What You Need to Know About M&A Transactions during COVID-19

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The coronavirus pandemic and the concerns for an economic downturn are affecting many industries and the worldwide M&A market. Some companies now want to suspend or terminate their contractual commitments.

So far, global mergers and acquisitions (M&A) activity this year is lower than that of last year’s equivalent period. The uncertain situation is partly to blame.

Right now, many organisations are facing challenges. It is important to know how to protect yourself in ongoing M&A transactions where the target has trading relations with parts of the world that are most affected by the coronavirus. This includes having significant imports to or exports from, or production sites and operations in these countries.

You might not realize immediately that there are any problems but such could arise anywhere in the supply chain.

Business valuations have become more difficult, while auction processes are delayed or postponed. All sides need to identify the specific new challenges to adequately reflect them in the transaction documents.

Meanwhile, reduced stock prices can create new M&A opportunities, proving there is always a silver lining.

If the current situation is stressing you out, contact us and let us help.

Now, here is what you should know to be better prepared:

Due diligence and data rooms

The documentation of an M&A transaction often begins with a letter of intent. It generally does not bind the parties to commit to a transaction, but may bind them to confidentiality and exclusivity obligations so that the transaction can be considered through a due diligence process.

Sellers should include information in the data room about the possible impact of the coronavirus on the target. This includes appropriate mitigation and contingency plans (where relevant).

For buyers, it’s a good idea to conduct due diligence on the level of risk and the target’s scenario planning before the deal is closed. Relevant questions for M&A transactions include:

  1. Are the target company and its counterparties able to perform their obligations under material contracts? What are the consequences of a breach?
  2. Are there any contractual rights or legal principles that may excuse non-compliance or allow contracts to be terminated (also force majeure and frustration)?
  3. Are there any clauses permitting commercial renegotiations with counterparties that are in progress? What about termination rights that have already been exercised?
  4. How vulnerable is the supply chain? What is the availability of alternative suppliers?
  5. What is the impact on the business’s banking arrangements and its cash flow? Is there a solvency risk?
  6. What is the change in law risk? Will there be an impact from travel restrictions, quarantine measures and government-mandated closures, government initiatives or any other restrictions?
  7. Do the insurance policies provide adequate cover?
  8. Is the business currently implementing appropriate precautionary measures regarding health issues and employees’ rights?
  9. Could important information such as financial projections and audited accounts be delayed?


With all the uncertainty and disruption of the market, it can be difficult to agree a purchase price for the target (to be acquired) company. Valuations are often based on current revenue or earning expectations of the business, so now the parties have to take into account the impact of the pandemic on financial projections.

Buyers might try to make a portion of the price deferred or contingent upon the performance of the business post-closing.

Acquisition financing

It could be harder for buyers to obtain acquisition financing with lenders unable to accurately assess the market conditions and future business performance of the target business. Additional working capital might be required to cover short term cash flow issues.

Sellers should take into consideration the buyer’s financial viability and ability to meet post-closing obligations. Using escrow arrangements or parent company guarantees might set off potential risks posed by the buyer defaulting on their payment obligations.

Conditions precedent

Buyers should include a condition precedent for a specific and high impact but low likelihood COVID-19-related issue identified during the due diligence process.

It’s likely that the virus will have a significant but time-limited impact. It is perhaps more likely that the M&A transaction will be put on hold until the situation has stabilised. This is unless there is an urgent reason for entering into and closing M&A transactions, for example a distressed seller.

Material adverse change

A generic agreed MAC (Material adverse change) will probably not be triggered because there have been extensive reports of the coronavirus. In that situation, an adverse effect was probably foreseeable and in many cases, the virus is unlikely to cause a long-term impact on overall earning potential. Besides, it may be caught by any curve-out for changes in general market conditions.

Moreover, it seems unlikely that sellers will concede a MAC that is specifically related to the impact of COVID-19 unless it is linked to a specific risk - like termination of essential contracts - or triggered by an actual financial impact (as opposed to anticipated future one) in the period between signing and completion. If potential M&A deals are to conclude a MAC, the seller should include an express coronavirus-related carve-out.

Pre-completion undertakings

Sellers should make sure they can comply with pre-completion conduct of business covenants, whether general commitments about the ordinary course of business or trading, or specifically related to contracts, employees or production. Obligations to finalise relevant contingency plans might also be appropriate.


The interested party should request representations and warranties around risk assessments, scenario planning and adverse impact of the coronavirus. Sellers conceding these should seek knowledge and materiality qualifiers, and avoid subjective or forward-looking warranties and repeating warranties at completion.

Warranty limitations

For M&A transactions, sellers should consider a general COVID-19-related exclusion of liability. Ring-fencing (so that virus-related claims can only be made under specific warranties and not under general ones like the accounts warranty), buyer’s knowledge, changes in law and other limitations can also be applicable.


Sellers should take time to consider the need for COVID-19-related disclosures (e.g., against material contracts warranties), being as specific as possible to cover any requirement for “fair” disclosure.


Targeted indemnities for specific known risks might be appropriate.

If either party wants to take out warranty and indemnity insurance, that policy should be reviewed carefully to understand any exclusions on claims related to COVID-19.

The relative bargaining power of the parties will play a great role, and sellers are likely to insist that any indemnity is of limited duration and capped at an appropriate amount.

M&A transactions in 2020: Conclusion

Now you know the risks and opportunities the coronavirus pandemic may cause regarding M&A transactions and the whole M&A process.

On one hand, it is uncertain whether normal deals in industries heavily affected by the pandemic, such as the travel and leisure one, will still take place now and in the near future. Buyers might also try to avoid closing already signed transactions.

On the other hand, other industries, such as healthcare, may thrive. What’s more, M&A can be an option for businesses in financial trouble or even facing insolvency because of the crisis.

If you need any help or want to discuss your M&A transactions, we are always one click away - contact us.

Stay safe!


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