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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.
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.
Practical Guidance: Notification of a Force Majeure Event
As Covid-19 affects global business, a lot of legal practitioners have questions about force majeure clauses. Bloomberg Law’s annotated example can help.
Will due diligence, negotiations, and closing occur on schedule? What modifications to those processes need to be made?
While much of the due diligence process can be completed remotely, Bloomberg Law’s Grace Maral Burnett and Eleanor Tyler caution that certain elements are better suited to being done in person. Tyler advised that she would not want to conduct due diligence “without actually sampling inventory, checking VIN numbers and serial numbers on equipment, and conducting actual real site visits.”
In terms of negotiations, Burnett also noted that “social distancing could really put a wrench into important negotiation meetings on the terms of the contracts and closings.” While the back-and-forth between lawyers often happens via calls, “important negotiation meetings where they bring the clients to the table are, in my experience, often held in person.”
For pending deals that have yet to close, how have valuations been impacted?
One example of what can happen when share prices take a hit post-signing and pre-closing, according to Burnett, is the ongoing saga of LVMH’s acquisition of Tiffany & Co., which it originally agreed to in November 2019. Due to the coronavirus slump, Tiffany’s shares are below the $135-per-share price that LVMH originally agreed to. Following the price decline, LVMH discussed the potential of purchasing for less on the open market, but ultimately stated that, “In accordance with the agreement concluded with Tiffany in November 2019, LVMH is currently committed not to buy Tiffany shares.”
Additionally, funds centered on merger arbitrage are posting losses as plummeting share prices are causing deal spreads to widen. This is making some investors concerned about deals falling through or being renegotiated.
Are deals being put on hold or terminated? What are the associated costs?
Some dealmakers are considering renegotiating deals, or even triggering “material adverse change” clauses. Asbury Automotive Group is backing out of a $1 billion all-cash purchase of Park Place Dealerships and will pay $10 million in damages.
In the media industry, AT&T, ViacomCBS, and Ion Media Network are all putting major sales on hold. Meanwhile, a delay in the megadeal sale of Caesars Entertainment Corp. to Eldorado Resorts Inc. is resulting in fees of almost $2.3 million per day for Eldorado.
How are valuations trending for companies in distress, and who will be making those acquisitions?
Some finance experts are predicting that lower valuations, particularly in the Asia-Pacific region, might motivate private equity buyers who have been sitting on a record $388 billion in dry powder in Asia. Firms with less available cash, however, may struggle as credit tightens.
Bloomberg Law’s resource page offers additional guidance to help you advise clients and businesses through the impact of Covid-19.