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As the coronavirus rocks the global economy, stalled supply chains and disrupted business are impacting contracts, commercial transactions, and the M&A market. Analysts on Bloomberg Law’s transactions team identified the questions that are top of mind for legal practitioners in navigating uncertainty spurred by Covid-19.
Can parties get out of existing agreements because market conditions have declined?
For companies combing through contract terms to get out of previously agreed-upon deals, many are hoping force majeure protections could be a saving grace. These clauses let parties off the hook for obligations that go unfulfilled due to “acts of God,” or events beyond their control. Whether or not this is a viable path depends on the contract’s wording.
<h3=”volatility”>How is the M&A market responding to market volatility?
In terms of new deals, the European Union is urging companies to delay merger filings “until further notice, where possible.” Meanwhile, in the U.S., deals that require review by the FTC or the Department of Justice are going to take more time and will go through different procedures for the duration of the emergency, according to the agencies.
Deals are still getting done – companies have announced $67.5 billion of mergers, acquisitions, and investments since the virus was deemed a pandemic on March 11, according to data compiled by Bloomberg. But that’s less than half the amount during the same period a year earlier, meaning 2020 could be one of the worst years for M&A in a decade if that pace holds.
Some major deals have been scrapped as a result of the virus’s spread, but overall, the data do not show an atypical trend of deal failures at this point. Thus far, March deal terminations are about one-half to one-third of prior years.
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How should parties allocate risk stemming from the pandemic in M&A agreements being drafted now?
More than 1,940 companies have now included coronavirus risks in their Form 10-K reports since Levi Strauss & Co. made the initial filing on January 30, 2020.
Additionally, some M&A transaction documents are now including language related to Covid-19. For example, Morgan Stanley’s $14.5 billion acquisition of E-Trade Financial Corp. specifically carves out the virus from the scope of the definition of “material adverse effect,” as does Aon Plc’s more recent all-stock purchase of Willis Towers Watson Plc.