Contributed by: Juris Legal
COVID-19 has affected the world on a scale which has never been seen before. More than 9 million persons have been infected with COVID-19 globally, which has resulted in the unfortunate death of over 4,95,000 persons. The consequences of COVID-19 have also been felt in a number of facets of the M&A world. The valuations of target companies are being adversely impacted, as deals are priced based on a large number of factors, which are difficult to predict given the current situation.
II. Delays due to COVID-19
Parties that had already entered into transactions before the impact of COVID-19, may face difficulties in fulfilling pre-closing covenants and conditions precedent. The lockdown and travel restrictions have resulted in slowing down the due diligence process, and have in some cases caused deals to be postponed or even cancelled. Physical verification of documents, inventory etc. may not be practicable, and registration and stamping of documents may prove difficult in the near future.
Additionally, requisite government, regulatory, or third-party approvals may be indefinitely delayed due to operations with limited staff, or simply due to the government being focused on more pressing issues. The courts and tribunals having been forced to hear only urgent cases through video conferencing has resulted in an even greater backlog of cases, and cases related to M&A may be delayed, notwithstanding the curtailing of summer vacations in many jurisdictions to combat this issue.
III. Government Policy
Prior government approval has been made mandatory for foreign direct investments from countries which share a land border with India. This will have the greatest impact on Chinese investments, as previously only investments from Pakistan and Bangladesh faced such restrictions. Investors from countries not covered by the new policy only have to inform the RBI after a transaction rather than asking for prior permission from the relevant government department.
In light of the current social distancing norms, SEBI and the RBI have allowed electronic filing of applications. The CCI has also allowed parties to file combination notices online, and allowed pre-filing consultations through the use of video conferencing.
IV. Key contractual clauses affected by Covid-19
1. Material Adverse Change: The Material Adverse Change (“MAC”) clause, which gives the right to either party to terminate a contract if there is an event which has a large impact on the economic viability of the transaction, is now being amended to include events such as pandemic, lockdown, closure of borders.
2. Force Majeure: The list of Force Majeure events is being expanded to include epidemics, pandemics and government imposed lockdowns.
3. Representations, Warranties and Indemnities: Certain buyers are assessing the risks to target companies arising due to COVID-19 and seeking detailed warranties.
4. Change in Law: Due to the ever-changing situation, new laws and measures are being announced by the government on an almost daily basis. Thus the allocation of risk on account of such a change in law would need to be decided, keeping in mind the limitations on due diligence due to COVID-19.
The COVID-19 situation may have also created some opportunities. The valuations of target companies may be lower and thus buyers may have an advantage in the pricing aspect, which in turn may further give higher return on capital in the long term. Similar trends have been observed earlier, with many private equity funds and multi-national companies buying stressed assets at lower rates in the aftermath of the 2008 recession. Buyers may also focus on investing in targets which are commercially benefiting from COVID-19, most of them being in the healthcare and pharma sector.
The increased reliance on video conferencing, and use of the internet due to COVID-19 has also led to M&As in the IT Sector. NIIT Technologies Limited, an IT solutions organisation announced in a company press release that it has signed an agreement with WHISHWORKS IT Consulting Private Limited to acquire a 53% stake initially, with the remaining equity to be acquired over the next two years through pay-outs linked to financial performance.
Due to the global impact, more countries are looking to be self-reliant and there may be a growth in opportunities for localisation. Due to the ever increasing use of the internet, newer business opportunities may arise in relation to the health-tech space.
Companies may place more reliance on insurance, particularly risk insurance. Similarly, individuals may look into getting life and health insurance in greater numbers.
With the easing of lockdown measures, and the abovementioned uptick in the insurance sector, along with similar consequences in sectors related to essential activities such as healthcare, pharma, IT, etc. an increase in M&A activity is expected.
Contributed by Juris Legal