The impact of Covid-19 on business disposals

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

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

While some transactions continue or are completed without tension, others are suspended, postponed or 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 buyers who believe that they will make a bad deal (an expensive or too risky acquisition in this context).

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

This Covid-19 context reminds us in some respects of the 2008 crisis…while being very different in many other respects, particularly due to all the emergency measures and aid put in place in very short timeframes (The implementation of facilitated partial activity for employees, the release of emergency cash, the granting of guarantees by Bpifrance to promote loans during, and especially, at the end of the crisis)

In any case, this context leads us to question the impact of the Covid-19 phenomenon on business transfers.

Whether it involves business assets or social rights, the transfer process is likely to raise, depending on the stage at which it is situated, the question of the impact of the phenomenon, as well as its possible consequences at the microeconomic level of the company or at a macroeconomic level.

The purpose of this article is to attempt to measure such an impact and to enable transferors and transferees to find their way around it.

 

 

I – The implications for the ongoing negotiations

 

If the sale process has been initiated and negotiations are underway, the parties remain in principle free to terminate it at any time, in particular in consideration of the impact they believe the Covid-19 phenomenon may have on the operation and their expectations regarding 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 formalized, which are not supposed to translate an obligation to sell and/or buy but are intended, at most, to organize negotiations or to formalize the agreement of the parties on certain points, insufficient to form a global agreement, is in principle irrelevant.

Covid-19 can therefore be a reason allowing a party to terminate even advanced negotiations, without its responsibility being sought, subject to respecting, if they exist, the terms provided for in the possible pre-contractual agreement.

 

II – The implications when an offer has been made

 

When, during 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 phenomenon of Covid-19.

The principle is that an offer must be maintained for a reasonable period or the period stipulated 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 in the context of the operation; French law refusing to extend the compensable loss to the loss of the benefit that was expected from the acquisition.

 

 

III – The consequences when a promise has been signed

 

If the negotiations have resulted in the parties formalizing a promise, unilateral or bilateral, the impact of Covid-19 is likely to be, in theory, less.

The purpose of a 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 to buy or sell, at the discretion of the beneficiary of the promise).

When it is synallagmatic, the promise formalizes the agreement of both parties regarding the conclusion of the contract, subject to the fulfillment of formal or substantive conditions, which are beyond the control of the parties and must be met in order for it to be concluded.

 

1. The absence of any fundamental impact on the binding force of the promise

The occurrence of a phenomenon such as Covid-19 is, in theory, incapable of calling into question the commitments made by either party, whether it be the transferor or the transferee under a unilateral promise of sale or purchase or a bilateral promise of sale.

 

2. An impact that could result from the failure to exercise the option under the unilateral promise

The occurrence of a phenomenon such as Covid-19 is likely to result in the non-completion of the transfer, within the framework of a unilateral promise, if the transferor or the transferee does not exercise the option granted to him, in consideration of said phenomenon.

If the option is not exercised within the allotted time, the unilateral promise is in principle intended to become void, without compensation from either party, unless other financial consequences could have been foreseen, such as the payment of a deposit by the transferee when the promise was made by the transferor.

 

3. An impact that may result from the failure to fulfill the suspensive condition of obtaining financing within the framework of a reciprocal promise

Although the Covid-19 phenomenon, even if it occurred after the signing of the bilateral promise, is not in principle likely to call into question the commitments of the transferor and the transferee, it is nonetheless an event likely to prevent the completion of the transfer when a suspensive condition relating to obtaining financing by the transferee has been stipulated.

The lending institutions approached may indeed be unwilling to finance the operation given the potential economic context

Loan refusal (subject to compliance with the terms and conditions stipulated in the suspensive condition) may either render the promise void or require the parties to modify the terms and conditions of the transaction, for example by resorting to seller financing or a gradual transfer.

It should be noted that the fulfillment of other suspensive conditions may also be difficult, such as obtaining legal approval due to the inability to convene the assembly, or obtaining administrative authorization when the competent awarding authority is operating at a reduced capacity or has closed its non-essential services.

 

4. An impact that may result from a party invoking the concept of force majeure or the treatment of unforeseen circumstances within the framework of a promise

The Covid-19 phenomenon is finally likely to lead one party, a priori more the transferee than the transferor, to invoke:

• either the concept of force majeure to suspend or call into question the completion of the transfer
• either the treatment of unforeseen circumstances to renegotiate the terms of the promise and, if that fails, to take the matter to court to have the conditions revised or terminated.

Each of these two mechanisms assumes the fulfillment of conditions which are not, in absolute terms, easy to meet and which are not necessarily likely to be met with regard to the phenomenon of Covid-19 in the context of the completion of a transfer, and this provided that the application of such mechanisms is not expressly excluded by the parties in the promise.

 

 

 

IV – The impact on the recently completed transfer

 

Similarly, if the transfer has been completed, or if, in a unilateral promise, the option to buy or sell has been exercised (the transfer then becoming final subject to the existence, moreover, of suspensive conditions), the subsequent occurrence of the Covid-19 phenomenon is, in theory, also not likely to have any impact.

Various eventualities may arise, however, 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 assignee.

 

1A lack of fundamental impact on the completed transfer

Once completed, the transfer 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 acquired company.

In principle, it is the sole responsibility of the transferee to bear these consequences, without recourse against the transferor.

 

2An impact likely to affect the determination of the transfer price

Covid-19 may have a definite 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 subsequent to the sale (additional price clause, earn out clause).

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

 

3An impact that could again result from a party invoking the concept of force majeure or the application of the doctrine of unforeseen circumstances

The Covid-19 phenomenon is also likely to lead one party, again a priori more the transferee than the transferor, to invoke, after the completion of the transfer:

• 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;
• either the treatment of unforeseen circumstances to renegotiate the financial conditions of the transfer and, if unsuccessful, to take the matter to court to have them revised or to terminate the transfer.

Each of these two mechanisms again presupposes the fulfillment of conditions that are not, in absolute terms, easy to meet and which are not necessarily likely to be met with regard to the Covid-19 phenomenon in the context of a sale, especially given the chronology of events. The impact of the "Material Adverse Change" (MAC) / "Material Adverse Effect" (MAE) clauses, or so-called "significant/substantial adverse changes" clauses, included in the preliminary agreement or the deed of sale

 

 

4The impact of "Material Adverse Change" (MAC) / "Material Adverse Effect" (MAE) clauses, also known as "significant/substantial adverse changes" clauses, included in the promise or deed of assignment

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

The question will then be whether the Covid-19 phenomenon meets the conditions stipulated by the parties, which is likely to be 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