When The Pandemic As An M&A Deal Breaker

Law Blog

A trove of distressed businesses will come on the market this year, making it a good time to acquire cheap assets. But if you agreed to acquisitions before the COVID-19 pandemic, you may be trying to wiggle out of them. 

Currently, more deals are being cancelled than consummated. Some private equity firms are waltzing away from deals, without even paying a break-up fee. Others are sharpening their legal defense for a court battle. The matter about to go before the courts is whether the material adverse effects clauses in these deals covered the fallout from the pandemic. 

Material Adverse Effects

One of the companies jilted is L Brands' Victoria's Secret and Pink chains. Private equity firm Sycamore Partners planned to take the company private. L Brands' big oversight was not using the word "pandemic" in its material adverse effect clause. Material adverse effects clauses allow a contract to be terminated when an event, circumstance, development, and so on, creates a material adverse effect. Going forward, few mergers and acquisitions attorneys will overlook pandemics.

Closing Conditions 

Before a deal closes, both parties agree to satisfy certain conditions. If these conditions are not met, the deal can be terminated. The representations and warranties made must still be true on the closing date for the deal to be considered valid.  

L Brands claimed it could no longer meet these conditions after it shut stores, laid off workers, and couldn't pay its rent. However, Sycamore argues that the changing business conditions did not warrant material adverse effects, and therefore they say they have grounds to cancel the deal. 

Excluding MAEs as Deal Breakers

In a case in which "pandemic" was specified as a material adverse effect in the contract, the seller is using the term to force the deal to close. In Forescout Technologies Inc. vs. Ferrari Group Holdings, Advent International seeks to cancel its $1.9 billion acquisition of cybersecurity firm Forescout. Advent says the coronavirus created a material adverse effect. Forescout disagrees. To the contrary, the seller argues the agreement excluded using the adverse effects of a pandemic to cancel the deal. 

When M&A deal activity does pick up later in the year, it is unlikely that a contract will be written without mentioning pandemics. Experienced securities attorneys are ensuring the contract terms reflect the real business risks in today's market, and that includes provisions for pandemics as a material adverse effect. To learn more about mergers and acquisitions law, you can click this website link.


15 June 2020