Canada: COVID-19 M&A Transaction Series: Negotiating The Deal

The rapid advancement of the COVID-19 (coronavirus) pandemic has caused disruption to mergers and acquisition ("M&A") activity in Canada and around the globe.

This disruption is poised to continue for the foreseeable future as corporate and regulatory stakeholders continue to adapt to the changing landscape. This is the first of a three-part series of frequently asked questions ("FAQ") relating to M&A transactions in the COVID-19 world. In this FAQ, we address key questions relating to how COVID-19 impacts transaction negotiations.

Q: How does COVID-19 affect the letter of intent ("LOI")?

A: At the LOI stage, parties to a transaction should identify key transaction issues that may be affected by COVID-19. These may include, among others:

• Additional due diligence requests to address aspects of the business that may be influenced by COVID-19. For example, historical financial information may lose relevancy to an assessment of the business going forward.
• Timing considerations for completing due diligence and negotiating definitive transaction documents. For example, does management have the capacity and resources to address concerns in a real-time manner?
• Access to information and the extent to which "in-person" or "on- the-ground" investigations are required.
• Required third party approvals and the potential for delay in obtaining them.
• Transaction conditions that may need to be tailored to address COVID-19-related issues.
• The need to adjust transaction consideration and payment provisions to account for changes in value stemming from COVID-19-related impacts on the business being acquired. Consider claw-backs and hold-backs among others.
• Material adverse change, material adverse effect and force majeure clauses that address COVID-19.
• Modification of standard LOI termination provisions.

Q: What additional due diligence considerations arise as a result of COVID-19?

A: We anticipate that COVID-19-related issues will require additional due diligence. In addition, we expect that due diligence will take longer to complete. Here are some key due diligence-related issues:

• COVID-19 may have a novel effect on certain businesses. These issues should be identified and additional specific due diligence requests should be made in an effort to understand and mitigate the risks arising from COVID-19.
• While due diligence investigations have been made easier by the availability of virtual datarooms, investigations requiring physical visits may be severely limited given prevailing governmental advice to restrict travel. Alternate means of undertaking this due diligence should be considered.
• Contract review will become even more important. Purchasers should carefully review material contracts to identify provisions that may be adversely affected by COVID-19.
• Due diligence search results from government agencies may take longer to receive or may not be received at all due to closures or staffing shortages.

Q: How should COVID-19 be addressed in negotiating definitive transaction agreements?

A: COVID-19 has the potential to impact upon almost every material term of a definitive transaction agreement. Parties will be required to negotiate extensively to allocate transaction risk arising from COVID-19. The following is a summary of key transaction terms where COVID-19 should be addressed:

• Material adverse change, material adverse effect and force majeure definitions and clauses should be drafted to address COVID-19. For more information on these key contractual provisions please refer to the following blogs:
  • Questions and Answers Regarding Force Majeure Clauses
  • COVID-19 and Excusing Non-Performance of Contractual Obligations
  • Five Provisions to Consider in Your Project Agreements as COVID-19 Advances
• Conduct of business and transaction covenants should be carefully considered to address transaction, business and financial uncertainty arising from COVID-19. Parties may wish to include carve-outs that permit a party to address these financial and business uncertainties during the transaction.
• Representations and warranties should be drafted to ensure that they are accurate in light of COVID-19-related impacts on the parties. If necessary, representations and warranties should be qualified in order to avoid potential misrepresentations arising from COVID-19.
• Required third party approvals and the timing needed to obtain them should be thoughtfully addressed. These should be negotiated up front in order to avoid a future need to re-negotiate or terminate a transaction as a result of delay.
• Closing conditions, termination and break fee provisions should be diligently considered in order to assess and allocate risk due to COVID-19-related factors. Consideration of these provisions is tied to the drafting of material adverse change, material adverse effect and force majeure provisions.
• The terms of cure and amendment provisions should be drafted to account for potential delays and uncertainty due to COVID-19.
• Parties should consider the allocation of risk arising due to COVID-19 in the indemnity provisions.

Q: Do COVID-19-related issues impose any additional duties upon a board of directors when approving a transaction?

A: Directors remain subject to their fiduciary duties to act honestly and in good faith with a view to the best interests of the company. In considering whether a transaction is in the best interests of the company, directors are required to exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances. Directors must make decisions on an informed and reasoned basis. Due to the transaction uncertainty created, it is essential that COVID-19-related issues be considered. As a result it would be prudent for directors to:

• Be fully informed of, and actively review, the results of due diligence investigations, including specific COVID-19-related issues.
• Actively inquire of management regarding COVID-19-related issues that may impact upon the transaction and how these issues are addressed in definitive transaction documents.
• Retain and question third party advisers, including legal and financial advisers, regarding COVID-19-related issues.
• Consider obtaining a fairness opinion or valuation from an independent financial adviser in order to provide support for the transaction consideration.
• Meet independently of management, and if necessary, consider forming a special committee of independent directors to consider the terms of the transaction, including potential impacts of COVID-19 on the transaction.

Q: How does COVID-19 alter the transaction planning process?

A: The COVID-19 pandemic presents a challenging and ever-changing environment for management and directors as they seek to successfully complete M&A transactions. Parties should be mindful that while the ultimate scope and scale of the COVID-19 pandemic remains to be determined, there remains the possibility of unknown future pandemics. The COVID-19 pandemic presents parties with the opportunity to assess their internal processes and risk tolerance while planning for future potential M&A transactions in the context of potential future business disruptions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.