Singapore: Legal M&A strategy in the post-COVID-19 world

Mergers & Acquisitions (M&A) can be a useful tool for corporations seeking to navigate the new normal following COVID-19. Consider the example of 2008's great recession, companies that undertook strategic M&A during the economic down turn and the recovery phase generally outperformed those that stayed the safe and stagnant path.

Divestments can free up capital to be put towards better performing business lines or to make crucial investments to mine emerging business opportunities. The freed up capital can be invested in digitalisation or new infrastructure or technology enhancements.

Acquisitive M&A can also be a smart move, to branch into co-related or adjacent business segments, target SMEs, "small brands" and start-ups with innovative offerings, or, reshape the ecosystem via large scale consolidation.
We have observed that executing an M&A in the midst of the on-going COVID-19 pandemic may make good business sense for some companies but may appear to be a daunting endeavour.

In our experience, adopting some of the key strategies below may help to improve outcomes and help the M&A parties successfully close the deal with substantially less hassle.

Leveraging Technology for Effective Due Diligence

It has long become common place for due diligence to take place in the virtual dataroom. With safe distancing measures in place in many parts of the world, and many professionals working from home, we expect more aspects of due diligence to shift to the virtual environment, including management Q&A and in terms of collaboration between in-house teams and outside counsel.

We also expect the adoption of due diligence technology to accelerate as corporations seek to expedite due diligence to capitalise on market opportunities during this period with somewhat greater volatility in valuations.

M&A Market Turns Buyer Friendly

The past years of what was generally considered a "seller friendly" M&A market is now tempered by increasing demands for security sought by buyers to get them comfortable to close an offer in the post-COVID-19 environment.

As such, we are seeing greater pragmatism on both sides to be willing to negotiate on buyer friendly clauses that were once considered highly and contentiously negotiated or even outright unacceptable to sellers.

We will see more material adverse change or material adverse effect (MAC/MAE) clauses in M&A agreements, allowing buyers to walk away or trigger valuation downgrades on the occurrence of economic events, loss of financing or changes to prospects for the target's goods or services.

In our view, an effective MAC/MAE clause will need to be exceptionally well drafted and will have to fully detail the situations where the buyer can walk away (without a break fee or with a defined break fee).

The exclusions (events that do not trigger MAC/MAE) will also likely see some lively negotiations and innovative drafting. As sellers provide concessions to buyers, pressure will also mount to refine generic wording such as "changes in general economic condition" or "changes in conditions in the financial markets or capital markets" to be much more specific.

Change of Law Clauses Become More Important for M&A

With jurisdictions implementing new laws and regulations at rapid pace, both to stem the spread of COVID-19 and to bolster the economy, buyers and sellers will have to put some effort into agreeing and documenting which party will take on the liability for changes in law that might have a detrimental effect on a target's prospects in M&A.

It had been the case that such change of law clauses were typically negotiated where targets operated in highly regulated industries, but with the depth and breadth of COVID-19 regulation impacting industries wide and large, change of law clauses will be important to cover exigencies that may arise to bring post-COVID-19 M&A transactions to a close.

Legal support for M&A

The M&A market remains an essential tool to create value for stakeholders as we adapt to the new post-COVID-19 normal. As with any period of uncertainty, opportunities are to be found. Corporate leaders seeking to chart a course through this environment should not fear to lean on their legal counsel to devise solutions for effective risk allocation and project management.

This article is produced by our Singapore office, Bird & Bird ATMD LLP, and does not constitute legal advice. It is intended to provide general information only. Please note that the information in this article is accurate as at 3 June 2020. We will continue to monitor the situation and provide updates on any changes as soon as these are communicated to us. Please contact our lawyers if you have any specific queries.

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