Creating M&A Issues for Non-public Corporations within the COVID-19 Period


The virus that causes COVID-19 has ushered in unprecedented times for our country and our global community. Certainly the pandemic is affecting the way M&A transactions are viewed, documented, implemented and even assessed. This article lists some of the broader pandemic-related considerations that arise in the private company M&A world.

Legal due diligence

The typical buy-side due diligence checklist provides a broad network for bringing legal risks and other potential concerns about the target business to the surface. Despite its breadth, the standard due diligence checklist may need pandemic-specific questions, including those that focus on: force majeure clauses; Interruptions in the supply chain; Staff accommodation; safe work environments; Whistleblower claims related to COVID-19; On-site contagion risk management; Business continuity and disaster recovery plans; Classification of business services as “essential”; CARES Act loans, credits, and the like; and analysis of the relevant insurance coverage.

Objectives and guarantees (representatives)

Many target agents typically listed in an M&A agreement may need to be expanded to cover pandemic-related matters, and at the same time those matters may warrant a broader inclusion in the target’s disclosure plans. The iterations most likely to consider a particular pandemic are those that cover the topics above, including the iterations related to normal operation and the absence of any material adverse effect or change. Compliance with laws; Work and employment issues; Annual accounts; and no undisclosed liabilities.


Earnouts are often helpful in closing a “valuation gap” between buyer and seller. A valuation gap is more likely to arise when the target faces economic uncertainty, such as the impact of the COVID-19 pandemic. At the same time, earnouts bring their own insecurity and can “throw the can down” and simply postpone a “failure” in terms of pricing. Careful and concise language is critical in order for the earnout – itself a tool for hedging against uncertainty – to work properly and as intended by the parties without introducing undue risk of disputes in the post-deal deal.

Disclosure plans and their updating

Disclosure plans contain factual disclosures (or exceptions to certain statements) regarding those who represent a goal. As such, they affect the area of ​​responsibility for these employees. The COVID-19 pandemic has underscored this aspect of M&A practice. The Targets seek to disclose more pandemic-related matters and consequences – past, present, and future – to buyers in their disclosure plans.

For transactions where an M&A sales agreement has been signed but not yet finalized, sellers use their sales agreements to review how the Disclosure Schedule update issue will be handled. The parties have a wide range of alternatives that they can use to arrange the update of the disclosure schedule within a sales contract. These in turn raise business issues as to what can or must be disclosed and what impact these updated disclosures have on the buyer’s termination and compensation rights before or after the deal.

Renegotiation of the LOI terms

There can be a “gap” between signing a normal, non-binding letter of intent (LOI) and signing a binding purchase agreement (either before or at the same time as the deal is concluded). While non-binding, typical M&A LOIs will include expectations regarding key business issues such as price, closing conditions, and the like. During this post-LOI period, sellers can experience pandemic business operations that can reduce cash flow, revenue, and other sales-related metrics. Buyers may find that their cash flow, revenue, and other metrics expectations are significantly depressed as they near a binding commitment to terms and conditions. As a result, the parties may need to adjust the LOI terms.

It is important to state in an LOI which metrics can be adjusted and when. This is important even if the LOI is not binding. Even in this context, the parties normally expect that key terms in the LOI will be appreciated without any unexpected circumstance or fact, and not least, being clear about whether the parties can re-examine key terms helps the business dynamics only when these discussions become necessary.

Adjustments to net working capital

Most purchase price adjustments (with the exception of adjustments related to debt, cash and transaction costs) are based on the target’s net working capital, specifically the difference between the closing net working capital and a previously agreed target level. This target working capital is normally intended to reflect a “representative” or “normalized” level of working capital for the company. However, given the frequency and the extent to which the pandemic has affected business conditions, this can be difficult to pin down as a target level. The parties could consider a mechanism to adjust the target level of working capital between signing and closing if the initial level becomes painfully optimistic with the knowledge gained through additional time.

Independent compensation

The impact of the pandemic on a destination’s up-front deal may be the “nature” of the topic or matter a shopper may get to, shouldn’t be “their problem.” Buyers can justify that when pricing and modeling deals, the pandemic-related economic risk was not taken into account, at least through the conclusion. They can view pandemic issues and their impact on the target business as one of those “toxic” risk categories that they consider “on the seller’s guard”. The size of the target representatives in these matters is an important mechanism for risk allocation.

If the parties agree that all or some of the pandemic-related impact on the target business should be borne by the seller, stand-alone compensation – a mechanism already widely used in M&A agreements for unusual or toxic risks – can be added alongside the target representatives play an important role as part of the overall structural solution.

MAC regulations

Provisions regarding “material adverse effects” or “material adverse changes” (collectively referred to as MAC provisions or clauses) are commonly seen in M&A agreements and serve three purposes: (1) as the subject of a positive target agent (ie since a at some point there was no MAC); (2) as a qualifier and limited to one or more other target agents (e.g. that the target company has qualified to conduct business in all applicable states, unless the non-qualification did not have a MAC); and (3) after signing, but prior to closing, give the buyer a right of termination, which gives the buyer the right to leave if a MAC occurs in the meantime.

Given a simple reading of typical contemporary MAC regulations, the COVID-19 pandemic is likely to fall under one of the most common “causal exceptions” to a MAC; B. for general economic conditions, force majeure or natural disasters. It is possible that a particular set of pandemic-related circumstances could nonetheless fall under a common “disproportionate effects” exception (although this is a MAC), although this is likely to be an uphill battle too, as disproportionality is usually measured by reference to comparable ones Companies within the same industry.

Regardless of the likelihood that existing best practices MAC regulations typically exclude pandemic-related consequences from reporting, parties are beginning to include MAC language that does so more explicitly and positively, either through a specific exclusion from a MAC definition for COVID- 19 Pandemic and its Impact or as part of disclosures on MAC-related representations and warranties. At the same time, given the current economic volatility, buyers can try to include the pandemic as a MAC event in order to grant a termination right if the pandemic-related consequences worsen significantly (or to include a pandemic-specific termination right). Target companies and sellers will of course oppose this effort.

Other provisions relating to the sales contract

Without exception, other provisions of a typical M&A sales contract need to be reviewed in the light of the COVID-19 pandemic. These may be provisions on external close dates (should the external close dates be extended if delays related to pandemics are beyond the control of the parties, such as third party consent, due diligence visits, or regulatory approvals not as soon as it would normally be the case); Interim Operating Covenants (which may need refinement to reflect local pandemic realities); and choice of law provisions (as some states have more established jurisdictions than others on certain post-pandemic M&A issues).

PPP loans

Loans to a target company under the CARES Act through its Paycheck Protection Program (PPP) also require special attention as part of an M&A transaction. The parties must consider whether the transaction changes the eligibility of the target as a PPP borrower (or applicant) before or after entering into or even executing a definitive sales agreement and whether the approval of the US Small Business Administration (SBA) is related to the Acquiring the target with outstanding PPP loans needed.

RWI insurance

The use of representation and guarantee insurance (RWI) in M&A transactions has exploded in the last more than 10 years. In general, RWI covers unknown risks that trigger a violation against a target agent. Specified, known risks are routinely excluded, e.g. B. those identified in the target’s disclosure plans, known industry risks, and the like. The COVID-19 pandemic is now, of course, a known affair. Accordingly, RWI insurers expressly include pandemic-related risks and losses as known risks that are outside the scope of a normal RWI policy. Insurers could also consider reading an explicit pandemic exclusion from a MAC definition and / or carving out agents specifically related to COVID-19 from the coverage. All of this, of course, happens in real time in response to rapidly changing local circumstances.

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