The Covid-19 pandemic has greatly affected the financial health of companies. In this scenario, the Mergers and Acquisitions (M&A) market has been an attractive window of opportunity, which the business sector has been seeking in order to grow or remain in the market. In addition, M&A operations lead to strategic and organizational changes for the evolution of businesses. As a result, there are many expectations regarding the increase in these post-pandemic operations in the country.
So, in order for you to better understand what M&A is and why you should think about it, we have prepared a series with seven important points about this process.
1. Due Diligence: assess the real situation of the target company or assets
There are several points of attention for those conducting this type of operation. Price is one of them, as the risks involved in the operations can increase or reduce the sale or purchase price.
While Due Diligence was already an indispensable procedure, after COVID, this prior study, pointing out the effect of the crisis on the company, is essential in order to plan or revisit the purchase conditions, price and obligations in the share and/or asset purchase agreement.
Always consult a professional who specializes in due diligence. This audit is essential for assessing the risks involved in the target company’s activities and the impacts of the crisis on operations and the possibility of evaluating investment strategies with greater security and reliability.
2. Impact on future performance/earn-out: thoroughly analyze the finances of the companies involved
The earn-out clause is used to link part of the price to the achievement of targets, improved performance, profits and performance indicators, as well as other desirable obligations for the parties, after the closing of the operation. Based on these objective and concrete elements in determining the price, it is possible to resolve disagreements about the valuation and balance the expectations of those involved.
In any case, it is crucial to assess the contract on a case-by-case basis, interpreting it in the light of the specific circumstances of each deal and the impact of the crisis on the sector in question. That’s why it’s important to rely on specialized professionals who know your business to draw up a document that aligns the interests of the parties and improves the company’s performance, without resulting in controversy.
3. Analyze the conduct of business for closing and interim obligations
In a share or asset purchase agreement, the conditions for closing or interim obligations are located in the “interim period”, i.e. after the share purchase agreement has been signed and before closing, usually characterized by the transfer of the shares or assets to the buyer and payment of the purchase price to the seller.
However, the pandemic gives exceptional prominence to the business conduct clause, which requires the seller to conduct the business during the interim period within the limits of the ordinary course of operations, giving greater predictability to the buyer and stability to the contract.
Therefore, a specialist lawyer should be consulted to assess the status of the contract and verify the conduct of business, as well as how the company should be managed, between the date of signing and the date of closing.
4. Analyze the Declarations and Guarantees carefully
Another aspect of the seller’s obligations – in the interim period – concerns the reaffirmation of the declarations and guarantees, seen here from a pandemic scenario.
The buyer relies on the information provided by the seller before, during and even after the due diligence to make its decision on the acquisition of the company and the details of the transaction. Transparency and reliability of information is essential, even after the interim period has passed.
5. Pro-sandbagging clauses
Pro-sandbagging clauses in M&A contracts have the function of allowing the recipient of the information, usually the buyer, to be indemnified for losses resulting from errors, inconsistencies and inaccuracies in the representations and warranties provided by the seller, at any time during the deal.
Therefore, the clause guarantees the buyer a remedy against the seller, providing for any right to indemnification for hidden liabilities, a remedy which will not be affected by the fact that the buyer has carried out due diligence and reviewed documentation proving the pre-existence of the liability.
6. What about declarations and guarantees in contracts and M&A transactions in the event of a pandemic?
In this case, we believe that warranties and representations are so fundamental to the price and conditions of the acquisition that, if an exceptional situation arises, clauses should be revisited in order to guarantee the safety of the parties, as well as the seller in terms of financial liability for any damages.
As we well know, periods of crisis cause creditors to take their debtors to court in an attempt to increase their own cash flow, which can result in the rapid escalation of many companies’ liabilities.
Again, the analysis will depend on the specific case, since many industries and services have not been affected so drastically by the crisis, in which case the declarations of these companies will be little affected or even unchanged.
7. Material Adverse Change Clause – MAC
Our final tip on the M&A process concerns the MAC clause, which is often used to discuss the allocation of business risks. Material Adverse Effect Clauses (or MAC, as they are also known) provide for any fact, change or event that has an impact on the business, financial conditions, results of the company or even on the conditions of the seller or other shareholders.
Therefore, for the pandemic to be covered by this clause, it is important to present in detail and concretely how the social and economic effects arising from it affect the market in which the company operates, especially as regards the impact on economic health, assets, liabilities, activity, image, legal situation, etc.
Marcos Martins Advogados puts its team at your disposal for further clarification on the M&A (Mergers and Acquisitions) process.
