Corporate transactions: What you need to know
COVID-19 will undoubtedly be a concern for businesses in the middle of any corporate transaction, whether you are the buyer or seller. In particular, what sector the transaction is in and the impact of COVID-19 on its underlying fundamentals will have a significant impact on whether the deal remains attractive.
Frequently Asked Questions
- We are in the middle of a transaction. Can we pause it and pick it up again later?
- What is the best way to fund our transaction in light of COVID-19?
Yes, depending on the type of contract and the stage of the transaction.
If you are simultaneously exchanging and completing the contract – and subject to any other agreements such as heads of terms, or an exclusivity agreement – there is no obligation on either party to proceed. In this case it is entirely possible to hit the pause button on a deal and resume it later when the future is clearer. If you are the buyer, this is likely to be the safest option.
Equally, you and the other party want to commit before pausing to avoid potential issues with delay, you can exchange contracts to legally bind and set completion at a later date.
If you take this split exchange and completion approach, you should include a material adverse changes clause in the contract. This will provide important protection and entitles the buyer to terminate the contract or reduce the purchase price if the conditions of the clause are met.
Using the target company’s cash reserves or the buyer’s own cash are the best and quickest ways of funding a deal in the current environment.
External funders, such as a bank’s private equity or venture capital, are likely to exhibit a cautious approach at the moment, the likely upshot of which is the transaction having to wait for now. Some funders may be willing to move forward, but they may alter the terms on which they first agreed to lend or invest. The key is to talk to them to understand their position.
While cash is king, a quick deal is not necessarily a good deal. At the moment you must check your cash projections carefully, whether it is your own cash reserves or the target company’s.
Time spent reconsidering the due diligence infomration provided, and really investigating the figures, will be time well spent.