Aublé & Associés offers you a first analysis of the consequences of the COVID-19 crisis on the M&A market.

M&A FLASH

Given the current health crisis related to COVID-19, mergers and acquisitions, regardless of their stage of completion, are affected. On the acquirers' side, they are considering the possibility of terminating transactions that have not yet been completed or substantially modifying their progress and negotiation. On the sellers' side, it will be a matter of ensuring that the transaction will be completed, even if it means granting certain concessions. More generally, this health and economic crisis will most certainly have a long-term impact on the way M&A transactions are negotiated. 

The main legal difficulties and mechanisms to be implemented are outlined below:

Audit(due diligence)

2 elements: on the form, the collection of information is made more difficult and on the substance, it will be necessary to pay particular attention to certain points. Thus, the audit phase will be impacted in two ways.

• On the form: the buyer, when he conducts his audit, will be confronted with the practical difficulties encountered by the seller to gather the different information. Moreover, it is no longer possible to organize on-site visits or meetings with management, except by using video means which only partially restore the exhaustiveness of head-to-head exchanges.
•  On the substance: buyers will have to pay attention to certain elements, today more than in normal times. Thus, certain subjects, already usually reviewed, must be addressed in light of the current crisis. This is the case for financial issues (impact on cash flow, results and access to financing), suppliers (ability of suppliers to continue their activity, specific clauses in supplier contracts), customers (payment terms, specific clauses), contracts (force majeure or unforeseen circumstances clauses and "MAC clauses"), human resources (possibility of telecommuting or not, employee health), IT (ability to set up remote work, robustness of the computer network), etc. It will also be important to consider the geographical areas when studying the supply chain, in case certain countries represent a significant part of the supply sources.

TheShare Purchase Agreement

In the current context, the following clauses will be particularly important:

• The conditions precedent to the completion of the operation must specify the deadline for their satisfaction as well as the consequences of non-fulfilment (allocation of costs);
• The clause relating to the interim period between signing and closing should not refer to a simple "management in the normal course of business" or "as a prudent person" and should be adapted to take into account the fact that regulatory authorities may take longer to review the files given the change in the working environment;
• Addition of special event clauses, such as a force majeure clause or a contingency clause and a "MAC clause", to specifically cover COVID-19 and its consequences (see below);
• The majority of price clauses should provide for anearn-out mechanism rather than lock-box clauses, to protect buyers in the event of serious market events between signing and closing and to take into account fluctuations in working capital requirements, debt and cash flow; and
• Representationsand war ranties are likely to be impacted on a number of matters that may give rise to the negotiation of exceptions (absence of material change, customers and suppliers, human resources, etc.). This type of discussion may become even more difficult in the future as acquirers want more coverage at closing.

The question of recourse to force majeure and/or unforeseen circumstances

In addition to the conditions precedent and MAC clauses mentioned above, force majeure will be a classic element allowing the termination of a transaction that has not yet been completed:

• In order for force majeure (as defined in article 1218 of the Civil Code) to be accepted, it is necessary that the criteria of unpredictability and irresistibility be met. With respect to the first criterion, the event must not be reasonably foreseeable at the time the contract is concluded. It will be particularly difficult to determine at what point in time COVID-19 could be considered to have been known and to have affected the contract. Concerning the second criterion, irresistibility, it will be necessary to demonstrate that the coronavirus justifies a total incapacity to perform its obligation without being able to take any "appropriate measures" of replacement, this element thus seems also complex to prove. Finally, in the case where the force majeure could be retained, this one, by principle, suspends the execution of the contract but does not make disappear definitively the obligation to execute it, unless "the delay which would result from it justifies the resolution of the contract".
• For these reasons, the use ofunforeseeability (as defined in article 1195 of the Civil Code) seems more appropriate. It is no longer a question of absolute unforeseeability but of an "unforeseeable change of circumstances", which is obvious in the case of COVID-19. Moreover, if unforeseeability only allows for a "renegotiation" of the contract with an obligation to continue, it may be the stage preceding resolution or recourse to the Judge. 

Various

• Timing: the parties must necessarily take into account the delay induced by the current crisis which implies, for the buyer, to obtain a longer exclusivity period or to have it extended.
• Reinforcement of the control of foreign investments in France (the States are indeed afraid that the fall of the stock exchange prices gives bad ideas to the foreign purchasers and will thus take care of the grain in this matter).
• Unsurprisingly, the deals that are expected to be "hot" soon will be related to the pharmaceutical, food distribution, and energy sectors.
• As for the transactions that will take place in the near future, a large part of them should be qualified as distressed M&A and will result in the consolidation of certain sectors.