Is the Covid-19 a sufficient argument to suspend an ongoing fundraiser

The Covid-19 has just blown an icy wind on current fundraising operations. The market is perplexed… even at a standstill in certain sectors of activity since the recent decisions of the State aimed at combating the spread of Covid-19. While some operations continue or are closed without tension, others are on hold, postponed or, quite simply, canceled due to exceptional circumstances.

Investors prefer to temporize in order to have better visibility of the evolution of the market; start-ups consider that this is no longer the right time to raise funds: low valuations, few active investors on the market, complicated or unstable business plans. Above all, bank financing has become more and more difficult, if not impossible, to obtain since the start of confinement, making it impossible to renegotiate bank debts, generally concomitant with equity participation operations….

This context of Covid-19 reminds us in some respects of the 2008 crisis...while being very different for many others, in particular because of all the emergency measures and aid put in place in a very short time. (partial activity facilitated for employees, the release of emergency cash, the granting of a guarantee by Bpifrance to encourage loans during, and above all, at the end of the crisis). But what about ongoing operations?

Operations in the audit or negotiation phase

Freedom is essential: the parties can choose to continue or end, at any time, the negotiations in progress, in particular due to the Covid-19 phenomenon. However, limits may exist if the parties have framed their negotiations, in a more or less restrictive manner, by a confidentiality agreement or a letter of intent (LOI), or even a term sheet, a memorandum of understanding ( MOU) or a memorandum of agreement (MOA).

These acts, which aim to organize the negotiations or to formalize the agreement of the parties on the essential points, are generally insufficient to form an overall agreement.

The Covid-19 can therefore be a reason allowing a party to end negotiations, even advanced ones, without its liability being sought, subject to respecting, if they exist, the terms governing the end of the negotiations which may appear in such pre-contractual agreements.

Transactions that have been the subject of a firm investment offer

What if one of the parties has formulated a firm and precise investment offer, in particular by the transmission of completed draft deeds (protocol, shareholders' agreement) comparable to such an offer or the submission of a LAW or MOU having binding force?

• If the investment offer has not yet been accepted

Such an offer must be maintained for a reasonable period or during the period stated in the offer.

The withdrawal of an investment offer by its author, before the expiry of such a period and, of course, its acceptance, allows the beneficiary, at most, to seek compensation for his loss, either on the basis common contract law, or by requesting the application of a clause appearing in the term sheet, the LOI or the MOU.

• If the investment offer has been accepted and withdrawn before the closing could have taken place

Upon acceptance of a firm and precise investment offer, the fundraising operation becomes final, an agreement having been reached between the parties.

Thus, the withdrawal of such an offer could be without effect if it occurs after its acceptance by the partners of the start-up beneficiary of the investment offer; the latter can then choose to impose the forced execution in kind of the investment commitment made, subject to the appropriateness of such a decision, and to seek compensation.

• A question may then arise: who bears the audit and advisory costs incurred during this negotiation period?

In the event of a breakdown in negotiations even before the formulation of a firm offer, each party generally retains the burden of the costs incurred. However, it is not uncommon to find in the term sheets, LOI and other MOUs, a clause governing the financial consequences of the breakdown of negotiations or the refusal of the firm investment offer, placing the responsibility of the party deciding to retract the payment of the costs incurred by the other party during this period.

If the amount of these costs is set at a flat rate and proves to be exorbitant or disproportionate to the financial capacity of the partners of the start-up beneficiary of the fundraising, it could be considered as an infringement of the freedom to pursue or terminate the negotiations.

In the absence of such a clause, the common law of contracts will allow the party victim of the premature withdrawal of the offer formulated by the other party to request compensation corresponding, mainly, to the costs incurred within the framework of the operation ; French law refusing to extend the reparable damage to the loss of the profit which could have been obtained from the operation.

Transactions governed by an investment protocol

If the negotiations have given rise to the regularization by the parties of an investment protocol, or even a shareholders' agreement, the impact of Covid-19 is likely to be, in theory, less.

• The finality of the investment agreement, even if the realization of the investment transactions remains in progress

This memorandum of understanding is generally intended to organize the agreement reached between the parties and to schedule future operations: lifting of certain conditions precedent (agreement of the lending bank), capital increase, issuance of simple bonds or convertibles, etc.

The occurrence of a phenomenon such as Covid-19 is, in theory, unlikely to call into question the commitments made by one or other of the parties, whether the partners of the startup or the investor under the terms of the signed agreement.

In practice, Covid-19 could have an impact on the lifting of certain conditions precedent or conditions precedent to the operation.

For example, the organization of a general meeting or the obtaining of a banking agreement regarding the renegotiation of the startup's debts could prove complex to implement by the parties in the current economic context and in view of the emergency measures taken to combat the spread of covid-19.

The outcome of the operation will then depend on the legal consequences provided for in the event of non-fulfilment of one of the conditions provided for.

Some memorandums of understanding will become null and void if the investment operation is not carried out within the stipulated time, while others will continue in order to allow the parties to be able to carry out the planned investment.

• Is there, however, a solution to get out of the investment commitment made?

The use of force majeure or unforeseeability

The Covid-19 phenomenon is finally likely to lead a party, a priori more the investor than the partners of the startup or the startup itself, to invoke:

• either the concept of force majeure to suspend the execution of the investment operation or call it into question
• or the treatment of unforeseen circumstances to renegotiate the terms of the signed investment agreement and, in the event of failure, to seize the judge so that he revises the conditions or puts an end to them.

Each of these two mechanisms supposes the meeting of conditions which it is not, in absolute terms, easy to fulfill and which are not necessarily likely to be met with regard to the phenomenon of Covid-19 in the context of carrying out an investment transaction, provided that the application of such arrangements is not expressly excluded by the parties in the investment protocol.

The impact of “Material Adverse Change” (MAC) clauses, “Material Adverse Effect” (MAE) clauses or so-called “significant/substantial adverse changes” clauses

The purpose of these clauses is to specify that one of the parties or both parties may decide to suspend or terminate the transaction unilaterally, following the occurrence of an event likely to significantly impact the company subject to the transaction or an event having a material adverse effect.

These clauses may appear in the investment protocol, or even, in certain cases, when the pre-contractual acts are quite restrictive, in a term sheet or an MOU.

The question will then arise as to whether the Covid-19 phenomenon fulfills the conditions provided for by the parties, which risks being delicate and a source of dispute in this new and exceptional context.

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