M&A Deal Making In the Time of COVID

The M&A deal process in India was as it is complicated, only made worse by the pandemic

Mergers and acquisitions have long been established as a value addition mechanism for corporates looking to enhance their intrinsic valuation or enter new markets. However, the deal process of M&A in India has always been a little complicated. The COVID-19 pandemic has made the M&A process even more complicated.

This article attempts to examine some of the considerations that lawyers and deal makers have to keep in mind when executing M&A transactions during the course of the pandemic.

EXECUTION OF DOCUMENTS

In share purchase transactions, the statutorily prescribed Form SH 4 has to be duly stamped and signed by the buyer and the seller for the share purchase to be valid. Therefore, it is necessary to ensure that the Form SH 4 has been duly stamped with the proper stamp duty and executed by both the buyer and the seller of the shares.

Stamping with the appropriate amount of stamp duty is also necessary for the transaction document to be valid, whether it is a share subscription agreement or a share purchase agreement.

In the time of the pandemic, it is therefore advisable to buy stamp papers in advance or to ensure that the stamp duty official is available to affix the right amount of stamp duty in order to avoid any issues in the execution of documents.

CONDITIONS PRECEDENT

Given the limitations on due diligence on account of the crisis, purchasers are likely to ask for inclusion of a satisfactory due diligence as a condition precedent to closing. The due diligences may be conducted through data rooms, however, care must be taken to ensure that confidentiality agreements are executed by all parties accessing the data rooms.

Further, there may be significant delays in obtaining government, regulatory and third-party approvals which are condition precedents such as approvals from lending banks as banks and government departments are either closed or operating with limited staff.

MATERIAL ADVERSE EFFECT ("MAE") CLAUSE

In the postsigned but pre-closing stage of transactions, the MAE clause is one of the most interpreted and scrutinized clauses and purchasers/investors will try to invoke this clause to walk away from transactions. Whether they can will vary from case to case depending upon the terminology of the clause in that particular document, the industry/sector in which the target operates as also specific exclusions to the MAE clause. Even where pandemics and epidemics are not specifically provided for, general economic conditions are widely excluded from the ambit of the MAE clause and these may be interpreted as exemptions from the MAE clause.

In the pre-signed negotiating stage of transactions, the MAE would certainly be one of the most negotiated clauses with the buyers/investors trying to extend the clause to all sorts of events including pandemics, epidemics, lockdowns, closure of offices, falling foul of the founders (in case of PE/VC transactions) and sellers trying to narrow down the scope of the clause.

CLOSING

For the purposes of closing, all board meetings will have to be held vide video conferencing. Shareholder approvals would have to be obtained through voting by electronic means.

REPRESENTATIONS AND WARRANTIES

Given the practical difficulties in conducting and relying on a due diligence, the purchasers/investors would place greater reliance on the representations and warranties. The representations and warranties would therefore have to be elaborate and comprehensive and with the highest knowledge qualifiers.

A holdback of a portion of the purchase price for a period of 6 months to a 1 year in the event any of the warranties prove to be untrue is also a preferred option for the buyer.

The target company and the sellers should also prepare a comprehensive disclosure letter given the challenges of the pandemic to rectify compliances which were earlier not done.

POST CLOSING

Post closing filings in transactions will not be a challenge given that most authorities including the Registrar of Companies and the Reserve Bank of India have been accepting filings online for quite some time now.

To conclude, the pandemic has been a bolt from the blue as far as deal making is concerned and it will serve lawyers and deal makers well to keep in mind all the aforestated considerations in the course of deal making.