March 5, 2020

Coronavirus: Implications for M&A Transactions

Earlier this week, I blogged about the possibility that the coronavirus might be used as a MAC trigger, and noted that some sellers have already negotiated specific carve-outs to prevent this from happening (here’s another one – see p. 9). Of course, the outbreak has implications for M&A that go well beyond MAC clauses, and this recent Sidley memo is a terrific resource for getting your arms around the wide array of deal issues that this event creates.

The memo addresses MAC clauses, but it also reviews the potential implications of the coronavirus for due diligence, pricing and consideration, reps & warranties, covenants, drop dead dates – and even governing law provisions.  Here’s an excerpt addressing factors to consider when negotiating interim operating covenants:

Between the signing and closing of a transaction, buyers generally want sellers to operate the target business in the ordinary course to protect the value of the business they committed to purchase and want to be consulted (and their consent obtained) on a variety of material or non-ordinary course matters. On the other hand, sellers continue to own the target business until closing and, particularly if the transaction has been priced under a post-closing adjustment mechanism, sellers will continue to take pricing risk on the business during the applicable measuring period.

Sellers will therefore want to retain the authority to take the steps they feel necessary to operate the business during the sign-to-close period with minimum oversight and interference by the buyer, as well as rights over the operation of the business during any post-closing adjustment period. The uncertainty associated with the coronavirus outbreak means that sellers should insist on being able to (and buyers should be amenable to allowing them to) respond quickly to the coronavirus threat in order to protect their workforce, comply with legal or public health requirements and orders and undertake other activities that may be deemed necessary or prudent in this environment.

The memo goes on to recommend that sellers consider reviewing their coronavirus contingency plans with their buyer before signing the purchase agreement in order to obtain pre-approval for the activities contemplated by the plan.

I started off today by referencing my earlier blog on the coronavirus outbreak’s potential use as a MAC trigger.  In response to that blog, I received the following insight from one of our members:

“I was looking at the 2019 Nixon Peabody MAC survey – it looks like acts of god and national calamities were excluded from MAC definitions in 77% and 17% of agreements, respectively. Query whether the coronavirus falls into either exception (fortunately, I don’t think we’re anywhere close to a national calamity). Unfortunately, the survey does not indicate how often these exclusions are subject to disproportionality qualifiers.”

Those of us who made the mistake of looking at our 401(k) plans earlier this week might dispute the assessment that the outbreak isn’t approaching a “national calamity” yet, but it’s worth noting that some of the more general MAC carve-outs may already encompass the potential fallout from the coronavirus.

John Jenkins