As we all start to adjust to "the new normal", it's worth considering the impact of the crisis on M&A transactions, particularly for those companies looking to acquire new technologies.
This article sets out some – but my no means all – of the key issues for businesses when undertaking M&A activity in the current environment and what to keep in mind for the months ahead.
There has been a real slowdown in M&A activity in recent months. Most parties are waiting to see how target businesses are being impacted by the pandemic and how quickly life will return to normal as lockdowns gradually ease. These parties need to be realistic with any timetables they set. Although it's become the norm to hold virtual negotiations, it can be more time consuming to undertake due diligence while working remotely and when site visits are not possible.
In this turbulent market, buyers should consider the extent to which the target business may have relied on any temporary government schemes and whether they have actually complied with all the requirements of these schemes. Any failures to do so could give rise to potential claims or liabilities to repay recovery assistance. Buyers should also consider the impact of the crisis on other areas of the business, including the finances of the target generally as well as contractual and financing arrangements, counterparty risk and insurance, among others.
At the moment, buyers are including additional warranties to learn about the measures a target has taken to manage all aspects of its business throughout the pandemic – whether it be its financial position, any government schemes it's been a part of, employment measures or contractual arrangements.
Meanwhile, sellers are eager to avoid an excessive disclosure burden by including either COVID-19 exclusions to the drafting of the warranties or broad COVID-19 disclosures. It's important to ensure that the disclosure letter reflects the correct position at the time the warranties are given. If there is a significant gap between signing and completion, sellers should insist on a right to update the disclosure letter before completion.
Historically much less common in Europe than in the US, Material Adverse Change (MAC) clauses are increasingly being used as a way for buyers to manage risk. Where a MAC clause is used, it's important that the parties consider what events constitute a MAC. Buyers will want a MAC clause to cover as many scenarios as possible while a seller will want to minimize the scope of the MAC to reduce the risk that the buyer will invoke the MAC and walk away from a deal, for example by making clear that any worsening of the COVID-19 pandemic (such as a second wave) will not constitute a MAC.
In recent years, there has been a significant shift to the "locked box" structure under which financial risk passes to a buyer as of the date of an agreed set of locked box accounts. These are often prepared months before the acquisition is subsequently completed. Given that locked box structures put the risk of adverse changes in the business between the locked box date and completion on the buyer, we expect the locked box will become less popular, at least in the short term, and for parties to instead use completion accounts. Where locked box structures are still used, buyers will be keen to ensure that the gap between the locked box date and completion is as short as possible.
While the emergence of electronic signatures on platforms like DocuSign assists to some extent, special arrangements may need to be made for certain documents. Helpfully, many organisations like HMRC have modified their procedures to accept electronically signed stock transfer forms for stamping. However, many M&A transactions involve the execution of deeds, and many practitioners have concerns around whether electronic signatures can be used to execute deeds – it will be interesting to see how both the law and practice develops in this area going forward.