The seismic events of the COVID-19 outbreak are likely to have far reaching ramifications for deal making in the Middle East, and beyond.  In this article, we explore areas that warrant particular consideration while navigating M&A transactions during these uncertain times.

Timing

Parties that are either in the process of negotiating their acquisition agreements or are in the pre-closing stages of a transaction should take into account the increased possibility of the following time delays and disruptions:

• the performance of due diligence;
• the satisfaction of conditions precedent;
• the ability to secure/confirm financing; and
• the completion of closing formalities.

Following signing, transactions in the Middle East involving share purchases often run the risk of taking additional time to complete due to the involvement of government authorities or regulators. Additionally, despite certain government authorities in this region publicising that they are fully operational, the COVID-19 pandemic has slowed down the process of obtaining authorisations and approvals (including procedures relating to the transfer of shares). Therefore, in light of the foregoing, parties should consider extending or adjusting their long stop dates.

Due diligence

Prospective buyers are likely to expand their typical due diligence of the target to include a more critical review of the following:

• the general impact of the pandemic on the target’s operations, including any disruption to the target’s supply chain and the ability to find alternative sources of supply, customer slowdown;
• the target’s ability to perform under its existing contracts and/or whether the target’s material contracts are affected by force majeure or change in law/material adverse change clauses, which may require renegotiation (for additional information on key contractual provisions when negotiating or attempting to exit contracts, please see our note on COVID-19: Legal and contractual implications);
• whether the target has sufficient insurance policies in place, such as business interruption insurance;
• the effectiveness of the target’s general emergency preparedness, business continuity plans, risk management protocols and whether the target is in compliance with the laws and regulations relating to the pandemic; and
• the target’s liquidity and cash flow, emergency funding and budgeting, and its ability stay solvent as a result of the pandemic.

Purchase price

Parties may revisit negotiations regarding the target’s purchase price or restructure the payment of consideration due to the perceived risks to the business as a result of the COVID-19 pandemic. For example, locked-box pricing mechanisms, which typically assume continuity of profitability, and fixed pricing, may be considered as being too risky by buyers. Rather, we may see an increased trend in post-closing purchase price adjustments, deferred or staggered consideration or contingent consideration, such as earn-outs.

In addition, due to market instability, purchase price financing may be more difficult or take longer to secure and buyers that may have already secured financing should identify whether the lender has the ability to retract financing and explore alternative sources, if available.

Warranties

It is to be expected that buyers will require additional COVID-19 related warranties to add a greater degree of certainty to the transaction. Additionally, some common warranties are likely to be impacted as a result of the pandemic, such as those related to the absence of certain changes, compliance with laws and material contracts.

Sellers, on the other hand, should seek to maximise the disclosure of any impact or potential impact from COVID-19 in disclosure schedules. In addition, they should also insist on having “bring-down” provisions in the agreement and otherwise ring-fence or qualify warranties (e.g., materiality or knowledge) to minimise the possibility of buyers claiming that implications arising out of COVID-19 resulted in a breach of the acquisition agreement.

In the case that warranty insurance is being taken, the insurer should be constantly engaged with in real time.

Material adverse change

As a result of this pandemic, the importance for carefully drafted material adverse change (“MAC”) clauses is enhanced. For transactions that are in the stage between signing and closing, whether the buyer may rely on a MAC clause to walk away depends on the specific wording used in the agreement. Buyers at this stage should seek further advice on the ability to invoke any such termination right.

For parties in the negotiation stage, MAC clauses will remain highly fact-specific, and the allocation of risks of COVID-19 related changes to the target’s business will likely be one of the difficult points of negotiation between the parties. Buyers should insist on MAC clauses that address risks arising from COVID-19 and include impacts arising out of pandemics and epidemics as a general matter. In contrast, sellers will likely pushback arguing that the risks from COVID-19 have been well known in the market. A compromise might be to have a MAC clause that allows the buyer to terminate the agreement where there is a negative impact of COVID-19 on the business that is disproportionate to other businesses in the same industry or jurisdiction or where there is a disproportionate impact of COVID-19 on specific material contracts.

Logistics

Parties will likely have to adjust to the business environment dictated by the quarantine restrictions (which may vary in each jurisdiction) such that face-to-face negotiations, management presentations and on-site visits are either difficult to arrange or unfeasible. As such, negotiations via video conferencing and the use of virtual deal rooms should be considered as alternatives, where possible.

This also means that any corporate approvals or decisions will be taken via audio or video means of conferencing or by way of written resolutions (or equivalents), if the applicable laws and relevant corporate procedures set out in the constitutional documents so permit. This potentially may require changes to the constitutional documents of companies in cases where “impersonal” decision-making is not permitted.

Conclusion

While existing M&A transactions appear to be moving forward, the long-term effect of the pandemic on the M&A market in the Middle East region remains to be seen.

As this global health and economic crisis continues to evolve, we will monitor the impact of COVID-19 on M&A transactions and work closely with clients to provide practical solutions. If you have any questions or need assistance, please do not hesitate to contact any of the team members listed below or your usual contact at Stephenson Harwood.