During a time when more and more areas are affected by the COVID-19 outbreak, the M&A market seems to be following the trend: it is adapting. We are starting today a series of articles in which we will try to point out how we would expect the architecture of a standard M&A transaction to be (re)shaped these days.
Episode 1: Breaking the deal – is the Covid-19 outbreak a justified reason for breaking the deal?
Considering the changes in the market, some of the ongoing deals will be put on hold or simply break. Why is that? Because no one can really anticipate the evolution of the Covid-19 outbreak, both in terms of effects and duration.
Subject to the right wording being included by the legal advisors in any preliminary transaction documents (including drafts), irrespective of the stage of the negotiations between the parties, until a binding agreement is signed (and even after that in some cases, as we will detail in the next episodes), either party is in principle free to walk-away from the transaction.
Whilst neither party may be forced to continue the negotiations, a careful approach is of significant importance in order to ensure that the general good faith principle in negotiations is followed even in these uncertain times. A breach of the mentioned principle might trigger the responsible party’s liability, depending on the timing and the specifics of the concerned transaction.
The general good faith principle prohibits a party to start, continue or stop negotiations in bad faith. So, whilst either party’s need to take the time and assess the potential impact of the outbreak on its business interests in relation to the envisaged transaction was fully justified in the beginning, once such assessment was done and the parties decided to continue the negotiations, if there are no new developments justifying a change in view (such as new consequences of the outbreak that could not have been foreseen), the parties will no longer be able to invoke the Covid-19 outbreak as a justified reason for breaking the negotiations.
Once the parties (hopefully) decide that the deal should go through, the attention shifts to organizing the deal process and adapting the transaction documentation to the new commercial environment, which we will be addressing in our following episodes. Stay tuned.
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