COVID-19 pandemic has led to a worldwide lockdown. The sudden halt in activities has led to a disturbance in business transactions and the entire world has seen an economic crisis. The pandemic also impacted Mergers and Acquisitions as the corporations have to take a tough decision between delaying or holding deals still and going ahead with operations. The main reason which impacted mergers and acquisitions are change in business dynamics, liquidity crunch, disruption in supply chains, and re-arrangement of surplus funds. Mergers and Acquisitions are considered to be one of the best modes of business expansion before the COVID-19 pandemic India Inc. saw a great spike in Mergers and Acquisitions deals but due to the outbreak many business owners and managers shifted their focus to core business and Mergers and Acquisitions took a backseat.
The aviation, hospitality and tours and traveling sectors have been deeply impacted due to the outbreak, buyers and investors will review and reconsider their decisions and Mergers and Acquisitions deals might be suspended. As buyers and sellers are constantly negotiating acquisition agreements, material adverse effect (MAE) clauses are playing an important role. The MAE clause is a clause in Mergers and Acquisitions agreements that permit buyers to terminate an agreement or transaction, as a result of an event or series of events, which had a significant impact on the financial health and business operations of the target. The bar for proving a MAE clause by the buyer is set pretty high and very often the court of law accepts the excuse as the buyers fail to provide sufficient facts but due to the pandemic, the entire global economy has seen a crisis and such a situation might trigger many MAE clauses. Though MAE clauses do not cover Act of God or pandemics to minimize risk but the current ongoing situation is different and difficult and there are exceptions to certain clauses, the buyers and sellers before reaching a solution will have to assess the risk and challenges and one thing that has to be kept in mind is both parties expectations are being met.
The COVID-19 pandemic will not only affect the Mergers and Acquisitions agreements but also buyer-seller relations, corporate governance structure, pricing structures and deal procedures. There will be an increase in delay in Mergers and Acquisitions agreements which were in their initial stage and might be suspended for some time. Global investments might face a back seat as Multi-National Companies will redirect investments and conserve cash owning to the unstable markets. Financial schemes and reliefs such as tax relaxations announced by the Union Budget 2020 and relaxation of schemes by regulatory bodies like SEBI, RBI, and MCA might act as a stimulant and simplify the process of Mergers and Acquisitions. MNCs can find this as an opportunity to acquire stressed companies that might fetch high capital later. The due diligence clauses will be impacted and changed, buyers might suggest to expand due diligence clauses owing to the impact of Covid-19 on the seller’s business, these will include financial and operational suggestions, the buyer might review the accounts of the company, employee strength to resume operations, the debts of the company, the buyer can request to review contracts, with limited physical meetings the buyers has to rely more on virtual data provided by sellers.
The COVID-19 era will experience certain changes owning to Mergers and Acquisition agreements, MAE clauses might enlist pandemics and lockdowns; relief measures are constantly being announced by the Government and compliance dates are being relaxed; specified warranties will be provided by sellers to buyers in order to overcome risk and challenges; many regulatory bodies like SEBI, RBI has allowed filings of applications electronically; e-contracts and e-signatures will play a vital role in the execution of agreements and board meeting and approval from shareholders and audit committee will be obtained through video conferences.
In the post COVID-19 era businesses will have to identify challenges, the financial markets will take time to stabilize and this will be an opportunity for buyers and sellers to resume the suspended acquisitions agreements. Healthcare, pharmaceutical, and IT sectors might see a major uprise and potential Merger and Acquisition activity can take place.