2020 M&A Annual Review

the pandemic altogether by reference either to the pandemic directly or to more general events. Buyers that accepted such carveouts often sought to carve the pandemic back in to the extent it had a disproportionate effect on the target company, raising questions of relative measurement. Covenant to Operate in the Ordinary Course of Business. Sellers sought flexibility to take potentially dramatic steps with respect to their businesses, while buyers continued to want to limit the changes a target could make and still require a buyer to close. A Delaware court opined that a covenant in one agreement to operate only in the ordinary course, consistent with past practice, without more, did not allow a company to take unusual actions even if they were “ordinary responses to extraordinary events,” while a court in Canada found that a covenant to operate in the ordinary course (defined to include consistent with past practices), in the context of the overall agreement, allowed for such actions in response to “systemic challenges that the pandemic posed for the entire economy,” at least where the changes did not fundamentally change the nature of the business or impose long-term obligations. 6 Parties now are negotiating more detailed provisions, depending on time expected to closing and other factors. Reps and Warranties. Many buyers requested additional reps and warranties, and target companies expanded their related disclosures, to address the various potential disruptions resulting from the pandemic, including with respect to labor and employment, stimulus funds and tax matters, relationships with customers and suppliers, material contracts, and collectability of accounts receivable. Parties also wrestled with materiality and knowledge qualifiers and bring-down conditions. Regulatory Approvals and Termination Dates. Many regulators are operating remotely and with reduced staff, resulting in longer turnaround times. Parties have responded by agreeing to longer outside dates and, in some cases, automatic extensions if the relevant party has been using specified efforts. Structure of Consideration. More parties are considering earnouts, additional holdbacks, and other mechanisms to address increased uncertainty in potential performance. Some parties have used stock as an acquisition currency to help address overall stock market volatility, where the parties, because of their respective industry positions or other characteristics, expected they might have similar exposure to and potential for impact from the pandemic and other systemic changes and thus might experience similar market valuation changes. DEAL PROCESS AND PREP GO REMOTE 2 The pandemic virtually eliminated in-person meetings. Buyers and sellers moved quickly to adapt their diligence and other deal processes. Parties strove to understand technology solutions for remote diligence, conferencing, and other logistics (not to mention the new dress codes). Deal processes are unlikely to return completely to the pre-pandemic “normal.” Expanded Due Diligence. Buyers are looking further into supply chains, employee health, insurance coverage, and other aspects of a target company likely impacted by the pandemic. Remote Working. Deals are being completed, and increasingly sourced, virtually, with greater use of virtual data rooms and virtual meetings, bringing increased attention to data security, privacy, and related issues. Rep and Warranty Insurance. Insurers’ approaches to coverage for pandemic risks are still evolving and may vary depending on the extent to which a company appears vulnerable to the pandemic (due to, for instance, the nature of its industry). While initially excluding coverage of the pandemic, some insurers are now writing policies, but interested parties should allow additional time for heightened diligence by underwriters and for negotiation of the terms of coverage. Many buyers requested additional reps and warranties, and target companies expanded their related disclosures, to address the various disruptions resulting from the pandemic. 4 M&A TRENDS