Six months on from the World Health Organisation declaring Covid-19 a pandemic, businesses in virtually every sector continue to feel the impact.
As the global response continues to develop, so too does the M&A environment. Whilst market volatility and the impact on businesses has led to certain deals being aborted or postponed, other transactions continue to progress as parties seek to exploit favourable valuations and turn to strategic consolidation in troubled markets. Whatever the driver, there are a range of considerations for companies engaged in M&A activity during the current environment to bear in mind, some of which we address in this brief article.Due Diligence
Buyers should seek to deliver, and sellers should be prepared to receive, tailored diligence information requests which look to address issues directly related to Covid-19 and pandemics more generally. Such queries may include questions around staff overseas travel, infection rates, the viability of remote working arrangements for employees and business continuity arrangements.
Buy-side teams are likely to focus their attention, in addition to the more customary topics, upon areas such as supply chain dependency, force majeure termination triggers in material contractual arrangements and covenants in finance facilities in the context of the target's ability to withstand liquidity issues in light of the crisis. Furthermore, there will be a detailed examination of any contingency procedures which may have been exercised by the target.
Sellers will need to overcome a number of practical obstacles in preparing for the diligence exercise. In the immediate term, it is likely that the UAE governmental restrictions requiring a proportion of the workforce in most sectors to work from home will mean that it is difficult to collate and upload the necessary information to virtual data rooms.
Similarly, any pre-transaction restructuring required in respect of the seller group (such as the transfer or dissolution of certain subsidiaries) is likely to be more protracted or problematic given the disruptions to the appropriate government authorities/registries. Additionally, sellers will need to ensure that they are able to mitigate challenges posed by the buyers' inability to visit work sites or physically meet key persons.
SPA Provisions
Whilst the apportioning of risk between the buyer and seller is a familiar concept in any negotiated sale document, there will now be a more exacting focus on specific areas. Such areas will be wide-ranging, deal-specific and ever-evolving and we address only a select number within this article. As always, respective bargaining power and appetite for risk will be central to the ultimate negotiated position that the parties reach.
Given that very few deals exchange and complete simultaneously within the UAE (due in part to the share transfer and regulatory approval process), parties are likely to give particular attention to termination rights. Sellers will likely seek to expressly exclude Covid-19 as a material adverse change termination trigger (insofar as it releases the buyer from payment obligations) whilst a buyer may wish to include separate Covid-19 related termination rights, particularly as the pandemic is now a known risk. Alternatively, the parties may want to measure against industry peers to examine if there has been a disproportionate impact on the target business as compared to similar businesses in the region due to certain defined Covid-19 related risks.
Similarly, the interim operating undertakings, which commonly create obligations for the seller to conduct the target business in the ordinary course between signing and completion, will also require close consideration. The parties will need to evaluate whether the seller may require greater flexibility in conducting the target business prior to completion to allow them to take reasonable measures to comply with the consequences of Covid-19 (which might include, for example, worsening economic conditions, greater expenditure as a result of government imposed guidelines or restrictions and amendment to statute or regulations) but yet not breach any relevant conduct provisions.
With the Covid-19 pandemic likely to be central to due diligence exercises, there will also be tailored warranties and indemnities in light of specific risks identified. Given the current turbulent economic environment and the uncertainty surrounding the pandemic itself, the concept of the repetition of warranties and walk away rights for breach of such warranties is also likely to be a key negotiation point. Sellers will need to carefully consider the disclosures they make in light of the risks posed by Covid-19.
It may be that deals with earn-out provisions, where part of the purchase price is paid up front with the rest deferred and based on the acquired business hitting certain hurdles, become more common with buyers less confident to transact on the basis of projected earnings. In such cases, sellers will be particularly concerned with the covenant strength of a buyer and its ability to meet its payment obligations, not least in the context of Covid-19's impact upon the willingness of lenders to finance acquisitions.
Negotiation and Completion Mechanics
There are likely to be novel challenges in dealing with virtual negotiations. Parties should be prepared to use available technology including Zoom Video Communications and Skype to conduct negotiations. In doing so, they will need to consider relevant confidentiality and data protection issues with using such tools and should take necessary security measures where available, such as de-activating the recording of meetings option in such applications.
Parties in the UAE will also need to be aware of the law surrounding the use of e-signatures. In the UAE, e-signatures are permitted under Federal Law No. 1 of 2006 on Electronic Commerce and Transactions. Parties will want to ensure that their reliance on electronic signatures is reasonable and where necessary, consider obtaining a legal opinion.
The onshore share transfer process in the UAE requires that a transfer instrument be signed before a notary public. Parties transacting onshore will need to keep abreast of the evolving notarial practices and factor in the revised processes into their deal timetables.
Summary
The rapidly evolving Covid-19 situation naturally injects a greater degree of uncertainty into the deal-making process. In this uncertain environment, parties will need to closely evaluate the various, and sometimes inconspicuous, ways that Covid-19 could impact their respective businesses and will increasingly need to rely on innovative solutions to achieve successful completion.
We have highlighted some of the factors that will need to be considered and potentially employed to mitigate the uncertainty caused by Covid-19, although the fast moving nature of the outbreak means that the areas of increased focus will undoubtedly continue to evolve and develop regularly. If you would like to discuss any of the issues raised in this article, then please contact either of the authors.
