“COVID-19” has officially left the confines of the material adverse effect (MAE) provision in mergers and acquisitions transactions. The realities of running deals and doing business during the pandemic, including the associated delays, hurdles, and uncertainties, are settling into a new status quo and are beginning to be more methodically addressed in M&A contract provisions that govern the mechanics of deals. Several new non-MAE provision types that make explicit reference to COVID-19 are popping up in large deals and deals involving top-ranked law firms—and it appears that new drafting trends are already taking shape, especially with regard to provisions governing the conduct of parties between signing and closing.
The main categories of these new COVID-19 provisions that appear in multiple recent deals of various sizes are as follows, along with example provisions from currently pending deals announced in June valued at $1 billion or higher:
Defining “COVID-19 Measures” and explicitly including such within the scope of “applicable Law” throughout the agreement
There are many provisions in M&A agreements that reference, are subject to, or are limited by “applicable Law” (“Law” itself typically being a concept that is defined in these agreements) including pre- and post-closing covenants of the parties. (See the Grubhub example below in which the pre-closing covenant to conduct the target business in the ordinary course is limited by any “applicable Law.”) By explicitly including “COVID-19 Measures” within the scope of “applicable Law” and calling it out in a parenthetical wherever the phrase appears—e.g., “Subject to applicable Laws (including any COVID-19 Measures)"—parties are ensuring that coverage of impacts of COVID-19 are essentially woven throughout the agreement.
Example: “‘COVID-19 Measures’ shall mean any quarantine, ‘shelter in place,’ ‘stay at home,’ workforce reduction, social distancing, shut down, closure, sequester, safety or similar Law, directive, guidelines or recommendations promulgated by any industry group or any Governmental Authority, including the Centers for Disease Control and Prevention and the World Health Organization, in each case, in connection with or in response to COVID-19, including the CARES Act and Families First Act.” (Grubhub Inc.–Just Eat Takeaway.com Inc NV Agreement and Plan of Merger, dated June 10, 2020 (governed by Delaware law))
Excluding “COVID-19" measures from limitations on the conduct of business “in the ordinary course” between signing and closing in pre-closing covenants
Target companies are typically bound by a pre-closing covenant to operate the target business “in the ordinary course” (again, usually a defined term in the agreement that comes along with a host of parameters and specific limitations) during the period between the signing of the transaction documents and the closing. We are now seeing parties drafting in exceptions to this covenant, so as to explicitly allow targets to take actions to address COVID-19 as need be during that interim period.
Example 1: “Clause 6.1 [regarding the conduct of business between signing and closing in the ordinary course] does not apply in respect of and shall not operate so as to restrict or prevent: (a) any matter reasonably undertaken by [Peak Oyun Yazılım ve Pazarlama AS or its subsidiary] in an emergency or disaster situation, epidemics and pandemics including the COVID-19 pandemic, with the intention of and to the extent only of those matters strictly required with a view to minimising any adverse effect thereof (and of which the Purchaser will be notified in writing as soon as reasonably practicable)[.]” (Peak Oyun Yazilim ve Pazarlama AS–Zynga Inc. Share Sale and Purchase Agreement, dated May 31, 2020 (governed by the law of England and Wales))
Example 2: “Except […] as required by applicable Law (including COVID-19 Measures) […] during the period from the date of this Agreement until [closing] […] [Grubhub Inc.] shall use reasonable best efforts to conduct its business in all material respects in the Ordinary Course of Business” (Grubhub Inc.–Just Eat Takeaway.com Inc NV Agreement and Plan of Merger, dated June 10, 2020 (governed by Delaware law))
Accounting for social distancing and quarantine requirements in access to records provisions pertaining to period between signing and closing
Another typical pre-closing covenant that targets agree to is to allow the buyer to access information, including the books and records of the target company, during the period of time between signing and closing. We are seeing deal parties spelling out the fact that due to the impacts of the pandemic and health concerns, there may be delays, the necessity for virtual access, and in some instances outright obstacles to the buyer getting access to the information.
Example 1: “Each of the Parties acknowledge that access to and provision of information may be delayed or limited in the circumstances, having regard to the impact of COVID-19, provided that any such delays and limitations shall be mitigated by the [Coty Inc.] and the [Coty International Holding, B.V.] so far as reasonably possible and virtual access (including to employees) shall be provided to the Purchaser or its representatives as soon as reasonably practicable to the extent possible if physical access is not available.” (Coty Inc.–KKR & Co. Sale and Purchase Agreement, dated June 1, 2020 (governed by the law of England & Wales))
Example 2: “[I]n each case, such access may be limited to the extent the [Grubhub Inc.] or [Just Eat Takeaway.com N.V.] reasonably determines, in light of COVID-19 or COVID-19 Measures, that such access would jeopardize the health and safety of any employee of the Company or Parent, as applicable, or its Subsidiaries.” (Grubhub Inc.–Just Eat Takeaway.com Inc NV Agreement and Plan of Merger, dated June 10, 2020 (governed by Delaware law))
The deals excerpted above are among only 22 pending and completed M&A deals with a transaction value above a billion dollars that were announced in June…worldwide. That’s less than half the number of deals announced in June 2019. M&A volume reached a historic low in the second quarter, and an examination of large M&A deals that have gone forward in the throes of the pandemic indicates that dealmakers are doing their best to write flexibility into their contracts.
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