COVID-19: Impact On Mergers And Acquisitions In Malaysia.

Usual Practice

Fixed

In a typical M&A transaction, the purchase consideration is fixed when the definitive agreement is signed.

Adjustment

• In some deals, adjustment to purchase price is allowed after the acquisition is completed, based on the situation of the target company as at completion.

• The most common reason that allows for post-completion purchase price adjustment is change in working capital (i.e. current assets less current liabilities) of the target company. Having a certain working capital is a good measure of the target company’s requirements to operate its business as a going concern.

• There is also a practice that allows for a purchase price to be adjusted due to Material Adverse Effect (MAE), though this practice is not that common as MAE usually provides the parties an option to terminate or proceed with the contract, which is usually to the benefit of the purchaser.

COVID-19 Situation

Material Change

• If some of the companies are already in the talks for an M&A but then realise that due to the COVID-19 outbreak, their valuation has increased way higher, what should they do? For example, while some businesses are suffering due to their inability to operate because of the lockdown, some businesses such as delivery businesses, online businesses and those who fall under the definition of “essential services”, especially food supply services and postal and courier services, are riding high.

• This situation is in contrast to the MAE concept that usually benefits the purchaser. This situation is a material change to the target company which is not adverse, but is in fact good for the target company.

Seller's Position

Can I increase my selling price?

In this situation, a seller who intends to dispose its asset would think that it should be getting more from the purchaser, if, on the day of the completion, the target company is valued 2 times more than when the agreement was signed.

What to Do

Negotiate this event from the beginning

A seller in an M&A transaction should negotiate for the right to initiate a purchase price adjustment based on parameters agreed with the purchaser should the value of the target company increase between the time of signing until the completion due to pandemic/epidemic outbreak, lockdown, restriction of movement and the like. This is not an easy point to negotiate but if the parties have an equal bargaining power, as a concession, the seller may wish to consider allowing for a purchase price reduction based on parameters agreed with the purchaser should the value of the target company decrease due to a not temporary MAE which includes a pandemic outbreak.

Alert

Intention must be clear

Though parties are free to contract this term to increase the purchase price, the intention of the parties must be clearly worded and reflected in the agreement. If the language to allow for the adjustment upward is not clear and parties bring this dispute to the court to decide, the seller may be seen by the court as trying to gain unjust enrichment in this situation.

Usual Practice

Business must be operated as usual

• It is a typical covenant in an M&A transaction that the seller must ensure that the business of the target company is conducted in the ordinary course of business from signing until completion.

• If the target company has to depart from its ordinary course of business, then prior written consent of the purchaser must first be sought.

COVID-19 Situation

Consent will disrupt business

• In this lockdown situation, a departure from the ordinary course of business may be required. For example, most business premises are required to be closed and employees have to work from home.

• In this situation, it will be hard for the seller to ask for the purchaser’s consent especially when a quick decision is needed to maintain the business.

What to Do

Good emergency plan must be in place

• The parties may agree to do away with the purchaser’s consent every time the target company needs to act outside the ordinary course of business (which may not be viable at the present time) if the purchaser is satisfied that the target company has a business contingency plan/ disaster recovery plan/ emergency plan framework and other crisis-related guidelines that would be adopted by the target company in this kind of situations.

• The purchaser must also be satisfied that the target company has a proper security system that protects the target company’s data when the employees are required to work from home and protects against hacking or fraud attempts.

• This issue has always been treated lightly in many M&As as compared to other issues, and there are even M&As that disregard having this term in their definitive agreements because the seller may not have all of the above in place or the purchaser is confident that it knows the acquired industry very well and that it can manage any challenges to come.

Alert

Review the usual terms in a different light

All terms under the M&A that may seem as “usual term” or “just a boilerplate” must now be looked at differently with a fine toothcomb.

Usual Practice

Minimum requirement

Usually, the purchaser will be satisfied with the insurances maintained by the target company if the properties, assets and employees of the target company are well covered by insurances up to the completion date. The purchaser will not usually go beyond these 3 in its due diligence exercise in deciding whether to proceed with the M&A.

COVID-19 Situation

Businesses are fragile

The present situation will make people realise how fragile a business is and that things can change overnight. Just because a business is running good today, there is no guarantee that it won’t suddenly be not in operation tomorrow.

What to Do

Minimum may now be more

In this situation where businesses and supply chains are disrupted, the purchaser should consider requiring the target company to take additional insurances in anticipation of this situation, for example, business interruption insurance, especially when the target company doesn’t have a comfortable level of gun powder to cushion the impact of the present situation.

Alert

Exclusion clause is crucial

Purchaser must go through the exclusion clause in the insurance policy carefully. The insurance policy must not exclude pandemics and related events or change of shareholders from its coverage.