The pandemic has changed M&A contractual agreements

COVID-19 has profoundly affected all of us.  There is no area of our lives that has escaped its wrath. From the loved ones lost to the lives that have been forever changed, from our restricted social interactions to our ever-changing workplace policies and practices, and from the youngest among us to the oldest, virtually nothing and no one has avoided being touched in some way.   

As we begin to re-emerge from our cocoons and start to navigate life under the “new normal,” a term we will likely loathe for years to come, we are learning that business and the world of Mergers and Acquisitions in particular, is no exception.  

From a legal and contractual standpoint, and in particular when determining what agreements should be used in a given business transaction and what provisions should be included, certain standard terms and concepts that have in the past merited only passing consideration have taken on new meaning and importance.  In addition, there are a variety of novel issues relating to or resulting from COVID and its attendant concerns that we should thoroughly consider and learn to deal with to our best advantage.  

 In general terms, we must consider and include language in our M&A agreements to take advantage of or to guard against the various effects the pandemic has and will continue to have on those businesses we or our clients hope to sell or acquire, and more time and attention will be spent in performing our “due diligence” to determine what effects may be at play.  Among the issues likely to garner more post-pandemic contractual attention are the following: 

• Contractual force majeure clauses should be expanded to include pandemics and other public health emergencies and consideration may need to be given to adding provisions that govern a transaction’s trajectory if normal business operations are disrupted but not entirely prevented by these forces; 

• Seller/Purchaser liability with respect to employee compensation and benefits resulting from pandemic assistance programs, as well as indemnification and other protections relating to that liability, should be discussed with language included in our contracts; 
• Any ongoing issues relating to personnel such as extended leaves, job performance accommodations made to employees affected by COVID and even revisions to workplace policies and practices that may require future review should be considered; 
• Responsibility for the potential repayment of PPP and other pandemic-related loans, including those at the federal, state and local level, should be determined, and the possibility of post-transaction compliance audits should also be discussed and adjustments to the transaction timeline or payment price made as necessary; 
• Agreement representations and warranties should command more focus and attention, and owners should consult with others within the organization who may have more knowledge of the situation before making these statements in the context of a sale or merger, as there may be unusual circumstances not previously anticipated or encountered by a business; 
• The possibility that a business’ volume of work in process, production levels and delays have been negatively affected by the pandemic should be considered when determining the division of responsibility for and revenues associated with this work; 

• Consideration should be given to the fact that the valuation of a company, including the traditional methodology by which its value is determined, may not be appropriate as the company’s prior periods of financials and projections, if they cover any portion of the COVID pandemic and ongoing recovery. These figures are likely to be atypical at best.   
• Negotiation and documentation of M&A agreements will need to take into consideration the fact that all the economic uncertainty and turmoil created by the pandemic and the resulting downturn and failure of many businesses has created an unstable and unpredictable market for both sales and purchases that will require careful and informed navigation, and the extent and types of destabilizing facts are likely to vary from one business sector, type or location to another. 

All of these issues and others that have come into play for the first time or that have taken on new importance as a result of our collective and individual experiences with COVID have required business owners, entrepreneurs and the professionals who assist them to think outside the box, and they will require us to think and draft M & A contracts more creatively. However, there are definite rewards for those who are willing to take on these tasks.  Although the return to ‘normal’ appears to be underway in both our personal and professional lives, we know the going is likely to be rough. As a result, the correct path won’t always be clear and we will experience setbacks, however, we really have no other option but to stay the course, plan and persevere. The business landscape may have changed during the world’s forced slumber, but it appears that great opportunities await our awakening for those willing to accept adversity as a teacher.    

Michelle Calvert Photo/Provided

Michelle R. Calvert is a partner with the Lebanon-based law firm, Reilly Wolfson.  She concentrates her law practice on business formations and transactions.