Two years on from the first lockdown – how have M&A transactions been impacted?

Virtual Data Rooms and Electronic Signatures

Even prior to the Covid-19 pandemic, virtual data rooms were commonly used to manage the due diligence and disclosure process. The Covid-19 pandemic has now fully cemented the shift away from physical data rooms towards virtual data rooms. Virtual data rooms offer a secure mechanism for sellers to share data in relation to the target company or business throughout due diligence and the subsequent disclosure process. Virtual data rooms have been fully utilised during the pandemic and will continue to be utilised post-Covid-19.  

Coupled with the use of virtual data rooms, there has also been a very firm shift to employing electronic signatures for completion processes. Prior to the pandemic it was already common place to utilise electronic signatures for standard, day-to-day commercial contracts. However, the pandemic has certainly fuelled a transition to going completely digital for both standard contracts and deeds and it is now common practice for the whole suite of M&A documents to be signed electronically and we certainly believe that this change is very likely to remain standard practice going forwards.

Despite this evolutionary use of IT, it is important to note that the whole signing process cannot be conducted remotely. The Law Commission (and the Law Society in a June 2020 update) confirmed that the witness of the signatory to a deed must still be physically present and directly observe the signatory signing on their computer or smart phone. It is not permissible for electronic signatures to be witnessed virtually.

Due Diligence

The uncertainty arising from the pandemic has increased the emphasis on due diligence. Already a key element of any M&A transaction of course, Covid-19 has placed a particular emphasis on its importance in gathering pertinent information about the target company or business and in particular, its supply chains and historic and projected customer revenues before, during and after the pandemic bubble. Short term Government initiatives around COVID loans and furloughing employees have obviously also become key points of diligence for any buyer but the longer term change in remote working practices for employees will ensure that employment diligence will remain a key area going forwards. Generally speaking, the pandemic has seen a raft of additional questions added to legal and financial due diligence questionnaires used to assess target companies or businesses.

It is likely that whilst the prevalence of Covid-19 continues to be ever changing, these questions will remain and there will be continued scrutiny of the impact of Covid-19 on the target’s business.

Warranties and Indemnities

Together with increased due diligence, buyers are seeking additional warranty protections and in some cases indemnity protections to cover the additional risks associated with the Covid-19 pandemic in-line with the areas of particular diligence focus as mentioned above.

W&I Insurance

W&I insurance has been around for many years but the Covid-19 pandemic has resulted in an increased use of W&I insurance. A W&I insurance policy is used to bridge the gap of the allocation of risk between a buyer and a seller.  It will cover the buyer’s loss as a result of the seller breaching any of the warranties (and possibly indemnities) under the sale and purchase agreement.

Material Adverse Change (“MAC”) Clauses

The pandemic has triggered further discussion regarding the use and impact of MAC clauses in contracts i.e. contractual provisions allowing a buyer to walk away from a deal in-between exchange and completion upon the happening of certain material events which adversely affect the target company or business – whether the loss of a key customer, or a substantial claim being made against the target. From an M&A perspective, given ongoing concerns around business stability and/or artificial Covid trading bubbles, it was anticipated that there would be a rise in the use of MAC clauses and as per the developments in focus on certain areas in due diligence and warranties, two years on from the start of the pandemic, MAC clauses are now being carefully drafted and negotiated to cover a range of specific areas of legal and financial risk associated with the new business landscape in addition to more traditional, boiler plate areas of concern.

Conclusion

Technology has greatly aided the ability for M&A transactions to continue despite the disruption caused by the Covid-19 pandemic. Ultimately, Covid-19 greatly impacted the practical mechanisms previously used to manage M&A transactions and it is very likely that the new ways of managing deals are here to stay. Similarly, the last two years have moulded variations in M&A documentation and again, it is very likely that these will continue to progress and change as the uncertainty caused by Covid-19 evolves.