The covid-19 pandemic is becoming more and more perplexing as society and market players realize the extension of its effects on the economy and the business environment globally. This article seeks to address the impacts caused by this crisis on the group of merger and acquisition transactions apparently most affected, to wit those for which contracts have been signed, but the deal itself has not yet been completed. These are transactions in the so-called interim period, which begins with the signing of the share purchase agreement and ends with the closing of the deal, by transferring the shares of the target company to the purchaser and paying the purchase price for the shares to the seller.

 

If, on the one hand, the transactions still in the negotiation phase allow the parties to mitigate, allocate, and price the risks in accordance with the new economic conjuncture in order to make the business viable, on the other hand, the transactions that are between execution and closing are in a more delicate situation. The parties are already contractually committed, but have not yet closed the deal. This means that funds have to be disbursed and risks have to be assumed that are no longer compatible with the current reality. In this context, the provisions on conducting business and the provisions on material adverse changes (MAC) become even more relevant and deserve closer analysis.

 

The conduct of business provisions essentially seek to ensure preservation of the asset and ensure that the seller’s management does not adopt measures that affect fundamentals and destroy value of the target business. Such provisions establish that the conduct of business during the interim period must occur within the limits of the ordinary course of operations. The first issue that arises is whether, in a disruptive pandemic scenario like the current one, preservation of the business by the target company might depend on measures that could be classified as outside the ordinary course of business. The crisis will probably require much more than everyday measures.

 

In this case, a literal interpretation of these provisions would limit the seller and the management of the target company to taking only day-to-day measures, which could be fatal for the business and therefore insufficient to achieve the parties’ purpose. On the other hand, a contextual analysis of the provision allows management to adopt extraordinary measures, outside the ordinary course of business, as long as they are justified as necessary for the continuity of the business and preservation of the value of the target company.

 

At first, it could be argued that it would be sufficient for the seller and the management of the target company to seek the prior consent of the purchaser in order to adopt such extraordinary measures. However, the reality of a crisis requires agility in decision-making. Submitting such decisions without limitations to the purchaser would increase the risk of gun jumping, which is an element that receives constant attention in the drafting of these clauses. This is because there is always the concern with avoiding that such restrictions, vetoes, and rights granted to the purchaser in the interim period represent effective interference in the business, exchange of sensitive information, or other circumstances deemed harmful from a competition law standpoint.

 

However, faced with an extraordinary scenario like the current one, in which the company’s management must make difficult and perhaps unprecedented decisions in order to preserve it, it would make sense for the purchaser to participate more actively in these decisions. In this sense, just as the Brazilian Securities and Exchange Commission (CVM) relaxed some rules provided for in the capital market regulations in order to reduce the economic impacts of the pandemic on public offerings of securities, an action by the competition authorities to limit the scenarios where gun jumping will be found in these extraordinary circumstances would be welcome.

 

At the opposite extreme of the efforts to preserve transactions between signing and closing, it is necessary to consider the right of the acquiring party to not complete the transaction in the case of events that adversely affect the business. This right is usually provided for in the so-called MAC clauses, related to what is defined in the purchase and sale contract as being a materially adverse change, the occurrence of which, between the signing and the closing of the transaction, allows the purchasing party to choose not to close the deal.

 

These clauses often establish objective criteria to establish MAC, as a value or percentage of the purchase price as a reference for the losses incurred, above which the purchaser may exercise the right not to close the deal. In the same manner, exceptions to this right are often made in cases such as war, cataclysm, and natural disasters, among others. In such cases, the risks are allocated on the purchaser's side, who will not have the right to withdraw from the deal should any of these exceptional events occur. The qualification of the covid-19 pandemic as a scenario or exception to the MAC clause should be examined on a case-by-case basis. If there is deadlock, the parties should ideally seek a consensual solution, avoiding the transaction to be left on hold until the end of judicial or arbitral litigation. Given the seriousness of the economic crisis ahead, the target company itself may not survive a long period of judicial or arbitral dispute between purchaser and seller.

 

Among the impacts of covid-19 on contractual relations in general, it is possible to anticipate an intense debate regarding the occurrence of acts of God or force majeure, as well as claims for excessive burdensomeness or economic rebalancing of the contract. In the universe of merger and acquisition transactions, MAC clauses give a very particular tone to these debates, when inserted into share purchase and sale contracts. Undoubtedly, the wording of each MAC clause will be crucial for each specific debate. However, it is important to remember that the Civil Code exempts debtors from damages resulting from acts of God or force majeure, as long as the debtor has not expressly assumed liability for them (article 393). The Civil Code also limits termination of contract due to excessive burdensomeness to contracts of continuous or deferred performance (article 478).

 

It is also important to briefly examine the possible impacts of covid-19 on the transfer of control of publicly-trade companies, especially in relation to the obligation to carry out a public tender offer (OPA) to minority shareholders. An OPA is a condition for the effectiveness of the transaction to transfer control and seeks to give equal or equitable treatment to minority shareholders as to sharing the control premium. Therefore, transactions for transfer of control that were entered into before the impacts of covid-19, but that still require the performance of an OPA to minority shareholders impose a very challenging situation on the purchasers, since they will have to pay to the minority shareholders a price per share between 80% and 100% of the amount paid to the controlling shareholders in a scenario of acute deterioration of the values of the assets.

 

It is important to emphasize that the application for registration of the OPA with CVM must be submitted within a maximum period of 30 days from the execution of the contract related to the transfer of shareholding control (IN CVM 361, article 29, paragraph 2). This deadline prevents fulfillment of the condition from being implemented in a more prolonged manner, which is ideal in the current situation of widespread uncertainty. In the case of transactions in which the OPA has already been published, CVM regulations allow for modification thereof, without the need for authorization from the agency, provided that it is for the benefit of the recipients. Any other change requires prior authorization from CVM (CVM IN 361, article 5). These are examples of situations that will require sensitivity from the regulator, and it is advisable to make the rules more flexible, as has already occurred in relation to other rules.

 

In the current crisis scenario, full of uncertainties, it is essential that all those involved in mergers and acquisitions be aware of the actual and potential impacts on each transaction. Efforts to minimize them depend not only on authorities and regulators, but also and above all on common sense, creativity, and legal intelligence applied by the parties and their advisors until normality is restored.