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The COVID-19 pandemic has changed the way we do business, resulting in many changes to the law to deal with the economic and social changes and it will no doubt change the way transactions are implemented in Australia. This piece is designed to prompt thoughts of what changes may be required in private M&A documents in order to accommodate and allocate risks (and to deal with procedural and logistical matters) relating to COVID-19 and the fallout from this pandemic.
One of the first provisions in a sale agreement which a purchaser may look to for deal protection is a material adverse change (MAC) (or material adverse effect) clause either as a condition to completion or as an express termination right.
Sellers may seek to expressly exclude the effects of COVID-19 (or pandemics generally) from a MAC clause. Indeed, it is typical that matters which affect the economy generally are excluded from matters which would otherwise constitute a MAC, so it will be interesting to see whether practice evolves to expressly include pandemics as a MAC (on the basis that this would exclude them from the customary exception for events which affect the economy generally).
For deals signed in the near-future, and brokered on the basis that the worst of the pandemic has passed, a purchaser should consider expressly including the occurrence of a second-wave of the pandemic as a MAC event (with or without a requirement for a certain economic threshold to be reached to establish a that MAC has occurred).
In an uncertain market, purchasers seeking greater deal protection and flexibility may take some comfort from more conditionality in a sale agreement. Some examples that a purchaser may seek to include (in addition to other purchaser-friendly conditions relating to no MAC and no breach of material warranty) are:
Under the recently amended FIRB regime, as part of the Federal Government’s response to COVD-19, a new form of FIRB condition will be required in order to accommodate both the granting of approval (or, rather, “no objections”) from the Treasurer and, if sooner, the lifting of the restrictions on foreign investment applicable to the transaction. The parties will also need to revisit the length of sunset dates for the satisfaction or waiver of conditions to accommodate the extended time required for approval to be obtained from FIRB.
The warranty and indemnity regime in a sale agreement will be another obvious avenue for purchasers to seek protection from the effects of the pandemic on the target group.
From the outset of the transaction, due diligence should be focussed on the ability of the target and its counterparties to continue to operate in a less certain business environment.
The review of a target’s contracts should include particular attention to the following provisions: term, termination for convenience, suspension rights, pricing, force majeure and obligations for minimum orders. On the supplier side, contract review should make note of whether for example, if the target were to take cost-saving measures post-completion, it would be entitled to terminate or suspend expensive supply agreements, suspend obligations, reset pricing, switch to cheaper alternative suppliers or reduce the amount purchased from suppliers under those contracts.
From an employment law and industrial relations perspective, any pre-completion restructuring or redundancy exercises should be carefully reviewed, as well as ongoing relationships with unions and the target group’s obligations to comply with industrial instruments, each of which may make any proposed redundancies or restructuring more difficult. Also, if the target has taken advantage of any recently-announced stimulus measures such as the JobKeeper scheme, eligibility for, and compliance with, any such schemes should be scrutinised.
Looking at due diligence from a practical perspective, the operational aspects of due diligence may require a different approach, given that some operations are closed, with employees stood down, offices closed (with the potential for delays in access to primary source documents) and management may not be available to travel or attend management presentations.
Purchasers should consider what additional or tailored warranties should be included in the suite of warranties and indemnities to drive disclosure and to allocate pandemic-related risk to the sellers. Some examples may include warranties with respect to:
Finally, if the transaction envisages coverage by warranty and indemnity (W&I) insurance, close scrutiny should be given to the breadth of pandemic-related exclusions in the W&I policy. We are already seeing very broad exclusions included in policies for any loss arising from, or which is increased by, COVID-19. The very wide ambit of such exclusions has the ability to cut across entire swathes of warranty protection, decreasing the value of the protection offered by such insurance. If exclusions of this nature cannot be negotiated out of the policy or restricted to a sensible scope, the purchaser may require comfort that any excluded coverage is compensated by the sellers or related parties (and adequate credit support is in place in respect of such coverage).
A further consequence of the new FIRB regime (together with its extended processing time for applications), is that transactions requiring FIRB approval will have extended intervening periods between signing and completion. As a result, new breach cover may be more attractive to purchasers than in a transaction with a much shorter period between signing and completion, however new breach cover may not be offered in all transactions.
In transactions with an extended period between signing and completion, a seller should consider including exceptions to, or providing greater flexibility to comply with pre-completion undertakings for matters required to deal with the fallout from the pandemic. Some examples of this may include permitting the target to make redundancies, increase its borrowing capacity or implement other changes to ordinary course trading (in each case, without the need for the purchaser’s consent).
Similarly, in transactions featuring consideration payable as an earn out, purchasers should consider accepting exceptions to, or providing greater flexibility to comply with, post-completion conduct restrictions (i.e. earn out protections in favour of the sellers). Such restrictions will enable purchasers to deal with matters resulting from the pandemic, which are not otherwise considered ordinary course or which may not otherwise be permitted by the earn out protections.
The pandemic may also have an impact on purchase price adjustment mechanisms:
There are plenty of other matters to consider not just in sale agreements but in general transaction documents (for example, exclusivity agreements). Some items to give some thought to include:
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