M&A in Times of COVID-19

Stephen Amdur is a partner and Brian McKenna is special counsel at Pillsbury Winthrop Shaw Pittman LLP. This post is based on their Pillsbury memorandum. Related research from the Program on Corporate Governance includes Allocating Risk Through Contract: Evidence from M&A and Policy Implications by John C. Coates, IV (discussed on the Forum here).

  1. COVID-19 may cause buyers and sellers to reassess valuations, adjust pricing mechanisms and implement new methodologies for interim operations and crisis response management at a target.
  2. Transaction participants should take steps to mitigate the potential disruption to deal processes and timelines caused by the virus.
  3. Parties should think through risk allocation—including the MAC clause—and how a target’s risk profile may change over time as the outbreak itself develops.

As novel coronavirus (COVID-19)—characterized by the World Health Organization on March 11, 2020 as a pandemic—continues to spread across the globe, companies and transaction participants are grappling with increased risk and uncertainty posed by the virus. This note identifies a few ways in which the developing outbreak may present challenges, both fundamental and practical, to the deal-making process and timelines. It also offers an analysis of how the virus may impact negotiations around that mainstay of M&A lawyering, the “material adverse change” (MAC) clause.

Initial Considerations

The outbreak of COVID-19 has the potential to cause buyers and sellers to pause and rethink some of the fundamental aspects of a transaction:

  • Valuation. Does historical financial information accurately reflect a target that may now have a disrupted supply chain, unusual inventory levels and distorted accounts receivable and payable? Do the financial projections and their underlying assumptions still make sense?
  • Pricing Mechanism. How should pricing risk be allocated between signing and closing? Given the difficulty in assessing the ways COVID-19 may develop and impact a target business over time, is a buyer still comfortable with fixed pricing or a locked-box pricing mechanism? Do earn-outs or other forms of contingent consideration make sense? A viral outbreak presents challenges for the deal market, requiring buyers and sellers to play the role of epidemiologist (a role far afield for most investment professionals).
  • Control. How should key decisions regarding a target company’s response to the virus outbreak be determined, and how should a purchase agreement’s interim operating covenants be altered? Do answers to the questions above about how business and pricing risk is allocated between signing and closing impact governance and oversight over key decisions during this period?
  • Due Diligence. Should buyers expand the traditional universe of due diligence professionals during a process to include health and medical professionals?

Deal Process

In addition to the impact that COVID-19 may have on buyer and seller risk appetites and some of the fundamental considerations like valuation, pricing and governance, given developing travel restrictions, office closures and quarantine requirements, the outbreak could impact the nuts and bolts of the deal-making process in numerous ways:

  • Auction timelines. As a general matter, a seller running an auction should think through the overall transaction timeline and consider adjusting auction steps to account for the increased logistical challenges to doing a deal.
  • Restrictions on Physical Meetings. Transaction participants should be mindful that it may be difficult—if not impossible—for everyone physically “to get in a room”, or to go to the financial printer, to push a transaction across the line. Timelines and expectations should be adjusted accordingly.
  • Due Diligence. Consider whether extra time will be needed to perform due diligence on, among other things, a target’s supply chain, IT systems, the coverage of any insurance products that may be relevant to the target business, or the target’s response from an employment law perspective. Also, consider the presence of any explicit force majeure clauses in the target’s key contractual and business arrangements. Regarding due diligence generally, in-person management sessions may be difficult.
  • Key Information and Financing. Parties should consider whether the outbreak and its related market impact could delay the delivery of key information, such as audited or interim financial statements or financial models or projections, about a target or the pro forma company, which may also delay the availability of financing. Market uncertainty may also increase the difficulty in obtaining committed financing with limited conditionality and limited market “flex”. Expectations and timelines should be adjusted accordingly.
  • Purchase Agreement Dates. Key purchase agreement dates, such as financing or regulatory filing requirements, the outside or drop-dead date at which a transaction terminates and the timeline for any purchase price adjustment mechanism (e.g., an adjustment based on closing date financial statements or a post-closing earn-out), should be reviewed. Should the outside date be extended, given the potential logistical challenges to closing a deal? If there is a dispute regarding a closing date purchase price adjustment, will the necessary finance professionals and outside accountants be available on the required timeline to resolve any disagreements?
  • Closing Mechanics. Parties and their advisors should think through contingency plans if travel disruptions or office closures—including those of regulators or government agencies—delay or prevent required approvals or closing processes. Does any closing document need to be delivered in hard copy? Does anything need to be filed with or stamped by any regulator or government agency? Thinking through the specifics of closing well in advance of an anticipated closing date will help avoid unwelcome surprises.

Material Adverse Changes

One area of negotiation and risk allocation that could be complicated by COVID-19 is the “material adverse change” (MAC) provision. One of the main functions of the MAC provision is to allocate between the buyer and the seller the risk of negative changes in the target business between signing and closing. These are heavily negotiated provisions, with the buyer generally arguing for an expansive definition of what constitutes a material adverse change in the target (e.g., its financial condition, ability to close the transaction, the “prospects” of target etc.) and the seller generally arguing for an expansive list of events or circumstances—i.e., “MAC exceptions”—that cannot be deemed to cause a material adverse change in the target business.

  • MAC Exceptions. We expect that transaction parties will put additional thought and effort into the wording of MAC provisions to address and allocate the risk of COVID-19. In particular, it is not unusual for the seller to try to include in the MAC provision some formulation of an “act of god” MAC exception. In some instances, the drafting of this exception consists of a passing reference to “acts of god” or “force majeure” events. In other instances, the drafting of this exception includes a detailed list of various natural and other disasters (e.g., earthquakes, fire, flood, etc.) and specifically mentions (or not) some grab bag of “pandemics,” “epidemics” and “disease outbreaks.” We expect that transaction negotiations will naturally focus on the exact language of this MAC exception and potentially include explicit references to COVID-19, something that has already turned up in the market (see Morgan Stanley’s acquisition of E*Trade Financial and the business combination of Aon PLC and Willis Towers Watson). In addition, other regularly negotiated MAC exceptions, including for changes in “general economic conditions” or “financial markets”, that are in turn potentially caused by macro phenomena like epidemics will be reassessed.
  • “Disproportionally Affects”. One added wrinkle to the typical MAC provision negotiation is the potential inclusion of “disproportionally affects” (pro-buyer) qualifications. Under this construct, a MAC exception favoring the seller only applies if the target is not disproportionately impacted as compared to its industry peers by the event purportedly constituting the MAC exception. For example, a MAC provision may say that an epidemic (i.e., the MAC exception favoring seller) cannot be deemed to cause a material adverse change at target unless such epidemic disproportionately affects the target compared to its industry peers. The unique qualities of epidemics highlight the potential uncertainty that COVID-19 could introduce to contract interpretation. Assuming an epidemic starts in one geography and spreads over time, is it possible that an epidemic can disproportionately affect a target at an earlier point in time but not at a later time once an epidemic has spread? Consider the scenario where an epidemic starts in one geography (e.g., Asia) and initially negatively impacts the business and operations of an Asia-based hospitality or transportation company. Early in an epidemic initially localized in Asia, a company with heavy exposure to Asia may be disproportionately affected by that epidemic when compared to industry peers globally. However, if the epidemic spreads geographically over time then industry peers in other markets could be caught up and adversely affected by the epidemic. Once the epidemic has spread, the Asia-based business may not be disproportionally affected because everyone in the industry is suffering.
  • Consider Durational Implications. While the Delaware courts have finally found a MAC to have occurred, parties should remember the importance of an extended durational impact in assessing the potential presence of a MAC. While the ramifications of COVID-19 continue to shake out, it remains too soon to tell whether the result will be a momentary blip or a long-term industry shake-up. Parties should be cognizant of the potential ramifications and, in the event that the impact on a target is anticipated to be limited in duration, consider appropriate alternative solutions (such as pricing adjustments, earn-outs, or other mechanics) as opposed to potentially relying on the MAC for resolution.


An epidemic like COVID-19 necessarily injects a degree of uncertainty into the deal-making process. It would be prudent for buyers and sellers to think through the different and not always obvious ways that COVID-19 could impact their respective businesses and the transaction process and terms.

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