Negotiating M&A Deal Terms During the COVID-19 Outbreak
By: Ashley Fuhrmeister
If you are in the process of negotiating the purchase or sale of a company’s assets, a large ownership stake in a company or some other merger or acquisition (“M&A”) transaction for a business, consider if and how COVID-19 could impact the terms of your deal, including those listed below.
1 - Purchase Price:
Before signing up a deal, the parties may want to evaluate whether the proposed purchase price should be adjusted to account for any material pandemic-related effects on the business. Additionally, certain proposed purchase price terms may warrant a second look. For instance, if the price will be paid all or part in stock, has the value of the stock been significantly impacted? If the deal is structured with a net working capital (“NWC”) component, are current circumstances expected to materially affect NWC at closing?
Further, if needed, evaluate whether an alternative structure may be acceptable to both parties. For example, if the closing purchase price is reduced, the inclusion of an earn-out feature (i.e., a provision which earns the seller extra dollars based on post-closing performance of the target business) may give the seller an opportunity to make up for some or all of the reduction if business rebounds over the duration of the earn–out period.
2 - Due Diligence:
Will the buyer be able to travel to and conduct the necessary investigations at the seller’s site? If this is uncertain, consider building in flexibility for extending the due diligence period. The COVID-19 pandemic may heighten a buyer’s due diligence with respect to certain matters too.
3 - Material Adverse Effect Clauses:
Material adverse effect (“MAE”) clauses in M&A agreements typically allocate between buyers and sellers the risk of certain events that have a significant and adverse impact on a business between the time of signing the deal and the time of closing. If the MAE clause is triggered, then the buyer may be able to walk away from the deal without breaching the agreement. Parties negotiating a deal in the COVID-19 era will want to consider which party will bear the risk of the pandemic’s economic effects on the business.
4 - Closing Conditions:
Depending on the particular terms of an agreement, a MAE clause may not justify a buyer’s termination of a deal after the transaction agreement has been signed. Accordingly, a buyer may want to include specific closing conditions that, if not met, will provide such justification. For instance, these may be based on financial performance metrics or maintenance of certain levels of sales volume through closing.
5 - Business Operations:
A deal agreement will often contain covenants of the seller requiring it to operate in the “ordinary course of business” between the date of signing and closing. A seller may need to consider what this means in the context of COVID-19 where businesses may face interruptions due to “shelter in place” or “stay at home” orders or other impacts from the pandemic.
6 - Third Party Approvals:
If the transaction will be conditioned upon approvals from regulators or other third parties, make contingency plans if you are unable to receive the necessary consents according to your current timeline. It may take longer to navigate the necessary channels to receive those approvals during the COVID-19 outbreak.
How you should approach these issues in the context of COVID-19 will depend on whether you are a buyer or seller. If you need assistance, please reach out to your BrownWinick attorney.
COVID-19 Resource Page
For updates on COVID-19 and new guidance provided by BrownWinick attorneys, please visit our COVID-19 Resource Page.