The Show Must Go On: Private Equity Transactions during and after the Covid-19 pandemic

Covid-19 has undeniably had an adverse impact on mergers and acquisitions (M&A) deals worldwide. With increased risk and uncertainties, the M&A market is slowing down, with some players taking a wait and see approach before deciding on their next step.
 
However, as with life, the M&A show must and will go on. While some parties will be eager to sell and divest their assets, others may see opportunity amid the pandemic.
 
Private equity firms with cash to spend may snap up bargain deals in companies which have survived the lockdown and in which they see potential to thrive in a post-Covid-19 world. With numerous companies needing cash injections and sellers eager to liquidate their assets, it will be a buyer’s market for cash-rich private equity firms.
 
This article examines some of the transactional issues which private equity deals are or will be facing in light of the impacts of the Covid-19 pandemic.
 
MAC Clauses
 
Extra emphasis can be expected to be placed on the negotiating and drafting of material adverse change (MAC) clauses both during and post-Covid-19.
 
Buyers will want MAC clauses to include the effects of the current Covid-19 pandemic, whereas sellers will wish to exclude the same, taking a caveat emptor position. Sellers would also likely try to negotiate an exception to the MAC clause where the target is not disproportionately impacted as compared to its industry peers by the event purportedly constituting the MAC. Deal makers and lawyers may find it challenging to come up with a clause that is unambiguous and will not draw parties into litigation when it is relied upon.
 
Extra focus will also be given to force majeure clauses. Lawyers will now be looking more closely at the definition and the impact of force majeure events in transactional documents.
 
Valuations, Internal Rates of Return and Purchase Price Adjustment
 
Where deals were valued prior to the Covid-19 pandemic, the potential buyer may wish to revisit and renegotiate valuations and internal rates of return (IRR) as these would likely be affected by the pandemic. The historical financial information used to determine the valuation and the IRR may not be a correct reflection of the target’s financial status post-Covid-19. Of particular importance will be ensuring that the target will still be able to remain solvent post-closing.
 
Buyers and sellers will also place an increased emphasis on purchase price adjustments. Sellers would prefer a locked box purchase price mechanism based on a date set prior to completion, e.g. a date prior to the Covid-19 outbreak, to allocate the economic risk to the buyer before completion. However, as the target’s business may be adversely affected by the pandemic, the buyer may prefer a purchase price based on a date closer to the completion date for a more accurate reflection of the value of the target as at completion.
 
Representations and Warranties, and Additional Due Diligence
 
Sellers’ representations and warranties will also be affected due to the pandemic. Certain representations may no longer be accurate (e.g. certain customer or supply contracts were terminated, or various receivables may not be collectible due to the pandemic). Sellers may want to relook at the representations and warranties they are able to give and consider providing additional pre-completion disclosures.
 
Buyers on the other hand may wish to carry out additional due diligence to ascertain the position of the target and whether it has been or will be adversely affected by Covid-19.
 
Interim Operational Covenants
 
It is common for agreements to provide interim operational covenants for targets to operate their businesses in the ordinary course of business for the time period between signing and completion. This may not be possible in the current situation as a target’s business may need to take extreme measures to keep its business afloat, e.g. redundancy, renegotiating financing, etc. 
 
In respect of deals that have been signed prior to the pandemic but not yet closed, sellers may need to obtain approval of the buyer to carry out such measures. Alternatively, they may need to renegotiate such covenants to cater for business disruptions during the pandemic.
 
Affected Timelines
 
While speed is certainly a prerequisite for M&A transactions, transactions will certainly be slowed down by the Covid-19 pandemic.
 
Sellers running auction bids should consider extending their auction timelines to take into account the logistical issues posed by the pandemic. Due diligences may take longer due to the various lockdowns worldwide and the buyer may seek additional due diligence on the target.
 
Third party consents and regulatory approvals will also take longer to be obtained as governmental services are kept to a minimum or physical offices are closed. As the world recovers post-pandemic, there will be a backlog of applications to be processed by the relevant regulators. This should be taken into account when determining long stop dates for completion.
 
Exits
 
The correct pricing and exit strategies for private equities will be the trickiest as it will be a question of what a realistic exit would be and whether an initial public offering (IPO) would still be able to find subscribers should there be an economic recession or worse, a depression. Similarly, trade sales at the right price may be difficult to find, unless the investment has been in a Covid-19 proof sector such as rubber gloves, pharmaceutical and medical industries, online platforms, and logistics.
 
Signing and Completion
 
Parties would need to be prepared for a lack of physical meetings for signing and completion.
 
The deal lawyers will need to plan in advance for originals to be couriered over, and to consider whether any documents need to be notarised or certified. The logistical issues on stamping and lodging of certain instruments will also need to be considered.
 
Conclusion
 
It seems that the Covid-19 pandemic will have a far-reaching impact, which will affect private equity transactions both during and after the pandemic. 
 
When private equity firms choose to invest, they will need to consider and cater for the impacts of Covid-19 on transactions. If they are able to adapt and be flexible, they may very well find bargains and thrive from these unprecedented and trying times. To the winner, the spoils!
 
If you have any queries on this Alert, please contact Ms Sheba Gumis (Partner) at sheba@skrine.com.