2020 M&A Annual Review

GOVERNMENT STIMULUS PROGRAMS PROVIDE LIFELINES AND POTENTIAL LIABILITIES 3 The federal government took unprecedented steps to support businesses and, in particular, their employees, resulting in potential liabilities that must be addressed in acquisition agreements. Chief amongst these was the Paycheck Protection Program (PPP), created in March by the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) and extended in the stimulus package signed on December 27. The PPP provides loans, principally to small businesses, that, in the right circumstances, are forgiven without repayment—but otherwise must be repaid. Initial Loan. Borrowers must qualify as small businesses under Small Business Administration (SBA) regulations or have fewer than 500 employees whose principal residence is in the U.S. With limited exceptions, for purposes of calculating the number of employees, the borrower must include all affiliates under the SBA’s affiliation rules. Borrowers also must certify the “necessity” of the loan for continued business operations. For borrowers that had significant private equity backing or other access to capital at the time they applied, the basis for this certification may need to be reviewed. Forgiveness. Borrowers must meet specified conditions, including continued employment of staff and use of loan proceeds for payroll, rent, or other eligible costs. Consents. SBA consent may be required for the acquisition of a PPP borrower, though lender consent only is required if the borrower submits its forgiveness application to the lender and establishes an interest-bearing escrow account with the lender for the outstanding loan balance. Potential buyers can address the first two items above via due diligence and reps and warranties. The consents, and any necessary escrow, must be incorporated into the agreement structure and pursued prior to closing. Especially in transactions where the purchaser’s diligence has raised cause for concern around PPP loan eligibility or the ability to obtain forgiveness of the loan, a purchaser can go a step further by requesting a special indemnity from the seller. SPACS AND DE-SPACS BECOME TRENDY (AGAIN?) 4 2020 saw multiple headlines regarding special purpose acquisition companies (SPACs), reflecting marked growth in SPAC IPOs and de-SPAC transactions. SPAC IPOs. 248 SPACs launched IPOs, with an average IPO size of approximately $334 million, raising total gross proceeds of approximately $82.8 billion—more than four times 2019’s 59 SPAC IPOs, with an average IPO size of approximately $230.5 million and total gross proceeds of approximately $13.6 billion. The amounts raised reflect much larger buying power, given the propensity to attract other capital into deals via PIPEs and other mechanisms and the leverage applied in acquisitions. De-SPACs. For SPACs that completed their IPOs in 2020, as of year-end, eight had completed de-SPAC transactions and 30 had announced de-SPAC transactions; 210 were still searching for targets, along with a number of 2019 SPACs that had not yet found merger partners. Pipeline. As of year-end, the SPAC IPO pipeline for 2021 is strong, with 69 SPACs that had publicly filed for, but not yet completed, an IPO as of year-end. While once considered principally as an option for less attractive IPO candidates, private company merger targets now may consider de-SPAC transactions a more practical transaction alternative. Part of the reason is the SPAC structure has evolved to create a much more competitive alternative to IPOs, providing the opportunity for greater certainty around execution, but, typically, at the cost of greater dilution and expense. Private company merger targets now may consider de-SPAC transactions a more practical transaction alternative. MORRISON & FOERSTER 2020 M&A ANNUAL REVIEW 5