In the wake of President Trump’s announcement that “social distancing” rules will remain in place through the end of April 2020 (and likely longer), please consider the following when negotiating your commercial transactions:
Due Diligence and Financial Structure of Commercial Transactions
- Review your company’s technology and remote capabilities to evaluate what changes may be needed to continue transacting while “social distancing” rules remain in effect for the foreseeable future.
- Consider how recent events are likely to impact a target company’s (or a target asset’s) net operating income, EBITDA, working capital, etc., and be sure to account for appropriate adjustments to historical performance / future projections accordingly.
- Prospective buyers will need to analyze a seller’s existing contracts to evaluate whether the COVID-19 pandemic falls within the “force majeure” clause or other sections that would excuse or suspend the performance until normal operations resume. On a related note, we are advising clients to make sure all force majeure clauses included in their contracts now include express reference to permitting delays resulting from “outbreaks”, “pandemics”, “epidemics” and/or “COVID-19”.
- The parties will want to include contingencies that would allow for appropriate extensions of time for diligence activities that may be delayed or unable to be adequately performed in the current environment.
- In connection with a prospective acquisition, diligence should include a review of the seller’s informational technology to evaluate how well it is responding to the demands arising from pandemic-related telecommuting and other increased reliance on technological infrastructure.
- Given the volatility in the financial markets, financing contingencies should be drafted carefully to allow a buyer flexibility in obtaining committed financing necessary to close. We expect that many parties who normally wouldn’t be inclined to push for a financing contingency will begin doing so until the capital markets become more clear and predictable.
- Buyers may want to consider shifting a larger-than-normal portion of purchase price to deferred payments, such as earn-outs or installment payments to help cope with uncertain revenue streams. Creative negotiating will be required to find an appropriate compromise, given all the uncertainty regarding future income and expense profiles.
Representations, Warranties and Covenants
- Both parties would benefit from introducing terms into their agreement that directly address COVID-19, including whether or not an asset or any employees have been exposed to the coronavirus.
- A buyer will want to make sure that the supply-chain relationships of an acquired company or asset will not change (without the buyer’s prior review or consent) due to COVID-19. Sellers will want to ensure that the agreement protects against reductions to purchase price that could result from any possible change in those relationships.
- Buyers will want to confirm that the target entity or asset has maintained the ordinary course of business that is consistent with past practice (taking into consideration short-term disruptions due to COVID-19) and that the language related to “material adverse effects” is sufficiently broad to provide the buyer with the ability to delay or avoid closing until COVID-19 disruptions subside. On the other hand, sellers will want to limit “material adverse effect” clauses to be able to force a buyer to close despite disruptions caused by COVID-19.
- Parties should also address how long representations and warranties related to COVID-19 will survive closing (as compared to those representations and warranties that are not related to COVID-19). COVID-19-related reps and warranties (if a seller does agree to provide them) will most likely survive for a shorter period of time than more typical reps and warranties.
- Consider whether pre-closing operational covenants (i.e., requirements to operate the target business in the ordinary course of business and refrain from taking certain actions without a buyer’s approval) may conflict with a selling company’s need to respond to the outbreak. For example, parties should consider how voluntary (yet prudent) actions to limit social interactions or potential exposure to COVID-19 across their supply chains should be construed and whether a buyer’s consent would be needed to take these types of actions.
Electronic Signatures and Remote Notarization
- Most contracts already allow for electronic signature counterparts to be exchanged at closing instead of original documents with “wet ink” signatures. Transacting during the COVID-19 crisis will require that all outdated “miscellaneous” provisions in contracts, including counterparts provisions and notice requirements, be updated to allow the parties to transact via email as much as possible.
- Prior to COVID-19, some states already allowed for “remote notarization” (notary via webcam), but the Commonwealth of Pennsylvania has not yet enacted a law permitting remote notarization. However, on March 25, 2020, Pennsylvania Governor Tom Wolf issued an order that temporarily allows remote notarization for certain real estate transactions, including all commercial real estate transactions.
- The Pennsylvania State Senate is presently considering a new bill to approve remote notarization permanently and the U.S. Congress is also addressing this concern pursuant to Senate Bill 3533 (not yet enacted into law).
If you have any questions about how to adapt your transactional agreements to account for the COVID-19 outbreak and social distancing, please contact your SGK Attorney.