Virtual M&A transaction and negotiations during Covid-19 era

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Luciana Tornovsky
Demarest, São Paulo


The Covid-19 pandemic has introduced a new reality and challenges worldwide. Strategic buyers and financial investors are now able to advantage of new opportunities, either in the form of distressed M&A or strategic partnerships and combinations.

Investors interest on distressed assets has increased during the crisis. Private equity funds were the first movers. They are the most liquid players in the market and are willing to find good opportunities in the market – especially as they tend to be quite active in times of crisis. For those that are well funded and have recently closed the fundraising cycle, they tend to benefit from this moment because valuations are pressed down and the stock market is depressed.

In my view, as a Brazilian Corporate M&A lawyer, I think that Brazil has some advantages compared to other countries, because of: a large market with strong potential for growth; a very important agribusiness sector; infrastructure investments promoted by government; private investment in public equity (PIPE); and a favourable exchange rate for foreign investments.

Certainly, lawyers need to consider key issues when negotiating M&A transactions in the Covid-19 era.

Logistics of deal making have become a challenge for companies, law firms and other advisors working remotely. The personal contact with clients required to negotiate M&A deals has become impossible under current conditions.

Before the pandemic, we were used to having in-person meetings, including in-person management presentations, site visits and meetings with key employees and stakeholders during a M&A process.

During the pandemic period, travel has been restricted, people have had to stay and work from home, and shutdowns have been imposed by the authorities. Therefore, all in-person interactions have become more difficult or almost impossible. Meetings, site visits and presentations are now virtual, through video conference or other means.

Several important diligence activities, including inspection of physical assets, cannot be conducted in person.

Considering those restrictions, buyers need to use alternative sources of information, such as historic third-party reports. They have to replace onsite visits for drones and other technologies.

Buyers should also seek additional contractual protections to mitigate any risks. For example, phase I and phase II site assessments and/ or real estate surveys have been delayed or prevented sometimes due to travel restrictions and shutdowns imposed by authorities.

Strategic buyers and financial investors will have wide-ranging business rationales for pursuing M&A transactions with significant disruption expected across many industries. Depending on the deal rationale, significant post-closing integration work could be required, including supply chain consolidation, technological investment and cultural integration. Achieving post-closing integration plans may be particularly complex in the current environment, and the scope and nature of a buyer’s due diligence will be heavily influenced by the deal rationale and the type and extent of post-closing integration work that is anticipated.

There is a risk that signing and closing arrangements are no longer feasible given Covid-19-related government closures and limited operations. In view of that, parties may need to explore alternative signing and closing arrangements, including the use of electronic signatures if possible.

If required, corporate meetings necessary to authorise the transaction should also be considered well in advance, including whether authorisation can be given via written consent or telephone (or video) meetings.

In addition, if the transaction requires documents or regulatory filings to be executed before a notary or apostilled, early engagement with notaries and/or relevant government bodies should be arranged.

Parties will also need to take into account the more limited operations of couriers, which may result in longer lead times for delivery of any required original signatures or certificates. Similarly, closures or reduced staff at governmental agencies may impact timing and parties’ ability to make filings on the anticipated closing date.

If key governmental or third party approvals are required in connection with the transaction – for example, antitrust or foreign investment approvals, or consents under key customer contracts – parties should take into account any potential delays in obtaining these consents or approvals as a result of government-imposed shutdowns and limited operations.

Regarding purchase price arrangements, we have seen parties negotiating in many transactions that a portion of the purchase price be tied to longer term financial performance of the business.

Earn-outs have been used a lot as possible alternative to protect valuation gaps given the current uncertainty by allowing sellers to share in future growth post-Covid-19.

Parties will need to consider whether such a mechanic delays potential disputes regarding the purchase price. Sellers will also need to make sure that they are comfortable tying part of the purchase price to the financial performance of the business during a period in which the business is controlled by the buyer, which may address the impact of Covid-19 differently than the seller

Another topic that has been hugely discussed during the pandemic is the consequence of a material adverse change in the target business as a result of the impacts of Covid-19, mainly between signing and closing. Parties should carefully consider the inclusion of any closing condition that no ‘material adverse effect’ has occurred with respect to the business between signing and closing. Parties will need to negotiate allocation of the risk for a significant downturn in the business after signing as a result of the effects of Covid-19. Material adverse change (MAC) / material adverse event (MAE) provisions often exclude macro-economic events such as market-wide downturns. However, Covid-19 may have an uneven effect even within certain markets or segments, so the exact wording of the ‘MAC / MAE’ definition will be closely scrutinised and likely subject to intense negotiation.

Sellers may seek to exclude the effects of Covid-19 entirely or the effects of Covid-19, except where the pandemic has a disproportionate effect on the target business compared to other businesses in the industry in which the target operates.

The standard for proving a MAC / MAE is typically high, requiring a buyer to establish the occurrence of events that substantially threaten the overall earnings potential of the target for a significant duration. Parties negotiating MAC / MAE clauses in the Covid-19 era should carefully consider the intended allocation of risk of the impact of Covid-19 on the target business.

In my view, those are the main topics that have been raised in M&A transactions during the Covid-19 pandemic.