Mergers & Acquisitions during COVID 19
Published 29 May 2020
The Coronavirus pandemic has had a profound impact on business sales and acquisitions which were ongoing before the government introduced lockdown. The short-term impact of these measures is that many vendors and purchasers were forced to call a halt to their negotiations, with some parties opting to abandon the transaction altogether. In certain industries such as the retail sector, we have seen that businesses who are thriving in the current economic uncertainty are eyeing up their competitors with a view to acquiring them and by extension, narrowing the marketplace. As the vultures circle for many businesses suffering from a decline in their financial viability, it is likely that the traditional steps in any M&A transaction will need to be altered with COVID19 specific measures put in place. This article will seek to set out the key stages that may cause some difficulty both during and following lockdown.
In order to give the purchaser an overview of what the target company looks like, the vendor will be expected to provide information by way of a process known as due diligence. It is likely that there will be a need for purchasers to carry out an increased level of due diligence to give them a better understanding of the risks involved with taking over the target company. The purchaser will want to review, amongst other matters, the impact the pandemic has had or is likely to have on the company’s financials, banking agreements, joint venture agreements, supply contracts and employees. The financial outlook of the company is likely to be at least in part dependent on what industry they operate within. In particular, it may be difficult to place a value on the company given the economic uncertainty which will follow COVID19 and where the company’s financial prospects are unclear.
For all company’s regardless of their current situation, it is important now more than ever that they keep proper records of board meetings and decisions and ensure that their statutory books are kept up to date. If the business gets into financial difficulty down the line, the ability to provide a potential purchaser with clear and accurate records will mean that the due diligence process can be conducted in the most efficient manner.
For transactions that have been put on hold, it may be wise for the parties to consider if the deal structure initially agreed is still the most suitable way in which to proceed. For example, if the deal was structured as an asset sale, there may now be some ambiguity over how the transfer of employees is to take place especially if some of these individuals are on furlough.
In simple terms, ‘Warranties’ are statements made by the vendor that the purchaser relies upon when buying the business. Warranties allow a purchaser to have confidence in what they are buying and provide a means of redress if these statements turn out to be incorrect. It is advisable that COVID19 specific warranties are worked into any ongoing or future transactions both to ensure that a purchaser knows what they are getting and, equally, that the vendor does not later become the subject of proceedings. For transactions which precede lockdown, parties will want to review any warranties given to ensure that compliance is still possible and that these have not already been inadvertently breached. A possible solution, and something which a purchaser will certainly want to push for, is to have all warranties repeated at completion to ensure they remain accurate.
With the introduction of measures such as VAT deferrals and the Coronavirus Business Interruption Loan Scheme it is clear that the government are taking steps to combat the economic effect the virus will inevitably have on businesses. It remains to be seen what affect the crisis is going to have on banking and acquisition finance.
With many of us working from home for the foreseeable future, issues around the execution and exchange of documents have arisen. Electronic signatures have become more prevalent and can be used for contracts and deeds however issues arise when the transaction involves the transfer of property. Land Registry deeds in Northern Ireland need to be signed and witnessed with wet ink, and so the use of eSignature technology is not a suitable alternative. At the time of writing, the Land Registry are closed. As lockdown is lifted and social distancing relaxes, this is likely to become less of an issue.
Fortunately, there are plenty of helpful solutions and tools which can be used to work around most of these issues without causing too much disruption. For example, the payment of tax for share transfers and stamping can now be done online and via email.
This is a non-exhaustive list of some of the areas in Mergers and Acquisitions which have or will be the subject of some scrutiny when lockdown measures are relaxed. They are, however, by no means insurmountable and adapting using technology and other alternate methods will be key.
Should you require any further information, please contact the Corporate team at MKB Law.
This article is for general guidance only and should not be regarded as a substitute for professional legal advice.