The measures taken by governments and companies worldwide in connection with the COVID-19 pandemic and the financial and economic impact thereof will likely have a material impact on M&A transactions.
1. Implications for contracts under negotiation
It is likely that negotiations will be suspended or terminated in the current environment. Liability relating to the termination of negotiations is not easily accepted under Dutch law, especially in the given circumstances. This might be different if one of the negotiating parties has acted in such a way that the other party could have relied on the agreement actually being reached (regardless of the COVID-19 crisis).
2. Implications for signed contracts
Allocating risk is the main focus of M&A. Signed contracts may be impacted by the COVID-19 crisis as follows:
- MAC: the COVID-19 crisis may well trigger a material adverse event or material adverse change (MAC) clause . M&A specialists typically distinct between a ‘market MAC’ or a ‘business MAC’, referring to whether the market generally or the business specifically must be affected. In the present situation, both may be true in many parts of the economy.
- Pre closing actions and conditions precedent: the COVID-19 crisis may make it more difficult to fulfill pre-closing actions and conditions precedents as people fall sick and business and governments grind to a halt and focus on essential services only. Dutch law offers escapes and remedies depending on the specific situation.
- Warranties and liabilities: the COVID-19 crisis may affect the risk-allocation system in M&A, typically reflected by warranties and indemnities, for deals not yet closed. Well-drafted warranties and indemnities should not be forward-looking and therefore deals that have closed before the COVID-19 crisis should not be affected. W&I insurers must be expected to exclude any risks and liabilities in connection with the COVID-19 crisis from coverage.
Legal remedies may be limited as Dutch courts have announced to operate on a limited schedule and only hear ‘urgent matters’ for the time being.
3. New opportunities?
The COVID-19 crisis is heavily felt by many businesses, but in its fall-out new opportunities may well arise. Needless to say contracts must be very carefully drafted in this environment.
As the COVID-19 outbreak confronts businesses with unprecedented risks and an uncertain future, it will be a challenge to fully mitigate and allocate these risks in transaction documentation. This would require a case by case assessment and a tailored approach.
For more information please contact our corporate team.
