&A) transactions are specifically aimed to consolidate two companies through economic transactions of either taking over the assets of the other company or combine own shares with the shares of the other company to increase valuation of the consolidated company. 

In cases, where the parent company takes over the other company while establishing itself as the owner of the new combined legal entity, it is called Acquisition. The stocks of the other company ceases to exist with trading continued in the name of the owner through its own shares. A Merger is the mutual agreement of two equal worth companies to come together and merge the value of their shares. The new single entity is legally identified and mutually operated.

The manner of consolidation of two companies determines the type of transaction, with the acquisition being a forced action against an entity to purchase its shares. The Board of Directors of the company acquired are removed from their position with immediate action. Mergers are well planned out strategic transactions with mutual consent to come together to increase the net worth of total shares. The Board of Directors of both companies, in cases of mergers, remain in their positions and mutually take decisions in the interest of the newly formed company.

Valuation of companies

The process of valuation is conducted to get the exact worth of the company to be compared with their own worth, after which the form of transaction to be undertaken is decided. If the worth of the other company is lower than the worth of the own company, then the acquisition transaction is favoured to reduce competition in the market. In case of the net worth of the other company similar to the worth of the own company, the merger transaction is favoured after communication with the concerned company. 

It is an attempt from both buyer and seller to value that company in which the acquiring company has shown interest, in a way that would prevent the M&A transaction. The buyer would value the company at the least possible price for it to purchase the company and the seller, in turn, would value the company at the highest price possible for it to go beyond the purchasing power of any other company.

There are certain metrics on which the valuation of a company is carried out:

  1. Price Earnings Ratio- This is an offer made by the acquiring company as to the price payable to the other company being multiple of their earnings. 
  2. Enterprise-Value-to-Sales Ratio- The acquiring company makes an offer of the transaction which is multiple of revenues of the other company.
  3. Replacement Cost- The acquiring company would warn the other company to either accept the transaction at their terms or they will replace the company. 
  4. Discounted Cash Flow- The tool to determine the company’s current value by estimating future cash flows. There is a link between future estimated cash flows and the present value of the company.

Legality of M&A transactions in India 

The M&A transactions are legally identified transactions that are enforceable under various statute laws:

Companies Act, 2013

Section 232 of the Act provides for the Tribunal’s power to call a meeting of the companies that are merging. The compromise must be for the reconstruction purposes of the companies. All the undertakings and liabilities of the company are required to be transferred to the other company. Section 233 provides for the procedure of the merger of certain entities, the description of the entities is provided in the section.

Section 237 of the Act provides for powers of the Central Government to merge companies in the public interest.

Securities and Exchange Board of India (Listing Obligation & Disclosure Requirements), 2015

Regulation 11 of the Listing Regulations provides that arrangement of financial transactions like merger, acquisition, amalgamation, etc does not violate the provisions of securities laws.

Regulation 47 of the Listing Regulation states that all listed entities that want to undertake arrangement must file a draft of stock exchanges to obtain a no-objection certificate from the Tribunal.

Income Tax Act, 1961

The provisions of the Income Tax Act, 1961 has identified M&A transactions as legal entities entitled to pay taxes as a single entity. It also states the need to transfer all capital assets from one company to the other company on amalgamation under Section 47 of the Act.

The Underlying Problem

The global business environment is going through an unusual and uncalled for challenge. Although lockdowns and social distancing are the only ways to deal with the pandemic of such kind, this in turn will lead to huge amounts of disruption in the supply chains, funding gaps, cash flow problems, plunge in the consumer spending thereby unimaginable conditions for most of the businesses. The key areas that will affect the overall decision making as to step in the merger or to desist from the process of entering into negotiation for the on-going deal are concerns regarding valuation, reshaping the business outlooks, liquidity crunch owing to reduction in lending by banks resulting in surplus fund reallocation. The M&A deals stuck at the documentation structuring will now probably be deferred to a date till the crisis subsides. The bidders are likely to drop out from the seller driven bid process. The closure of international borders has had an adverse impact on the cross-border mergers also now because the MNC’s and Private Equity funds conserve cash and restrict their outlook of business.

It is quite tedious work to predict the consequences of such a pandemic and the extending lockdowns globally, having a huge impact in daily life. With such an amount of unpredictability and uncertainty as to the post crisis the businesses will definitely focus on managing the core business and recovery of the time which was lost due to lockdown thus may result in M & A deals taking a backseat.[i]

The following headings will underline the problems associated with processes/aspects of M&A deals that would be affected and needed to be revisited through a different lens.

Legal Due Diligence

The process will now undergo a considerable change owing to lack of physical meetings and site visits, remote working arrangements and not much information about the health of employees due to the pandemic. The vendor due diligence reports regarding the deals that were in the negotiation phase would now be updated to account for all the new developments and conditions. The focus would now shift from inter alia,

  • the target company’s position to perform the obligations under contract,
  • whether the contract includes force majeure, warranties and indemnities,
  • assessment as to continuity of businesses would be done, provision for adjustments of working capital needs, ability to pay off debts,
  • counterparty risks, compliance of the government advisories regarding working in the pandemic,
  • health and safety of the employees which would now account for Sensitive Personal Information and also the effect of work from home for employees owing to data privacy breaches and online source of generating information can’t be relied upon fully.
  • Also what is supposed to be considered most importantly is the impact of pandemic on the ability of key suppliers to perform for the target company.[ii]

The seller company should notice the sensitivity by the buyer firm and already take into account the above factors and prepare a deal highlighting the measures taken to counteract various new questions that would make the buyer rethink the deal.

M&A transactions impacted by COVID-19

As per the experts, the most probable impact of COVID-19 would be a worldwide recession. The recession would mean an increase in the rate of unemployment, lack of demand in the market, low money supply in the economy and other such negative effects.

The companies could sense the futuristic impact of the COVID-19 on the Indian economy and make informed decisions to not put themselves in a disadvantageous position. The current scenario would be dictated by the ability of each company to expect the ratio of their incomes to expenditure. A positive ratio would motivate the companies to make quality transactions while a negative ratio would force the companies in taking precautionary measures to mitigate the losses.

The following are a few ways in which M&A transactions would be impacted in India:

Material Adverse Change (Mac) Clauses

The focus due to pandemic is brought on to the documentation process of M&A and a termination clause has come into the limelight while rethinking on the continuation of M&A deal. This clause would basically provide the purchasers with an opportunity to walk away from transactions, or withdrawal from the on-going negotiations. The definition is basically penned down in the purchase agreement

The Material Adverse Effect/Change (hereinafter referred to as ‘MAE’) or the termination clause typically allows a stakeholder to terminate the agreement in the event of any material adverse change in the seller company[iii]. The negotiation on this clause can reach a certain number of sittings as agreeing on materiality of an event is a tedious task in itself. Even the courts in our country fail to provide any guidelines as to materiality of an event and have restricted their opinion as to “any event or activity making it impossible or restricting any party to perform will be termed as Material Adverse Effect. Specifically the incorporation of this clause in M&A Agreements arises from Section 56 of the Indian Contract Act, 1872 (see here wherein the Doctrine of frustration is enumerated that the contract becomes void when the promisor due to an act, after the contract is made can’t prevent an event. Also Regulation 23(1)(c) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, sets out that “any open offer can be +withdrawn in circumstances where any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is not met for reasons outside the reasonable control of the acquirer, and such agreement is rescinded, subject to such conditions having been specifically disclosed in the detailed public statement and the letter of offer”  signifying that parties can withdraw from the obligations any time when the performance becomes impossible, due to reasons which are beyond the control of parties.

It is said that all such conditions constitute MAE upon which the target business has no control that may adversely affect the target business thus preventing buyers from walking off from closing the deal. As to the subsisting of COVID-19, the parties would now negotiate on the impact of pandemic on transactions and business and the problems for seller would arise as now they would want for narrower terms in MAE and the buyers would insist to include lockdowns, closure of territorial boundaries, epidemic to be included in the agreement. As of today’s situation when the duration and long term impact of the pandemic is undetermined, it is not viable to deduce that courts will address the issue of invoking of MAC clauses.

A party seeking to invoke MAC should consider if other alternatives are available and verify twice that if any alternative means of performance of contract is available then that should be considered at the first place. It is the responsibility to strike a balance between the termination clause of the agreement and the agreed term of performance. It is to be noted now that as of now in case any party invokes this clause the court will certainly decide on materiality of the impact of pandemic on the transactions of the company.

The clause depending upon the case is agreed between the parties along with certain exceptions to it, although earlier epidemics and public health events weren’t inclusive of the definition, but now these are the most important terms to be included in the ongoing contracts and in the ones to be entered in near future. 

Force Majeure Clause

The COVID-19 pandemic has been proved to be an economic crisis worldwide. Serious questions have been raised owing to the ability of parties not being able to perform the obligations of the contracts that do not ordinarily constitute essential services. Since, the restriction on the movement of goods and persons has been imposed by the Ministry of Health and concerned state Governments, suspicion has aroused as to performance of the terms and thus breach of contract is anticipated by many parties for the time being.

Force Majeure means an “event or effect that can be neither anticipated nor controlled . . . [and] includes both acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes, and wars)[iv], such clause is negotiated to include acts like that of god, riots, embargos, that of government, terrorism, war, pandemics, boycotts, plague etc. Force Majeure Clause in contracts is dealt as corollary to MAC clause however Force Majeure accounts for both artificial and natural events with specific prescription of the events where under MAC clause triggering events are not specified. The affected parties are released from performance of contract as and when the force majeure event arises, if it is specifically mentioned under the clause. Basically Force Majeure clauses are drafted with some wit and contain a “Catch all phrase” which is similar to “included but not limited to” or “any cause/event outside the reasonable control of parties” which comes under ejusdem generis.[v]

The Indian contract Act, 1872 contains 2 provisions relating to act of god and force majeure clause. Section 32 (see here deals with Contingent contracts inter alia specify that contract depends upon the happening of an event and if it doesn’t occur the contract becomes void. Further Section 56 of the Act inter alia provides a contract becomes void if becomes impossible by happening of an event which the promisor couldn’t prevent. It entails the Doctrine of Frustration which is basically an act outside the scope of the contract and the events beyond their control make the performance of contract impossible, difficult or even illegal.[vi] Further this doctrine can find its application during the COVID-19 wherein the contract contains the force majeure clause in a very restrictive manner not specifically mentioning the epidemic/act of god and also doesn’t contain catch all phrases then the doctrine comes into play.

Although not the Indian Courts but the Ministry of Finance of India though its official notification dated Feb.19,2020 declared COVID-19 as pandemic and be treated as a natural calamity thereby enabling parties to invoke Force Majeure Clause. Invocation of this clause as owing to act of god can derive is support from the judgement by the Apex Court in The Divisional Controlled, KSRTC v. Mahadeva Shetty[vii] (see here signifying that the expression Act of God means “operation of natural forces free from human interventions with the caveat that every unexpected natural event doesn’t operate as an excuse from the liability of there exists a reasonable possibility of anticipating the occurring.”[viii]. On detailing the law of force majeure and following guidelines that should be considered before invoking the clause were enumerated in Energy Watchdog v. Central electricity Regulatory Commission[ix] (see here which are (a) events being beyond the control of parties, for which they can’t be held liable; (b) analysing if best endeavours taken to mitigate the event; (c) the event was unforeseeable by the parties; (d) the event rendered it impossible to perform the terms of agreement.[x]

During the pandemic of COVID-19 it’s challenging to invoke the clause for a party to get relieved from performance of contractual obligation as the event should have a direct impact on non-performance and also the party is under duty to mitigate or explore alternate means of performance.[xi] What complicates the matter is whether COVID-19 the direct cause of non-performance or is it the action taken by authorities by imposing the lockdown and thereby restricting the movement of goods and services nationwide. In the case Standard Retail Pvt. Ltd. V. M/s Global Corp and Ors.[xii] (see here an injunction was refused by the court as to encashment of letters of credit on the ground that movement of steel was restricted by the government authorities. The court then highlighted the steel as an essential good and its distribution being an essential service, thereby the indirect link between COVD-19 and non-performance of obligation.

It is thereby stated that a good starting point to invoke the Force Majeure clause is to check whether the event is directly related to COVID-19 and also to consider is the duty to mitigate and the onus lies heavily on the party seeking to have the excuse of non-performance.

Representations and Warranties

Representations and warranties comprises the preliminary negotiating clauses by the seller which is highly negotiated. The Indemnity has basically been backed by an escrow of portion of proceeds payable at the closing[xiii] (10%-15% for 1-2 years). The purpose of this clause in the M&A Agreement is to protect for losses that arise due to sellers’ breach of representations made in the agreement.

As of date, the purchasers would assess the risk emerging from the pandemic and seek warranties for the same. The sellers will basically seek coverage under materiality qualifiers and would carve out all inaccuracies of which the buyer is informed, along with resistance as to forward-looking warranties and representations. The buyers would have an edge as to additional incentive to push for holdback of price to secure price adjustments along with payment of indemnity claims[xiv] and will further give them the right to walk away from the deal if they learn that before closing the agreement such representations and warranties were untrue. Since the pandemic has turned out to be such a huge risk, any virus or pandemic related business loss would be excluded by the underwriters in the future Warranties and Indemnity Policies.

For the deals in their negotiating and phase, specific indemnities, representations and warranties need to be added keeping in mind the COVID-19 in compliance with environmental and labour laws advisories. “Parking part of the consideration amount in an escrow account is a common mechanism for purchasers to offset some of the risk associated with the seller’s representations and warranties being untrue.”[xv]

Lastly, a major contract which needs to be diligently negotiated due to the pandemic is the Insurance. Though insurance companies seek to indemnify the losses/covering a peril, bit for limiting own losses, many clauses as to the exclusion to the covered have been brought into place. Such exclusion clauses deem to encompass every loss arising due to COVID-19 and the scope of such clauses can only be limited by negotiation depending upon the operational profile of the target company.[xvi]

Deal Valuation and Pricing Mechanisms

The pricing clause and payment structure and valuation have always been the heavily negotiated clauses even before COVID-19 making it difficult to align both buyer and seller on some financial value. Owing to the pandemic there now exists economic uncertainty and vulnerability in the economic forecasts and thus sellers who earlier preferred the locked box mechanism will now be unable to transfer the economic risk of business on to the buyers. The major problem posed will be the disagreements in the adjustment calculations that will arise due to abnormal inventory levels and uncertain number of accounts receivables and payables, due to this transaction being kept on hold or the withdrawal of purchasers.

With regard to finances for valuation, buyers are more likely to consider the deferring of payments with earn-outs and escrow mechanisms by linking the payments to valuation forecasts by undertaking the role of an epidemiologist. The parties would also like to extend the time limitations wherein earnouts are employed to account for the market conditions and the COVID-19 volatility.[xvii]

Considering the potential delays as to regulatory approvals, parties may prefer structures involving less role of regulatory bodies like acquisition via shares or by compulsorily convertible instruments directly linked to target’s performance also they may want a financing out option as it would become harder to obtain third-party funding for financing the purchase price.[xviii]

Ordinary Course of Business and Time Between Signing and Closing of the Deal

The draft of M&A Agreement usually contains Covenants and Undertakings which basically mandates the target to continue the “in the ordinary course of business” implying the business to be operational on a day-to day basis to preserve the value of the target business. The covenants include terms like not to change the compensation of employees or terminate them, pledge assets outside the normal course of business or to make capital expenditure only with the permission of the buyer[xix].

Owing to the pandemic even the covenant needs a few exceptions to be added to enable the target to execute the business and in response to the existing conditions and adhering to government regulations some significant changes will be taken by companies which would prove to be the actions outside the course of ordinary business which may be in best interests of the company. What needs to be taken care of is that parties consider how to balance the fiduciary obligations and ensure that actions do not erode the buyer’s interests.

The Ray of Hope for M&A Deals

At this situation of crisis the conventional approach for M&A deals would need to change for making such deals a success and may open-up some buy-side opportunities. Engaging with advisors, strengthening the terms of the deal and proactive planning are the way to facilitate the transactions. Although looking on the other side the M&A activities, business may decide to raise more capital and find the opportunities to acquire assets or business at a reasonably negotiated valuation and further to strengthen the supply chain and secure the competitors as mutually beneficial strategies to sustain, survive and grow.

As to cope with the COVID-19 situation, drastic change has been seen in the healthcare and Medicare facilities including the fields of allied medical research, equipment, devices and technology. Internet based platforms have spawned opportunities which further facilitated retail sale of drugs and medicines at the doorstep of consumers, coupled with innovations in artificial intelligence and technologies resulting of new opportunities in a de novo sector Health-Tech[xx]

Financially a package announced under the 2020 Union Budget like tax relaxations or exemptions on investments by sovereigns and some relaxation as to compliance norms by regulatory bodies would now act as a catalyst for the M & A process.[xxi]Further some opportunities may arise in the insolvency/ stressed asset sectors and the corporates with strong balance sheets and cash reserves will be able to get reasonable deals as banks and lending institutions would post-crisis lookout for salvaging such assets.

In sectors like consumer goods, manufacturing where Covid-19 had not that a bigger impact, buyers therein may reconsider or revise their valuations also because the stock market in Jan 2020 was at an all-time high.



The M&A transactions are a form of contracts which are among companies to consolidate with each other after a process of valuation being carried out. The merger is the mutual coming together of financially equal companies while the acquisition involves a company acquiring the assets of the other company replacing the Board of Directors of that company. In both cases, the singular entity is established with complete right over decision making. These transactions are legal in India under various statutory provisions.


[i] Samir Sheth, Navigating merger & acquisition activity during Covid 19, Consultancy (Apr.7, 2020),

[ii] Mahesh Singhi, Covid-19 to slow down M&A ecosystem, The Week, Apr.13,2020 at pg no.2.

[iii] Prithviraj Senthil Nathan, What to expect in M&A deals in India, KSK (Mar.21,2020),

[iv] Blacks Law Dictionary (11th Edition, 2019).

[v] Md. Serajuddin v.State of Orrisa, AIR 1969 ORI 152.

[vi] Abhishek Arya, Doctrine of frustration¸Mondaq (Jun.29,2015),

[vii] 2003 7 SCC 197.

[viii] Id.

[ix] (2017) 14 SCC 80.

[x] Mohana Roy, COVID 19: A pandemic, Force Majeure and MAC, Mondaq(Mar.24,2020),

[xi] Adarsh Saxena, Force Majeure in the times of COVID-19, CAM(Apr.30,2020),

[xii] Order dated April 8, 2020 passed by the Bombay High Court in Commercial Arbitration Petition (Lodging) No. 404 of 2020.

[xiii] Richard Harroch, A guide to M&A Representations and Warranties Insurance, Forbes (Jan.23,2019),

[xiv] KPMG Law, COVID-19 and Private M&A, KPMG(Last visited Apr.28,2020),

[xv] Id.n.4. ¶5.

[xvi] Pankhuri Saxena, M&A in the times of pandemic, Inc42(May.10,2020),

[xvii] Eric M. Kogan, How will COVID-19 impact M&A?, Natlaw(Apr.15,2020),

[xviii] Bhumesh Verma, Challenges and way ahead for M&A in COVID-19, Latestlaws(Apr.19,2020),

[xix] Supra n.16.

[xx] Ministry of Health and Family Welfare, Door-Step Delivery, Mohfw (Mar.26,2020),

[xxi] Id. n.1.

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