December 4, 2020

Post-Closing Adjustments: Covid-19 Issues

This SRS Acquiom memo addresses some of the more novel post-closing scenarios that have arisen in M&A transactions as a result of the Covid-19 pandemic.  Here’s an excerpt on some of the issues associated with the NOL carryback provisions of the CARES Act:

One of the many ways the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) helps businesses is by allowing taxpayers to carryback net operating losses (or “NOLs”) up to five years from taxable years 2018, 2019 and 2020. This is potentially a great benefit for companies that want to spread the losses from COVID-19 to prior tax years and hemorrhage a bit less cash in 2020. One of the unexpected outcomes, though, is a surge in tax return amendments regarding target companies which were recently acquired

Most merger agreements are silent on who should reap the benefits of pre-closing tax benefits that are received post-closing. Of those which are not silent, most deal specifically with the straddle-year return, and not potential amendment of prior tax years. As a result, it is unclear and to what extent the sellers should benefit from a tax amendment regarding the preclosing period.

Outcomes vary. In deals where the agreement is silent on pre-closing tax benefits, we have reached deals with buyers regarding a potential split of the benefit. We have also allowed buyers to reap the benefit in exchange for other benefits for the sellers, such as an early escrow release.

The memo notes that buyers are not incentivized to go through the expense of amending returns in deals where the sellers are entitled to all pre-closing tax benefits, and that this has led to SRS Acquiom reaching out to start a discussion and offer to pay for the work directly.  Other pandemic-related post-closing issues addressed in the memo include earnouts, deal litigation and stock settlements.

John Jenkins