Special newsletter coronavirus
Corporate acquisition contracts in times of the COVID-19 pandemic
At present, M&A transactions are frequently at least postponed because of uncertainties about the development of the target, the potentially unpredictable situation of the prospective buyer and its financing, and partly also because of practical problems to finalize the transaction.
Carrying out the M&A process
The impacts of the COVID-19 pandemic are most evident in actually carrying out an M&A transaction. Larger “face-to-face events” are currently hardly conceivable. The regular use of modern communication and collaboration tools, supported by experienced project management should not render these problems insurmountable, as long as the decisionmakers are available.
Legal due diligence will focus more than ever on exit opportunities and “force majeure” or MAC clauses in key contracts as well as adaptation provisions. The relevant regulatory framework (export bans, etc.) and the legal/operational resilience of supply chains will also need to be examined in detail.
There are far-reaching requirements as to how the acquisition price mechanism should be structured:
- Closing accounts / Locked box. At the present time, standard closing account and locked box mechanisms will lead to results that are considered unsuitable. It will unlikely be enforceable to entirely exclude consideration of the COVID-19 pandemic and, moreover, difficult to implement. It is therefore expected that, more than previously, contracting parties will at a minimum give additional consideration to MAC clauses and earn-out structures.
- Earn out. Acquisition price components that are based on future developments only postpone the problem into the future. If the parties expect, however, that all effects of the COVID-19 pandemic are only temporary, earn-out provisions – in combination with specific MAC clauses – may offer a solution.
Other particularities of contract design
In addition, the current uncertainties are particularly relevant in the following contractual areas:
- Securing performance / Solvency of the parties. Safeguarding mutual obligations by way of securing payment or performance (escrow, letters of comfort; reservation and proof of financing, etc.).
- Reservation of financing / MAC clauses. Financing reservations and MAC clauses have recently been used rather cautiously in German M&A contracts. Specially adapted MAC clauses and financing reservations will, however, become increasingly important to secure business deals.
- Seller representations. Warranties and representations relating to the status of the target and the contracting parties as well as customer relationships, in particular representations relating to solvency, material contracts and contractual relationships, financial and “ordinary course” warranties, and certain employee representations (such as key man clauses).
- “Bring down” clauses, with or without additional “disclosure” option.
- “Pre-closing covenants / Ordinary course.”
Period between signing and closing / Interference with the basis of the transaction
In the period between signing and closing, the question also arises as to whether the principles of “interference with the basis of the transaction” in accordance with Section 313 German Civil Code will justify a refusal to perform contractual obligations. While the application of these principles is usually excluded, the exclusion itself, however, may be the subject of interference with the basis of the transaction. Irrespective thereof, the grounds for such interference are strongly expanding. It is widely presumed that the risks of performance have to be borne by buyers alone and that this, jointly with sellers' risks from representations and acquisition price mechanisms, forms a uniform, fixed system overall. This will increasingly be legally tested in the future.
Corporate acquisition agreements that have already been closed
Corporate acquisition agreements that have (recently) been closed might be reviewed by the parties where necessary. Questions will arise in particular with respect to seller representations and outstanding closing adjustments and, there specifically, in relation to value adjustments and provisions.
It is material for the parties which phase of the M&A transaction they are in and whether it is still possible to influence the content of the transaction. If a contract cannot be concluded, the state of negotiations could at least be frozen and “parked” within the scope of an exclusivity agreement or a term sheet.
As relates to M&A agreements that have already been signed or recently carried out, the review of MAC clauses or the principles of interference with the basis of the transaction and the effects on closing accounts and warranties and representations will lead to increased discussion.