We are all experiencing the sudden and sweeping impact of the COVID-19 pandemic on capital markets and the global economy. You undoubtedly have many clients that are anticipating a closing of an executed purchase/sale agreement. Current indications are that the economic impact of COVID-19 has or will likely affect the timing and outcome of most pending M&A transactions.
The issue of COVID-19 serving as a trigger to terminate a transaction under a MAC or MAE clause has already engendered a significant volume of commentary. Most analyses are informed by the analytical framework outlined in Vice Chancellor Laster’s decision in the 2018 Akorn litigation in Delaware Chancery Court, which identified three key elements to consider in determining whether a dramatic decline in the target's performance might constitute an MAE or MAC: (i) the magnitude of decline in the target’s business; (ii) the duration of the decline; and (iii) the degree of disproportionality of the event on the target in comparison with competitors or its industry as a whole.
Our forensic accounting, transactions and valuation professionals are deeply experienced in supporting companies, sponsors and counsel in M&A disputes, including by providing analytical support in negotiations or litigation relating to MAE/MAC clauses. Irrespective of whether you are assessing your ability to invoke an MAE clause or preparing to contest a claim that an MAE has occurred due to COVID-19, there are at least four quantitative analyses you should perform, including:
- Detailed Historical Financial Analysis of the Target
Analyze the target company’s historical results and financial projections to determine the nature, timing and extent of the decline in the target’s business in relation to the potential COVID-19 related MAE. It will be important to examine in depth any pre-COVID 19 downturns in determining whether a post-COVID-19 business or financial decline can be persuasively linked to the pandemic.
- Industry and Competitor Analysis
Perform detailed industry, competitor and geographic analyses to determine the extent of any disproportionate impact on the target’s business due to business or economic disruptions attributable to the pandemic.
- Update Short- and Long-term Forecasts
Revisit short-term and long-term forecasts of the target company to carefully assess the expected duration of the target company’s downturn, to differentiate between an anticipated short-term reduction and a longer-term adverse effect that more significantly impacts the underlying value of the target’s business, or the value of the consolidated enterprise to the buyer.
- Refreshed Valuation Analysis
Beyond updated forecasts, used as cash flow inputs in a discounted cash flow valuation analysis, assess the appropriateness of discount rates used in determining the magnitude of decline in the underlying value of the target company. Whether or not an MAE is found to have occurred, this analysis will better prepare the parties for potential purchase price renegotiations that may bring the transaction to a mutually satisfactory closing.
As has historically been the case, disputes regarding MAEs will be very fact-and-circumstances specific, and parties will be better prepared to defend their respective positions by undertaking the analyses described above.
For more information on this and other M&A related questions facing your business, please reach out directly to our M&A Post Acquisition Disputes team.
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