‘Lessons learned in negotiating M&A transaction documentation in a post(?)-Covid-19 world’

Monday 27 June 2022

Report on session at 6th IBA Global Entrepreneurship Conference, 16 – 17 May 2022, presented by the IBA Closely Held and Growing Business Enterprise Committee

Session Co-Chairs

Paul A Josephus Jitta Buren, Amsterdam

Luciana Tornovsky Demarest Advogados, São Paulo; Senior Vice-Chair, IBA Closely Held and Growing Business Enterprises Committee


Lycke Cappelle Senior Legal Counsel, LUMICKS, Amsterdam

Nicholas Dorsey Cravath, New York

Christian Pleister Noerr, Berlin

Marco A Rizzi Bratschi, Zürich; Member, IBA Closely Held and Growing Business Enterprises Committee Advisory Board

Richard Spink Burges Salmon, Bristol; Conference Coordinator, IBA Closely Held and Growing Business Enterprises Committee

Session Report

In a very interesting session, the panellists discussed current trends on Mergers and Acquisitions (M&A) contracts, including purchase price adjustment mechanisms, representations and warranties, indemnities for specific Covid-19 related risks, material adverse change clauses, earn-out mechanisms and others.

First, the speakers commented on the experiences they had gained regarding M&A transactions since 2020, particularly the changes on the M&A process. Richard Spink made reference to the impact of Brexit on deals and target companies, in particular, changes in competition law and antitrust clearance processes. Lycke Cappelle mentioned that LUMICKS had raised $93m in the midst of the pandemic and explained how the pandemic had influenced the transaction in terms of the way the work and drafting was done, the impact of the ‘biotech bubble’ in the valuation of private and public biotech companies and the consequences of travel restrictions to the business. Christian Pleister commented that M&A negotiations showed less posturing, but more drafting rounds and discussed quality of documentation. Marco Rizzi closed the topic by stating that the pandemic had created a level playing field, but, on the other hand, large teams lost the advantage of ‘(wo)manpower’ and had to cope with longer/more complex decision-making processes and lead times. The virtual setups forces participants to speak one at a time and that controlling different channels of communication was, and remains, challenging.

The panellists then focused on deal terms and discussed the issues around the ‘ordinary course of business’ provision. Nicholas Dorsey commented on a recent Delaware Supreme Court case, and the panellists debated on the definition of ‘ordinary course of business’ and the application of interim management clauses when a company is facing unforeseen events it has never encountered before. The speakers also commented on carve-outs for emergency events in material adverse change (MAC) clauses and specific Covid-19 warranties and indemnities; as well as warranty and indemnity (W&I) insurers’ approach to Covid-19 warranties. They concluded that Covid-19 marked the beginning of a transition from a global world of global certainties to a fragmented world of global uncertainties. Although the pandemic was global, the way to deal with it, and therefore its effects on individual companies and economies, was very much local and heterogeneous. Accordingly, we lawyers (and our clients) need to adapt to this new uncertainty. Standard clauses will not help for the next crisis to come. We need to ‘think the unthinkable’ and try to catch it in the transaction agreements – and the parties need to negotiate and allocate such risks and developments.

The panel also addressed due diligence issues in connection with the Covid-19 pandemic, including compliance issues, information availability (and impact on W&I coverage if information is not available), impact and reliability of historic trading numbers, impact on supply chain and customers, and cybersecurity threats and concerns.

Regulatory aspects were also addressed, and the participants concluded that regulatory constraints and sanctions are becoming increasingly relevant and challenging when negotiating and closing an M&A deal.

The co-chairs asked the panellists to comment on lessons learned, and the following concepts were shared with the audience:

  • The way of working will probably improve, as we will have the ‘best of both worlds’. In M&A transactions the parties need to meet face to face at some point, and in difficult negotiations it may be good to put everyone together in a conference room to close open issues. But it is also true that remote working platforms allow the sharing of documents on screen and expedite the drafting process.
  • In the post-pandemic world, companies look differently at commercial contracts knowing that the ‘unforeseen’ can actually happen.
  • In acquisition agreements in the United States, parties are moving away from flat covenants to efforts- and materiality-qualified covenants. There is a trend to take several of the carve-outs in the definition of ‘material adverse effect’ and import them as exceptions to the interim operating covenants. This could have the practical effect of testing compliance with the ordinary course covenant essentially to a ‘material adverse effect’ level.
  • As lawyers, we need to have a better understanding of our clients’ businesses, in order to understand their specific constraints, vulnerabilities and risks and try to cover them in the acquisition agreements. There is an increasing importance of industry practices and of regional practices within law firms.