If it goes without saying that COVID-19 has changed the way that market participants do business, then why say it? Simple - COVID-19 has more than changed the way that we all do business, it has changed the type of businesses in which market participants currently engage and the risk that they are willing to accept in order to complete a transaction.
Risk in an M&A transaction is addressed primarily in the asset purchase agreement or share purchase agreement. Parties negotiate and allocate business risk in these primary documents by way of provisions such as a representations and warranties addressing interim periods, a material adverse change clause, a purchase price adjustment mechanism or a deferred payment structure.
Closing itself typically takes one of two forms – either a concurrent signing and closing or a signing with an interim period before a subsequent closing. The likelihood of an unforeseen business risk arising in a concurrent signing and closing situation is very small (subject of course to the existence of binding terms under a letter of intent or term sheet), but the same is not true in the case of a signing with an interim period before closing. COVID-19 has reminded us all that intervening events can be cataclysmic to a business and completely unexpected.
In the case of a signing with an interim period before a subsequent closing, parties may need to direct additional attention to potential business risk that may arise during the interim period by broadening the scope of the primary agreement provisions specified above. Alternatively, if the purchaser is concerned about assuming more than a certain level of risk at closing, risk can be managed by inserting specific closing conditions or representations and warranties as to the state of the business at the time of closing that give rise to an ability to ‘walk away’ from the transaction (similar to a financing condition) or to trigger the indemnification mechanisms in the primary agreement.
Absent very specific closing conditions or representations and warranties as to the state of the business at the time of closing, a purchaser’s ability to rely on the broad language in a material adverse change clause may give rise to litigation (and may in fact not even be covered). In these times, it is essential for the purchaser to specifically consider the risk associated with potential changes to the state of the business that may arise during the interim period and provide mechanisms through which to directly address same.
The M&A team at KMB is experienced at drafting the appropriate legal documentation required to address the considerations above in a practical manner. Should you have any questions regarding this or any aspect of your business, please do not hesitate to get in touch with Ian Wick or Kevin Fernandes – we are here to help.
Risk in an M&A transaction is addressed primarily in the asset purchase agreement or share purchase agreement. Parties negotiate and allocate business risk in these primary documents by way of provisions such as a representations and warranties addressing interim periods, a material adverse change clause, a purchase price adjustment mechanism or a deferred payment structure.
Closing itself typically takes one of two forms – either a concurrent signing and closing or a signing with an interim period before a subsequent closing. The likelihood of an unforeseen business risk arising in a concurrent signing and closing situation is very small (subject of course to the existence of binding terms under a letter of intent or term sheet), but the same is not true in the case of a signing with an interim period before closing. COVID-19 has reminded us all that intervening events can be cataclysmic to a business and completely unexpected.
In the case of a signing with an interim period before a subsequent closing, parties may need to direct additional attention to potential business risk that may arise during the interim period by broadening the scope of the primary agreement provisions specified above. Alternatively, if the purchaser is concerned about assuming more than a certain level of risk at closing, risk can be managed by inserting specific closing conditions or representations and warranties as to the state of the business at the time of closing that give rise to an ability to ‘walk away’ from the transaction (similar to a financing condition) or to trigger the indemnification mechanisms in the primary agreement.
Absent very specific closing conditions or representations and warranties as to the state of the business at the time of closing, a purchaser’s ability to rely on the broad language in a material adverse change clause may give rise to litigation (and may in fact not even be covered). In these times, it is essential for the purchaser to specifically consider the risk associated with potential changes to the state of the business that may arise during the interim period and provide mechanisms through which to directly address same.
The M&A team at KMB is experienced at drafting the appropriate legal documentation required to address the considerations above in a practical manner. Should you have any questions regarding this or any aspect of your business, please do not hesitate to get in touch with Ian Wick or Kevin Fernandes – we are here to help.
This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice based on their specific situations.
