One year of M&A transactions and company purchase agreements during the Covid crisis
What we have learnt
The Covid-19 pandemic poses new challenges for those involved in M&A transactions. Many companies and advisors were able to gain valuable experience over the last year in adapting flexibly to the dynamically changing circumstances and comprehensive hedging in M&A transactions. The Covid-19 pandemic already has effects even before the purchase agreements for M&A transactions are drafted. Please read our article Due diligence in M&A transactions in the Covid-19 pandemic – Topical questions with a view to the post-pandemic prospects for more information on this.
This article points out how the risks evaluated in the due diligence influence the conclusion of the company purchase agreement. Below we consider essential design elements for risk regulation in the context of the company purchase agreement, which have become much more important since the beginning of the pandemic:
- Purchase price adjustments: Flexibility is required to respond to short-term economic fluctuations that may result from the pandemic. In most cases, the following applies: Away from locked box/fixed pricing and towards earn out/closing accounts mechanisms and the agreements on additional variable purchase price elements.
- Material Adverse Change (“MAC”) clauses: Possibility of withdrawal (if necessary in return for an agreed break-up fee) or purchase price reduction between signing and closing. What is required is a clear definition of MAC events and materiality clearly defined by a percentage or a value threshold. Sellers typically reject the Covid-19 pandemic as such an MAC-triggering event. It is therefore advisable to define the event in concrete terms, e.g. as a material change in certain financial indicators (business MAC) due to the crisis. There are other options for arrangements in connection with:
- An industry-specific MAC clause: This includes events within an industry in the event that the company itself is also affected by the effects. For example, there are industries (such as hospitality) which the effects of the pandemic hit harder than other industries.
- A target-specific MAC clause: This includes events within the business of the target itself.
- Material Adverse Effect (MAE) clauses: These are comparable to MAC clauses, but in addition to the change in circumstances between signing and closing, they also include circumstances that already occurred before the signing but only have a negative effect retrospectively.
- W&I insurance policies to cover warranties and indemnities. However, an insurance policy will not comprehensively cover all the consequences of the pandemic as such.
- Warranties relating to material contracts, balance sheet warranties for provisions not made, realisation of receivables, data protection warranties and warranties relating to other areas affected by uncertainties arising from the Covid-19 pandemic. This concerns, for example, compliance with laws and regulations in connection with the pandemic.
Other matters to be considered:
- Compliance with formal requirements: To comply with contact restrictions and to avoid gatherings of multiple people, greater organisational effort is required to comply with statutory form requirements than before the pandemic. This affects the granting of power of attorney on signing and closing, handwritten signatures, voting and passing of resolutions in companies and the notarisation procedure. It is helpful in this context to grant powers of attorney that are as comprehensive as possible.
- Virtual negotiations: Since the start of the pandemic last year, M&A transactions have mostly been negotiated exclusively virtually due to travel restrictions and lockdowns. Virtual meetings replaced face-to-face meetings. This initially created challenges for the negotiators, but is now a real alternative for the post-pandemic period as well.
- Delays: These must be taken into account in the company purchase agreement, especially between signing and closing. Delays can arise, for example, due to longer processing times by the authorities, for merger control, apostilles, certifications, etc. These delays have to be taken into account in particular when agreeing and setting a long-stop date, after the expiry of which one or all parties have the right to withdraw from the company purchase agreement.
Conclusion: Contractual autonomy offers a great deal of leeway in drafting company purchase agreements. In the light of the Covid-19 pandemic, it is important to make use of this in order to hedge the associated transaction risks in the best possible way and to retain sufficient flexibility to adapt contracts in response to uncertain economic and political developments during and after the pandemic. There is no need to create new instruments for this. However, it is important to set new priorities in contract negotiations and to generally pay attention to the inclusion and drafting of certain clauses (outlined above), some of which were rare in German M&A practice before the pandemic. It is essential to examine the aspects relevant to a transaction and the incorporation or specific design of the individual clauses on a case-by-case basis.
Any questions? Please contact: Aleksandra Vujinovic
Practice Group: Corporate/Mergers & Acquisitions