Episode 4: Transaction documents – What about CPs? Will pre-completion covenants be impacted?
The certainty of the transaction has always been a very important point in any M&A deal. During this period in which things can significantly change from one day to another, and what is a great business opportunity today may become a huge loss tomorrow, this topic will for sure become one of the most negotiated points in most M&A deals.
Conditions precedent (CPs). Among the conditions precedent we would expect being negotiated in the vast majority of the M&A deals within the following months is the MAC clause. Given its extensive implications, we will address this in a separate episode. In what concerns the other conditions precedent, we would expect that:
- regulatory CPs – there is a Romanian saying: “If required, with pleasure”. In general, there is no way to avoid including regulatory CPs when the relevant legal conditions for triggering the need for a regulatory approval for completing the transaction are met. However, we expect to see an increase in the parties’ focus from the very beginning of a deal in preparing any regulatory approval filings and even submitting them prior to signing (when possible) to limit as much as possible any delays in completing the transaction;
- “remediation actions” CPs – within the local M&A market, purchasers push quite often for dealing with remediation actions in relation to the issues identified in the due diligences as CPs. We would expect that such practice will change, and only dealing with truly significant issues will be accepted by sellers as a CP;
- financing CPs – financing CPs were usually not accepted by sellers. However, in the current environment, securing binding financing from banks may prove extremely difficult, especially if the SPA is seller friendly and does not provide for other ways out from the transaction, so one would expect that financing CPs will become more common (even if, probably, they will remain exceptions).
Pre-completion covenants. The aim of the pre-completion covenants is to ensure that the substance of the acquired business is preserved between signing and closing. In most local M&A deals, sellers were willing to offer great comfort to purchasers through an extensive list of pre-completion covenants, with two limitations: (i) ensuring compliance with competition laws and avoiding “gun jumping” risks and (ii) ensuring that the target will not be hindered from conducting its activity in the normal course of business. In the current business environment, the need of management being able to take significant (sometimes out of the ordinary) decisions on very short notice may prove to be in various cases crucial. So, one would expect for the list of pre-completion covenants to be narrowed down and, in those cases where a general carve-out for actions taken to address the impact of Covid-19 outbreak will not be accepted, at least the term in which purchasers need to “approve” any deviation from the agreed list of covenants will probably be significantly reduced.
But still, what about MAC? And also, are there any substitutes for MAC provided by the Romanian law? These will be dealt with in our next episode. Stay tuned.
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