M&A transactions are strongly influenced by negotiations between the parties and their advisors, especially in the final phase before the sale and purchase agreement is signed. The initial restrictions and contact prohibitions imposed during the COVID-19 crisis make this process more difficult. In addition, the current focus will be more on the economic situation of the respective target companies and their forecast. For this purpose, the German legislator has taken some measures with an aid package to support the continuation of business operations.
Duty to file for insolvency, right to refuse performance and lease agreements
KfW special programmes were created to modify and expand the funding conditions of existing programmes. The new German Economic Stabilisation Fund Act serves to stabilise the German economy and secure jobs. The obligation to file for insolvency was suspended until 30 September 2020, the circumstances for insolvency appeal were expanded and payment prohibitions for the Board of Managing Directors were relaxed. For consumers and micro-enterprises, a right to refuse performance has been created until 30 June 2020 for material continuing debt relationships. In the case of consumer loan agreements, a three-month deferral is possible. During this period the right to terminate the agreement is excluded. Lease agreements cannot be terminated until 30 June 2020 due to non-performance based on the effects of the COVID-19 pandemic. Due to the more difficult implementation of general meetings or passing of shareholder resolutions, the German legislator has also provided for some simplifications in these areas. In the transformation law, the eight-months balance sheet deadline was extended to twelve months.
Request for postponement of notifications
In addition to other labour law regulations, companies can receive short-time work compensation if short-time work is ordered on the basis of COVID-19. The request of the antitrust authorities to postpone (merger control) notifications to a later date, if possible, is likely to be significant for the course of planned transactions. The European antitrust authorities are even signaling their intention to tolerate certain forms of cooperation between competitors during the COVID-19 pandemic. In the case of ongoing contracts that are affected by COVID-19, but are not covered by the COVID-19 laws, it is advisable to seek joint discussion between the parties rather than refusing performance on the basis of general regulations or terminating these contracts (e.g. disruption of the business basis, impossibility, etc.).
(New) exit challenges in times of crisis
The COVID-19 pandemic affects both ongoing acquisition processes and (portfolio) investments by private equity investors with a long-term exit strategy. For acquisition processes, the question arises whether the transaction can be completed or a suspension is possible. If the sale and purchase agreement has already been signed, the main question will be whether and in what period of time the antitrust authorities approve the transaction. Besides that, a right of withdrawal will come into consideration if a so-called Material Adverse Change (MAC)-clause has been agreed. In the event of severe events or changes in the business of the target company, which are precisely defined in the sale and purchase agreement, in the period of time pending between signing and closing of the transaction, the parties may withdraw from the sale and purchase agreement before the latter.
The situation is different if existing (long-term) investments are to be sold as part of an exit strategy. For these, sufficient liquidity is primarily relevant. If this is problematic, the above-mentioned measures and options must be examined and implemented by the management. It is possible that the process could turn out to be a company acquisition from insolvency (so-called distressed M&A).
Close coordination is advisable
If, despite the COVID-19 crisis, a sale and transfer is intended in the near future, the special focuses of potential buyers should be taken into account in the legal due diligence. In particular, the focus will be on possible legal disputes arising from ongoing contracts in the event of non-performance due to the COVID-19 pandemic, labour law measures such as short-time work or dismissals for operational reasons, the legality of subsidies and grants received, especially in the period of the COVID-19 pandemic, compliance with data protection laws or the existence of a corresponding (business interruption) insurance. It can also be assumed that MAC-clauses will become increasingly important in the context of sale and purchase agreement negotiations. In order to ensure further transaction security, close coordination with the antitrust authorities should take place to avoid further delays.
The COVID-19 pandemic has created some uncertainty in the M&A transaction business. For ongoing transactions, the focus will be on finding an amicable solution between the parties if a postponement is not (no longer) possible. For investments in (portfolio) companies, the appropriate measures must be taken in times of crisis. The COVID-19 pandemic leads in the context of an exit to new focus areas in the legal due diligence and in sale and purchase agreement negotiations. It remains to be seen what impact the COVID-19 pandemic will have on the M&A transaction business in the medium and long term.
This article was first published in: VentureCapitalMagazin, 3-2020, p. 30/31