COVID-19 has caused a myriad of challenges when it comes to Mergers and Acquisitions across the globe. I recently sat down with an expert on the subject, Louis Lehot, founder of elite boutique law firm L2 Counsel, who shared the primary issues of M&A deals right now that have been brought on by the global coronavirus pandemic.

"Apart business issues like the purchase price, the legal issues run the gamut from reps and warranties, covenant breaches, direct indemnities and claims vs. breaches," he explained. "Depending on the theme of the deal, there will be an inter-relationship between the caps on exposure, the scope of the reps, and the deductibles and thresholds. There can be caps at the escrow, at the purchase price or unlimited exposure, and insurance can externalize exposures on the early liquidity and or the post-escrow period exposure."

Some of the key issues to highlight include: A large public company or unicorn buyer, and a small, venture capital-backed startup seller with a purchase price below $50 million; the result of an auction sale process, competitive bids, with a purchase price at $100 million or more; the result of a dual track IPO and M&A process; a small tuck-in technology acquisition; a life sciences acquisition with heavily incented milestone payments; a cash deal or a stock deal or; an acqui-hire of talent and technology, but no business.

So, what is the best strategy for dealing with these issues?

From the start, the seller should try to address the issues in the term sheet or letter of intent, before agreeing to an exclusivity period, according to Louis Lehot. The seller must understand its relative position of leverage. So, if the seller is running out of cash and has a deadline to meet payroll, they will need to be selective on choosing what issues to raise and how to resolve them. Meanwhile, in a competitive process where seller has runway, seller can attempt to persevere on issues that count.

"At the outset of the pandemic, we thought about deals already signed and would they still close. We also had the circumstance of deals that had been the subject of a non-binding but signed term sheet, and had not yet gone to final definitive agreement," Louis Lehot said. "We next worked through deals where there had been price exploration before the pandemic, and how to reevaluate? As we conclude the first half and commence the second half, we are starting to see deals that originated during the pandemic."

In the face of this "new normal" of working in solitude, the reality is that dealmakers today need to work harder to build trust and confidence through their personal interactions over email, text, and calls, and increasingly use video calls to create a personal experience.

According to Louis Lehot, during these interactions, dealmakers must ensure their words and deeds are:

Honest. This means showing up on time for calls and meetings, and keeping the video function on where able. Honor your commitments to deliver information and follow-up on a timely basis. He added, "Avoid making promises that have the potential of not being met."

Clearly Communicated. This means being transparent and authentic about your goals and making sure that your words and deeds are always consistent, according to Louis Lehot.

Trustworthy. Your outreach to potential deal counterparties should be gradual and allow for time for potential issues to be fully vetted. Breaking a process into smaller steps can help, so Louis Lehot's advice is to take things at a measured pace to avoid spooking others. He said, "By being consistent, you become predictable, and by being predictable, you can be trusted."

Open. This means that you are transparent and authentic, that you listen and give clear and respectful feedback, to all parties. He said, "Giving mixed messages or telling different stories to different people can quickly inspire mistrust and fear."

Helpful. Be sure your words and deeds are viewed as constructive, practical, and commercially minded, always. According to Louis Lehot, people trust people they consider to be beneficial.

Not Self-Promoting. This means recognizing the efforts of other team members instead of claiming credit for yourself. He added, "Nothing inspires mistrust like transparent self-promotion."

Authentic. Acting with unity of purpose and belief, openly and transparently, helps to communicate your authenticity and inspire trust, so sacrificing your personal values can be viewed as sacrificing trust.

When first half of 2020 data is released, according to Louis Lehot, we will likely see a slowdown in M&A across geographies, industries and deal sizes. It is likely to be a significant uptick in distressed M&A, as companies failed to raise cash during the pandemic and stay profitable, and will not be able to survive independently. We expect to see court approved Chapter 7 liquidations and Chapter 11 reorganizations as well as a big increase in acqui-hires and assignments for the benefit of creditors.

He added, "As 2020 progresses, we expect to see a significant increase in distressed M&A deals, which will lead to asset acquisitions of technology and teams that acquire assets and leave liabilities behind."

When it comes to M&As, per Louis Lehot, the basis for indemnification is most often a breach of a representation or warranty in the definitive agreement, and is typically categorized as either a breach of an ordinary or basic representation, which is capped at the escrow or a smaller amount, and a breach of a "fundamental" or "quasi-fundamental" rep, which is typically capped at the purchase price. There can also be indemnification for breaches of covenants and for third party claims.

So, how can indemnification be best dealt with?

In assessing relative positioning on this issue, one must consider the theme of the deal. In fact, transactional insurance has become increasingly accepted in the M&A marketplace over the past five years to bridge the gap between sellers' desires to have a clean exit, and buyers' requirement to have recourse to capital in case the acquired asset is defective.

"While many believe M&A and fundraising is not possible in 2020, M&A professionals have the same requirements to deliver inorganic growth to their stakeholders as before, and the first half was slow. I would expect a significant increase in M&A in the fourth quarter."

About the Author: Amanda is a Freelance Journalist for a variety of online publications where she covers legal technology, intellectual property, litigation and more. She has been writing about technology, business and law for almost 10 years. Amanda earned a B.A. in Communications: Public Relations and Journalism from Central Connecticut State University. Follow her at @AmandaCicc.

Originally published in Medium.com, July 9, 2020

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.