Coronavirus - Mergers and Acquisitions (Past, Present and Future)

This may have an impact on:

• corporate transactions that have already completed but contain provisions that continue to be enforceable
• current transactions being negotiated
• future transactions

Past Transactions

The purchase and sale of a business, in whatever form, may include mechanisms for payments to be made after completion (eg the seller receives periodic payments or a percentage of the business's profits over a period of time) and typically involve the negotiation of bespoke warranties (promises by the seller to the buyer that certain facts about the company are true).  

• Deferred Payments:

Deferred payments of the purchase price can be structured in a variety of ways from set periodic payments of agreed sums (often using the profits of the target business to fund such payments) to 'earn-out' payments, which are dependent on the performance of the business.

If the target's business does not perform as well as expected, this will impact on the buyer's ability to service the payments of the deferred sums and the seller's ability to achieve targets required for any earn-out payments.

In light of the unprecedented circumstances created by the coronavirus, some buyers and sellers may consider agreeing an alternative payment arrangement. Unlike most commercial agreements, it is uncommon for there to be 'force majeure' clauses (ie which would allow the obligations in the contract to fall away in the event of an unforeseen 'act of God') in sale and purchase agreements. Therefore, it is likely to be at the discretion of each party whether they are prepared to re-negotiate the terms of the agreement.

• Warranties:

In times of uncertainty and change, a buyer may uncover that some aspects of the business are not operating as they expected or were led to believe during their research (due diligence) into the business. As a result, a buyer may look to claim back payments they have already made to the seller through a claim for a breach of warranty.

Warranties around the terms of contracts, realisation of debts, IT systems and data protection may be relevant where customers/suppliers are not able to comply with the terms of their contracts; debts are not being paid; and the business is having to utilise its remote working systems (e.g. working from home arrangements), which may not be as cyber-secure as envisaged or GDPR compliant.

Most sale and purchase agreements will be bespoke so we suggest that any buyer reviews the agreement as a whole and seeks advice as to what sort of warranty claim may be possible to bring.

Any seller who receives notification of a claim from a buyer should seek advice on the merits of such claim, as warranties are usually given at completion and not on a forward looking basis. Therefore, if the warranty was correctly given as at the time of completion, a buyer should not be able to bring a claim simply because the business was affected after completion by the coronavirus.

Present

For those who are in the early stages of negotiating the terms of their sale and purchase agreements, the circumstances in which they started the negotiations will have changed significantly. This will impact on matters such as exclusivity and price.

• Exclusivity:

Before entering into sensitive discussions about a business or completing an agreement for its sale and purchase, the prospective parties may have agreed to an exclusivity period. Exclusivity will be given for a period of time to allow the buyer to decide whether to proceed with the transaction and negotiate its terms, without the threat of the seller entering into discussions with other potential parties. It is possible that the current circumstances will have paused discussions or at least delayed the transaction, which means that the exclusivity period may expire before an agreement has been completed. We suggest that buyers review any agreed exclusivity periods and look to negotiate an extension where possible. Sellers may be able to use such delays to their advantage and seek to start negotiations with other potential buyers.

• Price:

Depending on the nature of the target business, a buyer may try to reduce the purchase price. However, if the target business is in a niche market which is currently in demand (for example, it is a provider of remote working IT facilities), a seller may be in a strong position to increase the purchase price. There are many factors which go into deciding the value of a business and the parties should seek assistance from their advisors on this.

Future

The coronavirus outbreak is a first for many and the repercussions will be felt for years to come.

Buyers will want to minimise the risks associated with buying a business by ensuring they have obtained robust warranties from the seller; ring fencing the risk of taking on a new business by possibly creating a new company to hold it; and performing further due diligence to ensure aspects of the business affected by the coronavirus (such as current employee furloughing or bank re-financing being undertaken) have complied with legislation and government guidance.

For specialist legal advice, please contact Richard Phillips on 07803 295 150 or Emma Cameron on 07939 261 632 in our Corporate Law team, or complete the form below.