The impact of Covid-19 on business disposals

Business disposals are also likely to be impacted by the situation generated by Covid-19.

For the past two weeks, the market for acquisition operations has been perplexed…

While some operations continue or close without tension, others are on hold, postponed or quite simply cancelled, due to exceptional circumstances, either because of sellers who consider that it is no longer the right time to sell, or because of the buyers who believe that they are going to carry out a bad transaction (expensive or too risky acquisition in this context).

Funding has become increasingly difficult, if not impossible, to obtain since recent government decisions aimed at combating the spread of Covid-19.

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 the aid put in place in a very short time. (The implementation of partial activity facilitated for employees, the release of emergency cash, the granting of a guarantee from Bpifrance to promote loans during, and above all, at the end of the crisis)

In any case, this context leads us to wonder about the impact of the Covid-19 phenomenon on business disposals.

Whether it concerns goodwill or corporate rights, the transfer process is likely to raise, depending on the stage at which it is at, the question of the impact of the phenomenon, as well as its possible consequences at the level micro-economic of the company or at a macro-economic level.

The purpose of this article is to attempt to measure such an impact and to allow assignors and assignees to find their way around.

 

 

I – Impact on ongoing negotiations

 

If the transfer process has been initiated and negotiations are in progress, the parties remain in principle free to terminate it at any time, in particular in consideration of the impact that they consider that the Covid-19 phenomenon may have on the operation and their expectations of it.

The fact that a confidentiality agreement or a letter of intent, or even a term sheet, a memorandum of understanding (MOU) or a memorandum of agreement (MOA) has been regularized, which are not supposed to reflect an obligation to sell and /or to buy but have as their object, at most, to organize the negotiations or to formalize the agreement of the parties on certain points, insufficient to form an overall agreement, is in principle irrelevant.

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 provided for in the possible pre-contractual agreement. .

 

II – The consequences when an offer has been made

 

When, during the negotiations, one party has made an offer, which has not yet been accepted by the other, such as an offer to acquire, this offer is likely to be called into question by the evolution of circumstances. resulting from the Covid-19 phenomenon.

The principle is that an offer must be maintained for a reasonable period of time or the period provided for in the offer.

However, if this offer is withdrawn before the expiry of such a period and, of course, its acceptance, the beneficiary of the offer can at most seek compensation for his loss, 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 was expected from the acquisition.

 

 

III – The consequences when a promise has been signed

 

If the negotiations have given rise to the regularization by the parties of a promise, unilateral or synallagmatic, the incidence of Covid-19 is likely to be, in theory, less.

The purpose of the promise, when it is unilateral, is to formalize the commitment of one party to conclude a contract for the benefit of the other party, who has an option as to its conclusion (option of purchase or sale, at the discretion of the beneficiary of the promise).

When it is synallagmatic, the promise formalizes the agreement of the two parties as to the conclusion of the contract, subject to the fulfillment of formal or substantive conditions, beyond the control of the parties and which must be fulfilled for it to be possible. be concluded.

 

1. A lack of impact in principle on the binding force of the promise

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 it is the assignor or the assignee under the terms of a unilateral promise to sell or purchase or a synallagmatic promise to sell.

 

2. An impact likely to result from the non-exercise of the option within the framework of the unilateral promise

The occurrence of a phenomenon such as Covid-19 is likely to lead to the non-completion of the assignment, within the framework of a unilateral promise, if the assignor or the assignee does not exercise the option granted, in consideration of the said phenomenon.

In the event that the option is not exercised within the time limit, the unilateral promise is in principle intended to lapse, without compensation on either side, in the absence of other financial consequences which could have been foreseen, such as the payment of an immobilization indemnity by the transferee when the promise has been granted by the transferor.

 

3. An impact likely to result from the failure to fulfill the condition precedent to obtain financing within the framework of a synallagmatic promise

If the Covid-19 phenomenon, even occurring after the signing of the synallagmatic promise, is not in principle likely to call into question the commitments of the assignor and the assignee, it is nonetheless an event likely to prevent the completion of the sale once a condition precedent has been stipulated relating to the obtaining of financing by the transferee.

The credit institutions contacted are in fact likely not to wish to finance the operation in view of the economic context that may result

The refusal of a loan (subject to having complied with the terms and conditions provided for in the condition precedent) is likely either to render the promise null and void, or to oblige the parties to modify the terms and conditions of the operation, by resorting, as for example, a vendor credit or a progressive assignment.

It should be noted that the fulfillment of other conditions precedent may also be tricky, such as obtaining legal approval for lack of being able to convene the meeting, obtaining administrative authorization while the competent attributing authority is operating slowed down or shut down its non-essential services.

 

4. An impact likely to result from the invocation by a party of the concept of force majeure or the treatment of unforeseeability within the framework of a promise

Finally, the Covid-19 phenomenon is likely to lead a party, a priori more the assignee than the assignor, to invoke:

• either the concept of force majeure to suspend the completion of the sale or call it into question
• or the treatment of unforeseeability to renegotiate the terms of the promise 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 presupposes 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 the realization of an assignment, and this, provided that the application of such devices is not expressly excluded by the parties in the promise.

 

 

 

IV – Impacts on the sale that has just taken place

 

In the same way, if the transfer has been carried out, or if, in a unilateral promise, the option to buy or sell has been exercised (the transfer must then be final subject to the existence, moreover, of conditions suspensions), the occurrence after the fact of the Covid-19 phenomenon is, in theory, not likely to have any impact either.

Various eventualities may however arise given the effects that the Covid-19 phenomenon may have on certain obligations of the parties, such as, for example, those relating to the payment of the price or the support of the transferee.

 

1. A lack of impact in principle on the sale carried out

The sale once completed is not intended to be called into question by the occurrence of subsequent events, whatever they may be, even if they have consequences on the activity and/or the financial health of the company. acquired.

In principle, it is up to the assignee alone to bear these consequences, without recourse against the assignor.

 

2. An impact likely to affect the determination of the sale price

Covid-19 can have a certain impact on the sale price to be paid in the context of the transaction, when all or part of its final amount depends on the achievement of economic or financial objectives after the sale (clause of price supplement, earn out clause).

However, in this case, it is only an application of the terms of the operation, against which the assignor cannot oppose.

 

3. An impact likely again to result from the invocation by a party of the concept of force majeure or the treatment of unforeseeable

The Covid-19 phenomenon is also likely to lead a party, again a priori more the assignee than the assignor, to invoke, after the completion of the assignment:

• either the concept of force majeure to suspend the execution of certain obligations relating to the transfer such as the payment of the part of the price which would remain to be paid, or to call into question the transfer;
• or the treatment of unforeseen circumstances to renegotiate the financial conditions of the transfer and, in the event of failure, to seize the judge so that he revises them or puts an end to the transfer.

Each of these two mechanisms assuming, again, 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 Covid-19 phenomenon. in the context of completing a sale, all the more so because of the timing of events. The impact of the "Material Adverse Change" (MAC) / "Material Adverse Effect" (MAE) clauses or so-called "significant/substantial adverse changes" clauses appearing in the promise or the deed of transfer

 

 

4. The impact of the "Material Adverse Change" (MAC) / "Material Adverse Effect" (MAE) clauses or so-called "significant/substantial adverse changes" clauses appearing in the promise or the deed of transfer

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 or goodwill that is the subject of the transaction or of an event having a significant negative effect.

The question will then be 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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Morgan Jamet (+33 (0)6 80 55 24 61) – mjamet@arst-avocats.com

Juliette Sellier (+33 (0)6 63 14 64 24) – jsellier@arst-avocats.com