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By Steven T. Lawrence, Esq. and Miranda Preston, Esq.
Milligan Lawless, P.C

The COVID-19 pandemic has impacted all aspects of business in the United States, M&A transactions in particular.   The global IPO market ground to a halt in March of 2020, and corresponding developments in the M&A market were felt almost immediately.[1]  By the end of March 2020, M&A levels for the first quarter of 2020 had fallen by more than 50% compared to levels for the first quarter of 2019.[2]  Many companies and private equity buyers moved away from the deal market in an effort to preserve jobs, customers and resources.  For example, Xerox ceased its $35 billion takeover bid for HP, SoftBank terminated a $3 billion tender offer for WeWork stock and Hexcel and Woodward ceased discussions on a $6.4 billion merger of equals.[3] 

Private company transactions were also impacted – a recent study of private company deals valued at less than $2 million found that 46% of deals were delayed and 11% were cancelled as a result of the pandemic.[4]  Some transactions involving the acquisition of physician practices that primarily perform elective procedures were delayed or cancelled altogether following the suspension of the performance of elective procedures.  The pandemic caused the re-evaluation of the terms of M&A transactions.  Transactions are still occurring, but in many cases the pandemic has caused the parties to agree to modified terms and conditions.  This article highlights five areas where the pandemic has affected the terms of M&A transactions. The second part of this two-part series will discuss actions prospective sellers can take in the face of the pandemic to optimize their position as targets for acquisition.

  1. Purchase Price.  One of the most noticeable effects of the pandemic has been the reassessment of target company valuations.  M&A transactions in 2020 have seen a greater prevalence of contingent forms of consideration, such as earn-outs or increased percentages of escrowed purchase price.  In the health care context, earn-outs and other post-closing adjustments can have regulatory implications.[5]  These contingencies add complexity to the transaction and increase the potential for disputes between the buyer and seller.  Post-closing adjustments have a new level of importance as day-to-day uncertainties of operations have made the ability to anticipate performance more difficult.

  2. Due DiligenceWhile the diligence effort is always an important aspect of any transaction, the pandemic has caused a heightened emphasis on the buyer’s diligence of the seller.  Buyers are now taking an even deeper dive into the pandemic’s impact on the target company’s sales, regulatory compliance, contract obligations, internal controls, among many other aspects.  A significant portion of due diligence occurs electronically over remote technologies, but not everything can be done virtually (e.g. site visits, surveys).  As in-person diligence remains limited, sellers should expect a longer and more rigorous due diligence process.

  3. Representations and Warranties.  There has already been a shift in the negotiations of representations and warranties to address COVID-19.  Some buyers are now requiring that sellers represent and warrant regarding: (1) the seller’s compliance with all local laws, rules and regulations regarding the pandemic, including any restrictions regarding the opening and closing of businesses; (2) the impact of the pandemic on the seller’s workforce and the ability of the seller to continue to operate in the face of “shut-down” orders; (3) whether the seller has obtained any CARES Act related relief, the seller’s eligibility for relief, and the seller’s compliance with CARES Act program requirements; and (4) the internal controls, policies and procedures of the seller regarding a safe workplace, including compliance with U.S. Centers for Disease Control guidance regarding re-opening.  Given the depth of these new representations and warranties, representations and warranties insurance (“RWI”) has become a consideration for many sellers who would have not previously considered it, or who may have determined the cost of RWI premiums outweighed its benefits.  This has led to new negotiations between sellers and insurers over the terms of such insurance and whether the policy contains COVID-19-related exclusions (which may result in coverage gaps during the pandemic).

  4. Operating CovenantsBuyers are demanding tighter controls on the target company between the signing of a purchase agreement and the closing of the transaction.  This tighter control is typically evidenced by covenants that obligate the selling company to operate in a certain way or with certain limitations, typically based on the “ordinary course” of the business.  Operating a business “in the ordinary course” may not be applicable (or as applicable) in a time of a worldwide pandemic.  What is the “ordinary course” today?  Does “ordinary course” mean pre-pandemic?  Historically, these provisions have been somewhat loose and allowed the selling company a level of room to continue to operate the business as it had historically operated.  However, in the pandemic era, buyers are demanding much greater controls and tighter restrictions on the selling company’s pre-closing operations.

  5. Material Adverse Effect.  Material adverse change or Material Adverse Effect (“MAE”) clauses generally allow a buyer to walk away from the deal if the seller’s business and operations suffer a material adverse change between the signing of the purchase agreement the and closing of the  transaction.  For transactions that were entered into before the onset of the pandemic, or for those contracts of the selling company that are under review, a question may arise whether the pandemic constitutes a MAE.  The party invoking a MAE faces a high standard in demonstrating that there has been an adverse change to the selling company’s business that qualifies as a MAE that would excuse the buyer’s performance.[1]  In evaluating whether there has been a MAE, the courts will likely consider: (1) the express language of the agreement; (2) whether a pandemic or epidemic is an anticipated (or reasonably anticipated) event; and (3) the depth of the impact on the business and length and scope of the downturn.  Given the fact that the long-term effects of COVID-19 are still unknown, and the high standard for demonstrating a MAE, it will likely be difficult for buyers to successfully argue that the disruptions caused by the pandemic constitute a MAE.

The COVID-19 pandemic has wreaked havoc on the U.S. economy; the M&A market is not immune to the pandemic’s negative impact.  That said, some M&A activity has continued unabated, though the terms of such deals and the associated risks look markedly different than they did pre-pandemic.  For information about the steps that prospective sellers can take to better position themselves when the time comes for a sale, stay tuned for part two of this series.  If you have any questions regarding any M&A issues, the business transactions team at Milligan Lawless is here to assist.  Please contact Steve Lawrence at 602-792-3635 or steve@milliganlawless.com or Miranda Preston at 602-792-3511 or miranda@milliganlawless.com.


[1] Jens Kengelbach, Jeff Gell, Georg Keienburg, Dominik Degen and Daniel Kim, COVID-19’s Impact on Global M&A, Boston Consulting Group, March 26, 2020.

[2] Richard Harroch, The Impact of the Coronavirus on Mergers and Acquisitions, Forbes, April 17, 2020.

[3] Cara Lombardo, Xerox Is Ending Hostile Takeover Bid for HP, The Wall Street Journal, April 1, 2020; Peter Eavis, SoftBank Won’t Buy $3 Billion in WeWork Stock, New York Times, April 1, 2020; Reuters, Aero Suppliers Hexcel and Woodward Scrap Deal as Coronavirus Pummels Industry, April 6, 2020.

[4] Market Pulse Report, Pepperdine Graziadio Business School, April 29, 2020.

[5] For example, in the context of the sale of a physician practice, where a portion of the purchase price is paid as an earn-out, if the owners of the seller will refer any patients to the buyer post-closing, the Stark Law and the Anti-Kickback Statute may be implicated.

[6] See Akorn, Inc. v. Fresenius Kabi AG, No. CV 2018-0300-JTL, 2018 WL 4719347, at *53 (Del. Ch. Oct. 1, 2018), aff’d, 198 A.3d 724 (Del. 2018) (citing Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008) at 738 (stating “A buyer faces a heavy burden when it attempts to invoke a material adverse effect clause in order to avoid its obligation to close”).