Company acquisitions are also likely to be impacted by the situation generated by Covid-19.
For the past two weeks, the M&A market has been perplexed.
While some transactions continue or close without tension, others are suspended, postponed or simply cancelled due to exceptional circumstances, either because of the 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 make a bad deal (expensive or too risky in such context).
The financing of acquisitions has become increasingly difficult, if not impossible, to obtain since the recent decisions of the French Government aiming at tackling the spread of Covid-19.
In some respects, the context of Covid-19 reminds us the 2008 crisis…while being quite different for many others, notably because of the existence of numerous emergency measures and financial supports which are being put in place within very short deadlines (the setting up of partial activity facilitated for employees, the release of emergency cash flow, the granting of a Bpifrance guarantee to encourage loans during, and above all, at the end of the crisis).
Such context forces us to wonder about the impact of the Covid-19 phenomenon on company divestitures.
Whether it concerns company or social rights and depending on the stage at which it is situated, the divestment process is likely to raise the question of the impact of the phenomenon, as well as its possible consequences at the microeconomic scale of the company or at a macroeconomic one.
The purpose of this article is to try to measure such an impact and to help sellers and buyers to understand it.
I – Implications for ongoing negotiations
If the acquisition process has been initiated and that negotiations are ongoing, the parties are supposed to remain free to terminate such process at any time, in particular in view of the impact that such parties consider that the Covid-19 phenomenon has on the transaction and their expectations
The fact that a non-disclosure agreement (NDA) a letter of intent, a term sheet, a memorandum of understanding (MOU) or a memorandum of agreement (MOA), which are not intended to reflect any obligation to sell and/or buy but merely to organize the negotiations or to formalize the agreement of the parties on certain issues, and are
insufficient to form an overall agreement, has been implemented is supposedly irrelevant.
The Covid-19 may therefore be a ground for a party to terminate the negotiation process, even if the negotiations were advanced, without its liability being triggered, subject to the compliance, if any, with the terms and conditions provided for in the pre-contractual agreement if there is one.
II – Implications when an offer has been issued
Where, during the negotiations, a party has issued an offer which has not yet been accepted by the other, such as an offer to acquire, such offer would be likely to be challenged on the ground of the changing circumstances resulting from the Covid-19 phenomenon.
The principle is that an offer must be maintained for a reasonable period of time or for the period provided stipulated in the offer.
However, if such an offer is withdrawn before the expiry of such a period and, of course, before its acceptance, the beneficiary of the offer may at most seek compensation for his loss, which mainly corresponds to the expenses incurred in connection with the transaction. Indeed, French law refuses to apprehend the loss of of the profit which was expected from the acquisition as a reparable loss.
III – Implications when a binding agreement has been signed
If the negotiations have resulted in the implementation by the parties of a binding agreement, whether unilateral or bilateral, the impact of Covid-19 is likely to be, in theory, less.
The purpose of an unilateral binding agreement is to formalize the promise of a party to conclude a contract for the benefit of the other party, who then has the option of completing the deal or not (i.e., a call or put option, at the discretion of the promisee).
When it is bilateral, the binding agreement formalizes the agreement of both parties to complete a final agreement, , subject to the fulfilment of formal or substantial condition precedents which are beyond the control of the parties and which must be fulfilled before such final agreement is enforced.
- A lack of impact on the binding force of the promise
The occurrence of a phenomenon such as Covid-19 is, in theory, insusceptible of calling into question the undertaking incumbent on the parties (assignor or the assignee) under the terms of the unilateral promise to sell or purchase or of the bilateral agreement to sell.
- An impact likely to result from the failure to exercise the option as part of the unilateral promise
In the course of an unilateral promise, the occurrence of a phenomenon such as Covid-19 is likely to impede the completion of the acquisition process since the assignor or the assignee could decide to not exercise their option, in consideration of the said phenomenon.
If the option is not exercised within the time limit, the unilateral promise is in principle supposed to lapse, without any compensation on either part, provided that there are no financial consequences that could have been foreseen, such as the payment of a fixed asset compensation by the assignee when the commitment was granted by the assignor.
- An impact that may result from the failure to meet the condition precedent relating to the financing of the deal in the course of a bilateral agreement
Even if it occurs after the signing of the bilateral agreement, the Covid-19 phenomenon, , is not, in principle, likely to call into question the respective promises of the assignor and of the assignee. It is nevertheless an event likely to impede the completion of the deal once if a condition precedent relating to the financing of the deal has been stipulated.
The financial institutions approached by the parties may prefer to not finance the deal in view of the economic context that may result from it
The refusal to grant a loan (subject to having complied with the terms and conditions set out in the condition precedent) is likely to either render the promise null and void or to oblige the parties to modify the terms and conditions of the transaction and, for example, resort to a vendor financing or to a gradual assignment.
It should be noted that the fulfilment of other condition precedents may also be difficult, such as the granting of a legal approval because of the inability to convene the meeting, or the granting of an administrative authorization if the competent authority idles or closed down its non-essential services.
- An impact likely to result from the invocation by a party of the concept of force majeure or from the treatment of contingency in the context of a promise
Finally, the Covid-19 phenomenon is likely to lead a party, a priori more the buyer than the seller, to invoke:
– either the notion of force majeure in order to suspend the enforcement of the deal or to challenge it
– or that of the contingency in order to renegotiate the terms of the promise or, if that fails, to claim in court for the revision of the terms dans conditions of the agreement or for its termination.
Each of these two mechanisms presupposes the meeting of conditions which are not, in absolute terms, easy to match and which are not necessarily likely to be met with respect to the Covid-19 phenomenon in the context of a company acquisition, , being provided that the application of such mechanisms has not been expressly excluded by the parties in the promise.
IV – The impact on the recently completed acquisitions
Similarly, if the acquisition has been implemented, or if, within the course of an unilateral promise the call or put option has been exercised (in which case the acquisition is final, subject to the existence of conditions precedents), the subsequent occurrence of the Covid-19 phenomenon is not, in theory, likely to have any impact.
Various possibilities may, however, arise depending on the consequences that the Covid-19 phenomenon may have on certain of the the obligations which are incumbent on the parties, such as, for example, those relating to the payment of the price or to the accompaniment of the buyer.
- A lack of impact, in principle, on the completed acquisitions
The sale, once completed, is not likely to be challenged on the ground of the occurrence of subsequent events, whatever they may be and even if they have consequences on the business and/or on the financial health of the acquired company.
In principle, it is the sole responsibility of the buyer to bear such consequences, without remedies against the seller.
- An impact likely to affect the determination of the sale price
Covid-19 may have a real impact on the sale price to be paid in connection with the transaction, when all or part of its final amount depends on the achievement of economic or financial objectives after the sale (earn-out clause).
In this case, however, it is merely an application of the terms of the transaction, against which the seller may not object.
- An impact likely to arise again as a result of the invocation by a party of the concept of force majeure or the that of contingency
The Covid-19 phenomenon is also likely to lead a party, again a priori the buyer more than the seller, to invoke, after completion of the acquisition the Covid-19 phenomenon:
– either the concept of force majeure in order to suspend the performance of certain obligations relating to the acquisition, such as the payment of the part of the price that remains due, or to challenge the deal,
– or the existence of unforeseen circumstances in order to renegotiate the financial conditions of the deal and, in the event of a failure to do so, to claim in court for the revision or the termination of the challenged agreement.
Each of these two mechanisms presupposes, once again, the meeting of conditions which are not, in the absolute sense, easy to fulfil and which are not necessarily likely to be met with regard to the Covid-19 phenomenon in the context of the completion of a company acquisition, all the more because of the chronology of the events.
- The impact of Material Adverse Change (MAC) / Material Adverse Effect (MAE) clauses or the so-called “material/substantial adverse changes” clauses in the promise or deed of assignment
The purpose of these clauses is to specify that one of the parties or both parties may decide to unilaterally suspend or terminate the deal in progress, following the occurrence of an event likely to have a significant impact on the company or the business that is the subject of the deal itself or an event with a significant negative effect.
The question will then be whether the Covid-19 phenomenon meets the conditions provided for by the parties, which may be delicate to assess and a source of litigation in this new and exceptional context.
Morgan Jamet (+33 (0)6 80 55 24 61) – firstname.lastname@example.org
Juliette Sellier (+33 (0)6 63 14 64 24) – email@example.com
Lawyer at the Paris Bar. Admitted to the Paris Bar since 1999. Holder of a Master’s degree (D.E.A.) in Contract Law from the Jean Monnet University of Law (Paris XI).
Lawyer at the Paris Bar. Holder of two Master’s degrees in General Private Law and in Business Law and Tax from the University of Paris I Panthéon-Sorbonne (in partnership with HEC)