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Considerations for M&A Transactions During the COVID-19 Crisis

March 24, 2020

Mark Manning is a partner in the Burns & Levinson’s Corporate, Venture Capital & Private Equity, and Intellectual Property Groups. Clients look to Mark Manning to achieve the best results in their most complex commercial transactions and internal business and legal issues. He regularly leads merger and acquisition transactions on behalf of both buyers and sellers, providing him with deep insight into what drives both sides of a deal – a perspective that helps him efficiently facilitate practical solutions to issues that keep deals from getting done. He can be reached at mmanning@burnslev.com or 617.345.3468.

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The COVID-19 Crisis has created upheaval in every facet of business and the M&A market is no exception.  The resulting wave of uncertainty will make closing M&A transactions very challenging for the remainder of 2020 and possibly beyond. The Burns & Levinson M&A practice group shares the following wisdom for buyers and sellers in the various stages of M&A transactions:

1. Deals Being Sourced or in Diligence.  The COVID-19 crisis knows no boundaries in terms of geographic scope, industries, and markets affected — financial implications or otherwise. Buyers should carefully consider not only obvious factors, such as the current and projected effect of the crisis on a target’s top line revenue, but also look even closer at other factors that could have outsized effects on a target’s performance due to the virus’ ramifications.  This could include sole source suppliers, customer concentrations, or the inability to operate with a reduced or remotely operating workforce.  Each analysis is target specific, and buyers should engage the right internal and external resources to ensure they have adequately considered all relevant factors. Likewise, opportunities may arise to pivot a particular manufacturing line, product, or service to participate in the response to the crisis – as an essential service or otherwise – until it passes before returning to its original purpose. Prospective sellers should anticipate these types of analyses by buyers and be prepared with responses that support maximum enterprise valuation under the current circumstances.
2. Letter of Intent (LOI) Stage Considerations. Buyers will need to focus now more than ever on drafting each LOI to permit an out based upon both its conclusions on the target’s short-term and long-term viability and also the buyer’s own ability to fund and finance the deal. Diligence requirements, closing conditions, and termination rights should all be carefully worded to match the buyer’s need to walk away if appropriate, including, if necessary, a specific COVID-19 related termination right. Sellers, on the other hand, will want to look at these same LOI provisions and negotiate for wording that is as specific as possible as to the reasons that the buyer can pull the plug. Buyers and sellers might consider using the “tightness” of these terms as a bargaining chip that might be traded for other deal points. Sellers could also try to incorporate a break-up fee into the LOI if a buyer walks; but given the extreme uncertainty caused by the current environment, buyers will likely balk. If representation and warranty insurance is being used or considered as part of the transaction, it is in both sides’ interests to confirm with brokers what if anything carriers are modifying in their policies in response to the pandemic and how that might affect the deal. 
3. Transactions Under Negotiation.  In the current environment, buyers should pause to determine what portions of their diligence conducted to date and what terms within the transaction documents in process need to be revisited in light of the current conditions, as well as the effects on the deal if the current circumstances continue for a period of 3, 6 or 9 months. Sellers who have a buyer that remains at the negotiating table should consider what if any remaining open points are true deal breakers and otherwise move as expeditiously as possible to a closing. Sellers should also expect additional diligence requests and changes to the deal document terms that could lead to a retrade on terms, and be prepared to make hard decisions as to where the walk away inflection points are with respect to purchase price and other key terms.
4. Signed Purchase Agreements with Closing Conditions. Like force majeure clauses, termination and so-called MAC (material adverse change) clauses have new and heightened importance in M&A documentation.  For purchase agreements that are signed and awaiting fulfillment of closing conditions, buyers wanting to reconsider will need to look for actual terms – or interpretations of them – that would permit not closing. Sellers should likewise look at these same terms for interpretations that require the buyer to close. However, sellers should also consider from a purely practical standpoint their appetite for bringing legal action for specific performance to get the deal closed against a buyer who nonetheless walks away, including the time, costs, and distraction to the management team during extremely difficult times.
5. HSR Considerations.  Note that if an M&A transaction is subject to HSR review, effective as of March 16, 2020, the Premerger Notification Office will no longer accept hard copy or DVD submissions. Submissions may only be done through the e-filing system. Also, the FTC/DOJ offices will no longer consider early termination, and the parties will need to wait the full 30 days before closing. 

As businesses makes their way through the ever-changing COVID-19 landscape, the Burns & Levinson M&A team will continue to update with news from the deal front and stands ready to partner with buyers and sellers to help them get those crucial deals done even in these tumultuous times.