How might coronavirus (COVID-19) impact consideration mechanisms in M&A?

The outbreak of coronavirus, Covid-19, is an ongoing pandemic that will no doubt impact M&A deals: those still being negotiated; those that have exchanged but not completed (or closed) and even deals which completed long before we began to understand the potential impact of this outbreak.

If you are still negotiating parties may want to consider:-

• Whether to hold fire, agree to pause the process and revisit in a few weeks' time;
• Exchanging contracts but include suitable material adverse change clauses that allow the parties to walk away if the situation worsens beyond what they expect;
• Agreeing an exclusivity period (or an extension to an exclusivity period) to see how things play out over the next few weeks or months without either party being bound to proceed;
• Taking the opportunity to undertake more robust DD (focussing on business continuity; exposure to high risk markets; strength of cash position; contract terms for material contracts);
• Requiring specific warranties and indemnities to cover the new known risks;
• It can be difficult to value businesses where there is uncertainty in the extent to which Covid-19 will affect the target businesses going forward. Fixed pricing and locked-box mechanics put all the risk on the buyer. The parties should be considering whether earn-out mechanisms that agree how a price will be calculated will help them get a deal done when they don’t know what the price should be;
• How long any earn-out period should be (it is currently unknown whether the prevalence of Covid-19, and naturally the social measures taken to combat will spread and its effects on businesses will be short-term or long-term);
• Sellers may want to consider what security they need for deferred payments or earn-out payments;
• Sellers should also consider mechanisms for early payment if the target (or the buyer) gets into difficulty; and
• Sellers may want to ensure that they have adequate post-completion covenants from the buyer that the business will be managed optimally during the earn-out period and provide the sellers sufficient rights to audit and information to make sure that this is the case.

If you have exchanged contracts (but have not completed):

• Take some early advice on the conditions to completion and any "material adverse change clause". Do any of the parties have the right to walk away or require the other to complete on the terms agreed; and
• Consider your options for re-negotiation.

If you have completed:

• Again consider taking some early advice especially if your SPA includes earn-out or deferred consideration; how might the current environment impact your consideration and whether you get paid?
• Consider your options for re-negotiation.