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

Mergers and acquisitions (M&A) can offer a wide range of opportunities for corporations looking to navigate the new normal following the COVID-19 outbreak. During the economic downturn in 2008, companies that undertook strategic M&A in the midst of the crisis and during the recovery phase generally outperformed businesses that stayed on the safe and stagnant path.

On the sell-side, divestments can free up capital which can then be put towards better performing business lines or make crucial investments to mine emerging business opportunities. The freed up capital can be invested in digitalisation, new infrastructure or technology enhancements. 

On the buy-side, acquisitive M&A can also be a smart move, to branch into co-related or adjacent business segments, target SMEs, small brands and high growth companies with innovative offerings, or, reshape the ecosystem via large scale consolidation.

Executing an M&A in the midst of the on-going COVID-19 pandemic may appear to be a daunting endeavour, but it can also make good business sense. Below are some key considerations for businesses looking to improve outcomes and successfully close the deal with less hassle.

Leveraging technology for effective due diligence

It has long become common place for due diligence to take place in the virtual data room. With safe distancing measures in place across the globe, 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, in order to capitalise on market opportunities during this period which is experiencing somewhat greater volatility in terms of valuations.

M&A market turns buyer friendly

The past few years of what was generally considered as a "seller friendly" M&A market is now tempered by increasing demands for security sought by buyers to ensure they are happy 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.
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 several jurisdictions implementing new laws and regulations both to limit 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.

In the past, the change of legal clauses was typically negotiated where targets operated in highly regulated industries. However, with the depth and breadth of COVID-19 regulation impacting a wide variety of industries, change of law clauses are important to cover eventualities that may arise in order to bring post-COVID-19 M&A transactions to a close.

The M&A market is an important platform for businesses to create value for stakeholders as we adapt to this new world post-Covid-19. As with any period of uncertainty, there are also opportunities and business leaders considering entering this environment should not fear to lean on their legal counsel to devise solutions for effective risk allocation and project management.