The COVID-19 crisis has already hit economy and thereby also leads to uncertainties in the field of upcoming or already ongoing M&A transactions. Cross-border transactions, particularly large transactions and transactions concerning motor vehicles as well as the transportation, gastronomy or energy sector are particularly affected in this context. However, the risks arising from the crisis can be contained by designing the transaction processes and drafting the contractual regulations accordingly.

Consequences for due diligence

Identifying risks within the target company is the main focus of due diligence. Buyers should consider the specific consequences of COVID-19 for the target company in the due diligence process to determine whether the target company is adequately protected against the negative impact caused by the virus. Disrupted supply chains, loss of production and decline in revenue, but also existing insurances, if any, measures ordered by public authorities, crisis management processes and consequences entailed by remote working, if applicable, should be taken into consideration. Sellers, on the other hand, should approach this issue with particular sensitivity and proactively provide the corresponding information. The risks identified in this step will form the basis of further negotiations and the drafting of the agreement.

Drafting tips

Material adverse change (MAC) clauses native to Anglo-American transactions are agreed upon to cover any material changes of the subject matter of the agreement. They aim at providing for circumstances, which were not predictable and adversely affect the target company, appearing between the signing and the closing. The MAC clause allows for the buyer to rescind the agreement and/or to renegotiate its conditions without being liable for a breach of contract. In particular, new transactions require increased care when it comes to wording. Even if the extent of the pandemic cannot be estimated at the moment, it has become a known event by now. Nevertheless, it will certainly be possible to find an appropriate wording taking into account the specific COVID-19 risk. In this context, the parties should carefully weigh the risks (and how they are addressed in the wording) in each individual case.

From the seller’s perspective, agreeing a break-up fee would be advisable. A break-up fee is a penalty determined in advance, which becomes due if a party withdraws from the deal. The purpose of the break-up fee is to reimburse the other party for the time and expenses it has invested in the deal. However, in particular from the buyer’s perspective, breakup fees will not be easy to negotiate due to the current uncertainty.

The unclear further development of the virus and its economic consequences are a major factor of uncertainty, which entails major difficulties in the determination of a purchase price. Thus, from the perspective of the buyer, particularly locked box and fixed pricing concepts are not recommended. Rather, risks should be identified already in the due diligence phase and appropriately considered when drafting the agreement. This will not apply to the seller, although it is doubtful, whether a fixed price acceptable for the seller can at all be pushed through in the negotiations. Particular caution is also called for in case of price adjustment clauses based on historical working capital.

Caution should also be used in the context of warranties and guarantees. Often, these are the subject of tough negotiations even under normal circumstances. Buyers should keep a particularly good eye on those fields which are the most affected by the uncertainty caused by the virus. These include, for instance, the collectability of the target company’s claims, its financial projections and a possible breakdown of its supply chain. From the seller’s perspective, demands for more extensive warranties and guarantees can be counteracted by way of more transparency.

Exit possibilities 

If the transaction has already been initiated, the question arises, whether the buyer can still exit the deal. In this respect, various possibilities could offer themselves. First of all, the written agreement is to be examined in great detail with regard to possibilities of termination and/or an adjustment of the purchase price. In many cases, agreements already include exit possibilities.

In particular international agreements often contain so-called force majeure clauses, which provide, in particular, for the (temporary) cancellation of performance obligations, for the exclusion of liability and for the right of withdrawal in case of an event of force majeure. But even without explicitly agreeing upon it, the remedy of force majeure may be applicable. However, this needs to be treated with caution. Even if epidemics and pandemics can generally be considered an event of force majeure, this does not necessarily mean that the parties of the agreement can actually invoke this circumstance successfully. Rather, it is necessary to specifically interpret the actual circumstances on a case-by-case basis.

A termination of concluded agreements or at least an adjustment can also be achieved on the basis of frustration of contract if certain prerequisites are met. For this to apply (in brief), the circumstances typical of this kind of transaction must have become the basis of the agreement and unforeseeably, material changes in circumstance must have occurred after conclusion of the agreement. Case law has allowed avoidance or rectification of contract due to frustration of contract only in exceptional cases so far. Ultimately, however, this, too, depends on the actual circumstance of the individual case.

Merger control

In the context of deals subject to reporting obligations, the Second Covid-19 Act (2. Covid-19-Gesetz) brought about an extension of the time limits to be considered. In case of merger filings received by the Federal Competition Authority (Bundeswettbewerbsbehörde) after the Second Covid-19 Act has entered into force but before 30 April 2020, the 4- or 6-week time limit within which the Federal Competition Authority and/or the Federal Cartel Prosecutor (Bundeskartellanwalt) can file an examination application with the Austrian Cartel Court (Kartellgericht), will not start running until 1 May 2020. Also for examination applications which have already been pending before the Cartel Court at the time when the Second COVID-19 Act entered into force or will become pending before 30 April 2020, the 5- or 6-week time limit for the passing of decisions will not start running until 1 May 2020. This regulation does not necessarily have to lengthen the period of time between signing and closing as the possibility to waive examinations remains unaffected by this amendment. It is to be expected that in the current situation, authorities will assess applications to waive examinations in a more generous manner in order to enable deals to be processed as fast as possible due to the given circumstances.

Opportunities with respect to distressed M&A

As any other crisis, the COVID-19 crisis, too, offers possibilities for seasoned, crisis-resilient buyers and strategic financial investors to purchase the desired target company under favourable conditions. It is foreseeable that despite the national and European aid packages, which have already been announced many companies will come under economic pressure. Thus, even companies that have not been available for sale and/or have been offered at a much higher purchase price will enter the transaction market. According to our judgement, an increase in new distressed M&A deals is to be expected in the short term.

Forecast

Despite the outlined possibilities, many M&A deals will ultimately be postponed or cancelled due to COVID-19. Nonetheless, the immense potential of M&A deals should not be underestimated. In general, it is expected that the market will begin to restabilise soon after the pandemic will have reached its peak.