Below, we’ve set out important issues to consider as you finalize and close your acquisitions.
Don’t Ignore the Issue.
As the parties draft and negotiate representations, warranties and the related disclosure schedules, each side should consider how the current business environment may affect the target company. Buyers will want to make sure that the representations and warranties are drafted broadly enough to capture the actual and anticipated impact of COVID-19 on the target company’s relationships with its employees, customers, vendors and suppliers. Sellers, meanwhile, will want to make sure the disclosure schedules accurately describe the current state of the business and the actions they have taken to respond to the COVID-19 crisis.
Consider the “New Normal”.
Representations, warranties and covenants, particularly the interim operating covenants covering the operation of the target business between signing and closing, often include exceptions or qualifications based on the ordinary course of business or operations that are consistent with past practice. Buyers and sellers should carefully review these provisions and make sure they still work as intended in today’s rapidly changing business and regulatory environment, when past practices may no longer apply. In particular, buyers should ensure that they will be involved in important decisions that may impact the value of the business, while sellers should seek to retain flexibility to quickly react to new challenges that may arise, including those relating to public health and safety.
It’s a Matter of Time.
As the operations of various businesses and federal, state and local governments are reduced, restricted or shut down altogether, buyers and sellers should be mindful of the potential impact on the timing of transaction closings. Consents from customers, suppliers and other third parties may be difficult to obtain as businesses are closed or forced to operate remotely. Further, regulatory approvals and routine government services such as entity formation or the issuance of good standing certificates may take longer than expected, as many state governments are eliminating expedited and same-day service options that parties have come to expect. Parties should also consider these potential delays when drafting termination provisions, as typical 30- or 60-day drop dead timelines may not be practical.
Hope for the Best, Prepare for the Worst.
Should the operations of the target business suffer during the period between signing and closing, the parties will want to make sure that the termination rights in the acquisition agreement, and their limits, are clearly defined. Buyers will want to be able to trigger material adverse change or similar termination rights, while sellers will likely look to limit such rights on the theory that COVID-19 is already a widely understood business risk.
The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.
Co-author Matthew M. McDonald is a partner in the Corporate & Securities Department.
Co-author Elizabeth Bucilla is an associate in the Corporate & Securities Department.