CROSS BORDER MERGERS AND ACQUISITIONS DEALS IN THE TIMES OF COVID-19
This post is authored by Kanika Kimothi, a fourth-year law student at the University of Petroleum and Energy Studies, Dehradun, Uttarakhand.
Photo by Campaign Creaters on Unspalsh
Covid-19 pandemic has made not only the human lives distraught but has also significantly affected a great deal of corporate transactions. It has hit us hard and the worse is yet to come. We have to prepare ourselves to get used to it till it is lingering and to prepare bulletproof plans and strategies to deal with its aftermath. Many of the corporations around the world are in the dilemma of whether to stop corporate transactions or to go with it. With this atmosphere of uncertainty, many corporations have decided to walk out of the deals and many are still to decide on it. Merger deals for the year 2020 have been reported to be 33% down from the previous year and the number of transactions has fell 20% year-on-year.[i]
Corporations To Brace Themselves
Preliminary stage M&A deals will probably not be carried out until the situation gets better. Corporations will have to work towards mitigating risk due to limitations imposed during this crisis-stricken time. M&A, which is also referred to as “sellers market”[ii] due to the upper hand of seller in this area through which they are able to set seller-friendly arrangements, will see a change as the crisis will get the buyer a lever to pull according to him. Sellers will be also reluctant to provide any warranties and indemnities to the buyers during this capricious period. However, he will have to make sure that the buyer doesn’t get himself walking out of the transaction because of the paucity of funds due to this unpredictable predicament.
Further, the process of due diligence[iii] will become difficult as site visiting will become challenging due to restrictions on international visits imposed by different countries. Most of the work will be done online but some of the work may not be able to happen online such as work containing confidential matter which requires personal presence. There may be certain merger clearance conditions[iv] which will be time constraint and are required by buyers to be fulfilled before a certain time to carry out the deal. Its failure may result in violations of merger and acquisition laws in different jurisdictions. This is known as “gun-jumping”[v] and may lead to invalidation of the deals. Deals may get delayed due to various court and regulatory approvals required before continuing with the deals. Therefore parties may look into deals that involve fewer regulatory interferences and legal obligations to be fulfilled to make the deal successful.
Due to travel restrictions, Board Meetings on decisions for mergers, amalgamation, and takeovers where the physical presence of directors is required are allowed to be conducted via video conferencing by MCA for a period of three months.[vi] SEBI and RBI have also allowed admittance of electronic applications.[vii] CCI has also allowed filling of electronic applications for combinations under the Green channel.[viii] It has also allowed video-conferencing for Pre-Filing Consultation.[ix]
Parties usually take time between signing and closing the deal. During this period the company remains in control of the seller. Due to the ongoing covid-19 outbreak, the companies’ situation will remain uncertain; and it will be a burden on the seller party to safeguard the company. Sellers will try to wash their hands of and this may deteriorate companies’ condition. In this tough time, it is prudent for both the parties to interpret and imply ‘in the ordinary course of business’ carefully towards the company welfare. The crisis may prompt parties to act outside the ordinary course of business, and therefore, the parties will have to be careful in allowing any exception to avoid getting adversely affected by it.
Parties will also have to carefully assess any indemnity/representation/warranty clause as the outbreak may render them untrue or difficult to apply. Buyers may look forward to these warranties to mitigate any risk and damages. Whether the agreement contains terminating rights to terminate the deal and whether all the ingredients for terminating the right is met will depend on the language of the agreement.
Opportunities in the time of Crisis
During this crisis still, some deal breakers are trying to get their deal done and are looking for new deals opportunities. Some potential buyers are opening their minds whether to secure current business more or to use the available liquidity for acquisitions. Buyers will have a prospect to have purchase price down which can lead to lower valuations[x] and a higher return on capital either by way of earn-outs or other purchase price adjustments.[xi] Taking into consideration the impediments during these times, certain watchdogs such as CCI and RBI have provided relaxations in compliance norms.[xii]
Safeguards to be Adopted
The situation is hard-hitting for many deals but some safeguards can be adopted to shield the M&A deals. One of mostly sought safeguard during the crisis is the existence of “Material Adverse Change” or “Material Adverse Effect” clause. It usually comes in the picture during unpredictable or adverse happening of things which will deteriorate the value of the target and would allow a party to terminate the agreement after signing it. It may be general or specific in nature. While the Specific clause contains specific inclusion and exclusion of the situations which would fall under the clause, the general clause contains no express categories. The specific clause can also contain exceptions such as a change in political scenario, natural disaster, and war. But the confusion remains whether Covid19 will be included in the clause. For that, the party will have to prove that due to the crisis the deal will have a material adverse effect. The agreement of Morgan Stanley and E*Trade Financial Corp.’s[xiii] deal have specifically excluded “any […] epidemic, pandemic or disease outbreak (including the COVID-19 virus)”. Inclusion of Force majeure[xiv] would allow the parties from reprieving of certain obligations in case of arising of unpredictable and uncontrolled events. This clause includes events such as natural calamity, plagues, act of God, government actions, etc. and would include certain conditions to be fulfilled for invoking this clause. Ministry of Finance[xv] has also declared covid19 as natural calamity and it to be included in Force Majeure clause.
How is India Preparing Itself?
India has armoured itself by adopting stringent rules for foreign investments. The step is taken after the Central Bank of China has increased its stake and has bought 1.75 crore shares in HDFC[xvi]. Many countries like China would have taken this opportunity which would have resulted in many more hostile takeovers. So as to avoid such acts, now “any country sharing its border with India or where the beneficial owner of investment into India is located in or citizen of such country”[xvii] will have to take government approval for FDI.[xviii] This will protect the hostile takeovers of the companies who are trying to survive in the crisis and can easily be made target by acquiring companies. MSME has also sought protection fearing hostile takeover and have reported that China’s funds are in splurge right now.[xix] The government has approved 10,000 crore Funds to help MSME which are in distress.[xx]
Covid-19 has already affected a great deal of M&A transactions and parties will have to remain conscious of any future deals till the crisis subsists. Change in regulatory norms by different countries is expected to avoid any halt for persistence of these transactions. Parties will have to be mindful of including various clauses such as the Material Adverse Effect clause, Force majeure clause, and clauses relating to termination of rights. As an agreement dealing with certain clauses can make the deal survive. Further, Risk factors need to be assessed to avoid having any undesirable change in the value of the target company. Seller may in unavoidable situations act outside the course of the business. This outbreak certainly demands a change in the outlook of dealmakers for the company’s survival.
[i] Covid-19 pandemic takes toll on global M&A as $1 billion deals disappear, Business Standard (June 10, 2020), https://www.business-standard.com/article/international/covid-19-pandemic-takes-toll-on-global-m-a-as-1-billion-deals-disappear-120042000822_1.html [ii]Covid-19 poses major challenges for (cross-border) M&A transactions as well as for capital market deals, The International Comparative Legal Guides (June 10, 2020), https://iclg.com/briefing/11272-covid-19-poses-major-challenges-for-cross-border-m-and-a-transactions-as-well-as-for-capital-market-deals [iii] Philip Watkins and Tom Braiden, The impact of COVID-19 on domestic and cross-border M&A, Financier Worldwide Magazine (June 10, 2020), https://www.financierworldwide.com/the-impact-of-covid-19-on-domestic-and-cross-border-ma#.Xt0Gq0UzbIU [iv] Derek Jones, Matthew Levitt and Inaya Homoud, M&A, merger control and COVID-19, Financier Worldwide Magazine (June 10, 2020), https://www.financierworldwide.com/ma-merger-control-and-covid-19#.Xt0jPkUzbIV [v] Vikram Narula and Shilpi Sharan, India: Gun Jumping In Mergers And Acquisitions, Mondaq (June 10, 2020), https://www.mondaq.com/india/antitrust-eu-competition-/849280/gun-jumping-in-mergers-and-acquisitions [vi] Ministry of Corporate Affairs (June 10, 2020), http://www.mca.gov.in/Ministry/pdf/Circular14_08042020.pdf [vii] Ramgovind Kuruppath, Archit Bhatnagar & Surabhi Saboo, COVID-19 and M&A in India: Navigating Risks and Understanding Opportunities, Cyril Amarchand Blogs (June 10, 2020), https://corporate.cyrilamarchandblogs.com/2020/04/covid-19-and-ma-in-india-navigating-risks-and-understanding-opportunities/ [viii] Measures in view of threat of CORONAVIRUS / COVID -19 pandemic, Competition Commission of India (June 10, 2020), https://www.cci.gov.in/sites/default/files/whats_newdocument/30thcircular.pdf [ix] Pre-Filing Consultation through video-conferencing, Competition Commission of India (June 10, 2020) https://www.cci.gov.in/sites/default/files/press_release/PR482019-20.pdf [x] Rupin Chopra and Vibhuti Vasisth, M&A in times of covid-19: considerations, navigating risks and understanding the change in dynamics, Lexology (June 10, 2020), https://www.lexology.com/library/detail.aspx?g=484f67a9-2fc8-426c-b393-8fa2b0e00b91 [xi] Supra Note iii. [xii] Supra Note vii. [xiii] ANALYSIS: Morgan Stanley, E*Trade Merger Excludes Coronavirus, Bloomberg Law (June 10, 2020), https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-morgan-stanley-e-trade-merger-excludes-coronavirus [xiv]Poorvi Sanjanwala and Kashmira Bakliwal, What is force majeure? The legal term everyone should know during Covid-19 crisis, Economic Times (June 10, 2020), https://economictimes.indiatimes.com/small-biz/legal/what-is-force-majeure-the-legal-term-everyone-should-know-during-covid-19-crisis/articleshow/75152196.cms [xv]Office Memorandum, Department of Expenditure, Ministry of Finance (June 10, 2020), https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf [xvi] HDFC stake impact: Centre tweaks FDI norms with an eye on China, The Week (June 10, 2020), https://www.theweek.in/news/biz-tech/2020/04/18/hdfc-stake-impact-centre-tweaks-fdi-norms-with-an-eye-on-china.html#:~:text=HDFC%20stake%20impact%3A%20Centre%20tweaks%20FDI%20norms%20with%20an%20eye%20on%20China,-Centre's%20nod%20must&text=Days%20after%20the%20central%20bank,share%20its%20border%20with%20India. [xvii] Press Note No. 3, Department for Promotion of Industry and Internal Trade, Ministry of Commerce & Industry https://dipp.gov.in/sites/default/files/pn3_2020.pdf [xviii]Govt Tightens FDI Policy To Check 'Opportunistic Takeover' Of Indian Firms Amid Corona Crisis, Outlook India (June 10, 2020), https://www.outlookindia.com/website/story/business-news-govt-tightens-fdi-policy-to-check-opportunistic-takeover-of-indian-firms-amid-corona-crisis/351010 [xix] Anandita Singh Mankotia, MSMEs fear takeover by Chinese cos, seek halt to automatic FDI, Economic Times (June 10, 2020), https://economictimes.indiatimes.com/small-biz/sme-sector/msmes-fear-takeover-by-chinese-cos-seek-halt-to-automatic-fdi/articleshow/75215743.cms?from=mdr [xx]Shreya Nandi, Cabinet approves ₹50,000 crore equity infusion for MSMEs through Fund of Funds, Live Mint (June 10, 2020), https://www.livemint.com/news/india/cabinet-approves-rs-50-000-crore-equity-infusion-for-msmes-through-fund-of-funds-11591011660598.html