A new type of defined term related to the pandemic is becoming increasingly prevalent in publicly filed mergers and acquisitions agreements, and is experiencing a noticeable surge this month. Different from “COVID-19 Measures”, which has become a pandemic market standard and typically covers government-mandated measures, the newly popular “COVID-19 Actions” and “COVID-19 Responses” cover actions taken by one or all parties (most typically the target) in response to Covid-19. Overwhelmingly, these terms impose a reasonableness requirement (such as “commercially reasonable” or “reasonably determined to be necessary or prudent”) on actions taken in response to the pandemic.
These “COVID-19 Actions"/"COVID-19 Responses” terms show up in a number of agreement provisions, typically including: a) Conduct of Business covenants governing the operation of the target business during the period between signing and closing, as an exception; b) Absence of Certain Changes representations and warranties, as an exception; and c) definitions of the Ordinary Course of Business (sometimes as an inclusion extending the definition of the Ordinary Course of Business to include the Covid-19 Actions/Responses, and sometimes as an exception, to exclude them). The terms are also making appearances in material adverse effect (MAE) provisions as part of the list of exclusions, though this application has been less common so far.
A total of 48 M&A agreements that include either “COVID Action”, “COVID-19 Action”, “COVID Actions”, “COVID-19 Actions”, “COVID Response”, or “COVID-19 Response” were publicly filed in SEC’s EDGAR through Feb. 24. Out of those 48 agreements, all of which were reviewed for this analysis, 41 (or 85%) included some reasonableness requirement. By way of comparison, thus far there have been 243 publicly filed agreements containing “COVID Measures” or “COVID-19 Measures.”
The first appearance of these new defined terms in a publicly filed agreement occurred in April 2020. We are only just beginning to see noticeable numbers of them—especially in deals valued at $1 billion or greater, which make up 22 (or 46%) of the agreements containing these provisions.
To access the Bloomberg Law Transactional Precedent Database search results including the 48 agreements reviewed, click here. Note that two of the search results were excluded because they were duplicate agreements.
While the definitions are still showing a great deal of variation, both in general structure and the type of reasonableness requirements applied, the “commercially reasonable” standard, which was present in 15 of the 48 agreements reviewed, seems to be showing persistence and is a trend to watch. An example of one of these provisions, including a “commercially reasonable” standard, was drafted as follows:
“COVID-19 Response” means any actions taken or omitted in response to the COVID-19 pandemic (a) to the extent reasonably necessary to comply with applicable law in any jurisdiction or (b) that (i) are commercially reasonable, (ii) are intended to protect the health and safety of employees of the Company or its Subsidiaries and (iii) are consistent with prevalent practices of similarly situated businesses in the industries or the locations in which the Company and its Subsidiaries operate (including any required quarantines, travel restrictions, “stay-at-home” orders, social distancing measures, other safety measures, or any workplace or worksite shutdowns or slowdowns) but, with respect to clause (b), solely to the extent supported by documentation, information, data, or other evidence reasonably substantiating the necessity or appropriateness of such actions or omissions. (Glu Mobile, Inc.–Electronic Arts, Inc. Agreement and Plan of Merger, dated Feb. 8, 2020 (governed by Delaware law))
A note on confusion in defined term use: In conducting this analysis, we have noted some instances in which “COVID-19 Measures” is being defined as party actions in response to the pandemic, similar to the “COVID-19 Actions"/"COVID-19 Responses” defined terms discussed above. This usage may be particularly confusing, because many of the agreements that contain the emerging “COVID-19 Actions"/"COVID-19 Responses” definitions also contain a “COVID-19 Measures” definition as it has typically appeared since the outset of the pandemic; e.g., “any quarantine, ‘shelter in place,’ ‘stay at home,’ workforce reduction, social distancing, shutdown, closure or sequester order, guideline, recommendation or Law, or any other applicable Laws, guidelines or recommendations by any Governmental Entity in connection with or in response to COVID-19.” The agreements containing the less common “COVID-19 Measures” provisions covering party actions in response to the pandemic generally were not included among the 48 deals reviewed.
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