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Covid-19 outbreak has raised concerns about the corporate acquisitions since it is not yet certain that how constant this period would be. In many jurisdictions, this pandemic environment is regarded as a key driver for suspending or cancelling proposed cross-border transactions.
Admittedly, as for merger and acquisition (“M&A”) transactions, the recent downturn results in sellers reconsidering whether this is the right time to market their business for sale whereas the potential buyers having hardship to provide financial resource for any possible purchase or even primarily to conduct any site visits or negotiations. This is quite challenging indeed for making major investment in acquisitions, particularly since buyers’ access rights to business are being interrupted where shut down or isolation measures are taken place. In this respect, sellers are genuinely more concerned about achieving full value of their business moreover to ascertain the sale process while the buyers struggle to proceed their eager to invest due to lack of certainty and audit mechanism.
Risks may stem from many aspects such as the difficulty of valuation of business, the postponement or delay in resolutions of governmental institutions, the vagueness of the transaction documents since the current crisis is not foreseeable. Nevertheless, it is not absolute that the merger and acquisition activities will continue to be standstill especially for healthcare related industries where there is a clear demand globally. On the other hand, it is announced by many that the transportation, retail and travel industries are hit hardest by Covid-19.[1]
As for transactions already in due, due diligence procedures must be focused on sincerely since it is mainly based on the operational and financial status of the target company. To do so, the company in demand could evaluate the risks through the following lenses for the purchase; i) contractual abilities of the target company and its counterparties which may also include the customers in performing their liabilities arising from the contracts; also any force majeure and termination clauses should be reconsidered in case invoked; ii) material bearings of the target company which may be due to employment such as wages and labor expenses or due to ongoing contracts lease or supply agreements or any potential breach of contracts; iii) any possible non-compliance with the legal procedures and risks under relevant laws as may be travel or import-export restrictions, quarantine measures and government-mandated closures; iv) supply chain managements and if possible alternative supplier investigations to create alternate potentials; v) the impact of pandemic on the target company’s revenue and the possible risk of insolvency; vi) any insurance claims may be faced; vii) the impact of the pandemic on the industry in order to continue the business after possible M&A transaction.
The analysis should be made as widely as possible to cover even the further interpretations by the government and international bodies which may directly affect an ongoing business. To this end, even though the buyer criticizes the possible purchase on those angles, there may be new challenges to be encountered by the parties which eventually can lead the parties to be less reluctant to enter a transaction.
In case seller and buyer are keen to move forward with a transaction, due diligence definitely would affect the drafting of the definitive acquisition agreement since it defines and limits the risk allocation. Hence, above-stated critical aspects should also be assessed in detail for the transactions that are currently being negotiated. Therefore, it is recommended to the buyer and seller to include specific provisions covering Covid-19 adjustments into their transaction documents or an independent undertaking by the parties as seller and buyer. These protective provisions may cover; i) adjustment on the purchase price which also can comprise of security arrangements for the seller in case the buyer suffers financial difficulties; ii) specific provisions embodying warranties for the financial and operational effect of Covid-19 on the target company; iii) involvement of a specific material adverse change provision or providing further funds for the buyer which may be equity commitment letters or other funds mechanisms preferably including certain funds in favor of the buyer where the buyer is at risk.
In the same vein as pre-closing covenants, closing conditions may also vary since Covid-19 causes an unpredictable environment for businesses and delayed timelines especially as for required approvals by the governments. Besides the trouble experienced through the pre-closing procedures, regulatory resolutions and delays may hamper the closing process of M&A transaction. In the majority of the regimes, compulsory pre-notification procedure is applied thus, closing cannot be realized unless the approval is granted by the related government authority. European Union (“EU”) has declared special measures combining “delay of merger notifications” as explained “due to the complexities and disruptions caused by the Coronavirus, companies are encouraged to delay merger notifications originally planned until further notice, where possible”.[2] In addition to the measures on delay, EU has encouraged the applicant to file all submissions in digital format. As recently ruled by the European Commission (“EU”), under the EU Merger Regulation, the approval of the proposed acquisition of Raytheon by United Technologies Corporation (UTC) combining aerospace and defense business, is subjected to a remedy package.[3] Hence, one can say that other possible measures and adjustments are being conducted. Likewise, EU, the Federal Trade Commission in USA has resolved to implement a temporary e-filing system.[4]
As opposed to many, in Turkey any restriction or postponement is not yet announced by the Turkish Competition Authority (“TCA”) rather TCA released six new resolutions regarding the merger control filings on March 26, 2020. Despite the fact that there is no announcement made in this respect, parties to a transaction should be aware that the approval processes could take longer than expected as the chaos evolves due to growing global impact of Covid-19.
Having said that, there also may be sector-focused advantages concerning M&A transactions even though Covid-19 has undeniable adverse impacts on the vast of population. In jurisdictions where no regulatory approval is necessary and supply chain risk is not experiencing the chaos and restrictions, the buyers may be triggered by these attractive opportunities.
Nevertheless, there is no denial that the business worldwide is experiencing a vulnerable and unpredictable ground, therefore this uncertainty impinges on cross-border transactions. Being aware of these circumstances, it is recommended to the buyer and seller to take precautionary measures and conduct not only company-based research but also industry focused approach. For the ongoing transactions, as seen in Pfizer and Mylan case where delay is consented, it is far more important for the parties to be flexible and cooperative in terms in order to deal on mutual agreeable terms in the wake of Covid-19.[5]
Author: Ezgi Aysima Kır
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[1] https://www.usatoday.com/story/money/2020/03/20/us-industries-being-devastated-by-the-coronavirus-travel-hotels-food/111431804/
[2] European Commission, https://ec.europa.eu/competition/mergers/news.html
[3] European Commission, Press Corner March 16, 2020
https://ec.europa.eu/commission/presscorner/detail/en/mex_20_470
[4] Federal Trade Commission, https://www.ftc.gov/enforcement/premerger-notification-program/guidance-filing-parties
[5] Reuters, https://www.reuters.com/article/us-mylan-nl-pfizer/drugmakers-mylan-pfizer-delay-merger-due-to-coronavirus-outbreak-idUSKBN21D1JZ
