How will covenants regarding the operation of the target company's business between signing and closing be impacted by the pandemic?
In an M&A transaction with a bifurcated signing and closing, there is typically a lengthy list of negative covenants governing the target company's operations during the interim period between signing and closing. These negative covenants tend to be quite restrictive, prohibiting most activities outside the "ordinary course of business." Sellers should make every effort to negotiate a carveout from these obligations for acts resulting from the COVID-19 pandemic, such as replacing a key supplier, allowing or even requiring employees to work remotely, and myriad other measures that may be inconsistent with their historical operation of the business. In addition, sellers should address any loan arrangements or other contracts they may potentially breach during the interim period and be transparent with the buyer regarding these matters and the underlying reasons therefor. Often such a breach would trigger buyer termination rights, so it behooves sellers to get in front of the issue by disclosing it to the buyer as soon as possible and trying to carve out certain breaches from the list of events triggering buyer termination rights.
Does the COVID-19 pandemic constitute a "Material Adverse Effect", under an acquisition agreement, thereby triggering Buyer termination rights?
A "Material Adverse Effect" (MAE) or "Material Adverse Change" (MAC) clause typically provides the buyer with a right to terminate if the target company suffers any one of a series of significant adverse events during the interim period between signing and closing. What constitutes an MAE or MAC is often subject to substantial negotiations between the parties. Whether the COVID-19 pandemic will constitute an MAE or MAC will depend on the specific definition for MAEs or MACs set forth in the acquisition agreement, including the list of exclusions therefrom typically included as part of the definition. This issue requires a case-by-case analysis based on the pandemic's damage to the company's business and the specific language in the acquisition agreement.
How will required regulatory approvals be impacted by the virus and how should the parties address this impact?
In light of the closure of many government agencies that provide regulatory approvals that are conditions precedent to the closing of an M&A transaction, the closing of such transactions may be delayed. M&A transactions requiring regulatory approval which were executed before the pandemic may trigger termination rights based on the failure to close before a specified deadline, commonly referred to as a "drop-dead date". For those transactions still being negotiated, the parties should provide more time than they typically would have in the past for obtaining regulatory approvals. Even when the relevant government agencies are back up and running with a full staff, they will face a backlog of matters requiring approval, which will likely result in continued delays.
This is a fluid and rapidly changing situation and these resources are current only as of the date of publication. We recommend that you contact your local Quarles & Brady attorney regarding the most up-to-date information or with any other questions regarding this subject matter, or contact Peter Spier: (312) 715-5058 / [email protected].