Effects of the corona crisis on M&A transactions


published on 26 March 2020 | reading time approx. 3 minutes


Even the drafting of share purchase agreements for companies is not exempt from the consequences of the coronavirus. The pandemic has implications for both upcoming and ongoing M&A transactions.



Due Diligence

As far as upcoming company acquisitions are concerned, the following should be considered in particular with regard to the due diligence phase:


First of all, special attention should be paid to issues of employment law. In this context, aspects such as the introduction of short-time work, continued wage payments despite the loss of employees, dismissals for operational reasons up to complete plant closures should be examined in detail. Linked to this is the question of whether and how any business interruptions are covered by an existing risk insurance.


The handling of data protection regulations can also be problematic, especially from the seller's point of view, if Covid-19 infections exist among absolutely necessary employees (key personnel).


A further, probably indispensable, central component of due diligence is the analysis of potential legal disputes, especially against the background of unfulfilled or terminated contractual relationships. In this respect, the examination of major contracts is likely to play an important role. These contracts may contain a large number of general terms and conditions of business with, among other things, provisions on time limits, default and force majeure and can, therefore, have a considerable impact on the validity of an important contract.


It should be noted that these principles should not only be examined at the target company, but also at its affiliated companies, possibly taking into account country-specific characteristics.


For the actual share purchase agreement, the following special features in particular arise, the concrete form of which depends on the perspective of the parties involved in the transaction.


A potential (company) purchaser should all the more insist on protecting himself against negative developments of the target company as comprehensively as possible due to the current situation caused by Covid-19 and the associated uncertainties.


In this respect, a contractual right of withdrawal in the event of a significant deterioration of the target company's net assets, financial position and results of operations in the period between the signing date (so-called "signing") and the closing date (so-called "closing") comes into consideration. This can be regulated by so-called "material adverse change" or MAC clauses in the share purchase agreement.


In this context, the question also arises as to whether a MAC clause applies at all, provided that one relies on the effects of Covid-19. In particular, this depends on the concrete form of the clause. A change in the general economic conditions, e.g. triggered by natural disasters, is generally not covered by a MAC-clause, as MAC-clauses predominantly aim at specific effects on the concrete target company (e.g. in this respect, among other things, the change of certain financial ratios in the period between signing and closing may be relevant).


Therefore, from the purchaser's point of view, if he succeeds in agreeing a MAC clause, the cases of material deterioration should be explicitly defined. Therefore, the definition should also include cases that affect the general market environment of the target company, such as the effects of the outbreak of a new and/or the spread of an existing pandemic and a consequent deterioration of business prospects due to a decline in orders and/or supply bottlenecks. As a guideline for such negative developments, certain thresholds can be used, for example, which must be determined accordingly.


In the end, however, the adoption and invocation of a MAC clause does not necessarily lead to a rescission of the share purchase contract, as a seller will probably find it difficult to accept such legal consequences in practice. In order to adequately solve such problems, it is conceivable, for example, to adjust the purchase price, although this requires a corresponding contractual agreement.


From the seller's point of view, however, an extension of the MAC clause should not be accepted in principle. This serves the transaction security as well as the protection of the seller.


However, in order to satisfy both sides, the agreement of a so-called break-up fee is conceivable in the event that the seller agrees to a MAC clause. If the purchaser makes use of the MAC clause and withdraws from the transaction in the period between the signing date and the closing date, the seller can demand a sum from the purchaser that has already been fixed in advance in the share purchase agreement.


In the event that agreement on a MAC clause is not reached, the purchaser could attempt to rescind the share purchase agreement due to the coronavirus outbreak on the basis of a statutory right of withdrawal due to the loss of the basis of the transaction (Section 313 of the German Civil Code "BGB"). However, it is likely to be difficult to enforce this right under Section 313 BGB in court, as the courts place very high demands on the subsequent amendment of contract terms.


However, the question of whether a court should decide on this issue requires first of all that the applicability of this provision has not been excluded, as is typically agreed in share purchase agreements.


It should be noted that each individual case may have to be assessed differently due to various special features. The scenarios presented above are also not conclusive.


Therefore, purchasers and sellers should seek comprehensive legal advice, particularly in light of the current situation with Covid-19, in connection with upcoming and/or current company transactions in order to incorporate the abovementioned and other possibly relevant aspects into the share purchase agreement in a legally secure manner.

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