M&A transactions privately negotiated are being deeply affected by the sudden Covid-19 outbreak, many in the basics and fundamentals of a recently agreed deal.
In nowadays international transactions M&A agreements signed (e.g. a share and purchase agreement, SPA) require certain events, conditions to be satisfied (e.g. regulatory approvals, conditions precedent) for completion needing a period of time.
For certainty, the agreement provides that business risk passes to buyer right upon signing the agreement. In turn, it is also common to introduce buyer termination rights (apart from other remedies like price reduction): fulfillment of certain conditions precedent, interim period obligation to conduct the business “as a going-concern in the ordinary course of business”, except under the occurrence of an event constituting a “Material Adverse Change” (MAC). Representations and warranties (R&W) are often qualified, subject to the lack of material adverse change event in the target business and/or the seller undertakes to reiterate R&W upon closing.
COVID-19 outbreak occurring during the interim period may cause serious distress in different forms and intensity, affecting the target -e.g. governmental measures prohibiting target’s business activities, operations, suspension of governmental procedures, sudden plummeting of customers’ orders and sales, while structure costs remain, supply chain failures- of the buyer: – inability to transfer non-cash items agreed as consideration (e.g. shares, real property, etc.), failure of its lenders,.. etc.
Deals completed with running earn outs while part o consideration agreed is subject to the performance of target business under the management control of buyer; M&A insurance policy agreements pending signature may be at peril; Auditors are reviewing their approach to financial statements closed just a few weeks before the COVID-19, or about to close addressing going-concern issues…
The impact of the COVID-19 pandemic outbreak leads many to plead force majeure, hardship and in M&A, the application of Material Adverse Change (MAC) clauses generally included in M&A agreements. Needless to say, the urgent issue is now for signed agreements: the solution to the conflicts will depend on how this contingency was contemplated and if so, how clauses are drafted. Most jurisdictions lack specific regulation on the impact of a pandemic in legal transactions in progress, or running obligations, other than the general statutes on force majeure, hardship, and the like. if parties fail to reach amicable settlement courts will solve, on a case-by-case basis.
In Spain MAC clauses are common in M&A and VC deals as they provide a flexible tool to balance parties risk allocation, but the wording of the clause must be wide enough to cover a huge variety of contingencies and scenarios but also accurate enough to clearly identify triggering events and the effects in the deal. If this is not the case in agreements already signed, parties will have recourse to the general legal framework in which this matter is quite restrictive to alter the sacred general rule of obligatory fulfillment of contractual obligations (“pacta sunt servanda”) where the parties agreement is binding under the “perpetuatio obligationis” principle. Spanish courts are likely to approach cases in two major ways: