In the on-going coronavirus pandemic, whilst many of our corporate technology transactions are proceeding as normal, we have seen reports that many UK M&A deals (particularly in sectors such as hospitality, health and fitness, or elderly care) have been paused or even cancelled. Volatility in the stock markets has also had an impact on financing arrangements, with some large multi-jurisdictional acquisitions also stalling due to currency risk. Deal timelines are also being delayed (although this is mainly due to practical issues such as restrictions on travel and meetings, rather than any fundamental COVID-19 related concerns).
Material adverse change provisions
We expect that buyers will be increasingly focussed on "material adverse change" / "material adverse effect" clauses as buyers look for certainty around their termination rights in an uncertain market. Warranty and indemnity (W&I) insurance policies will generally follow the terms of MAC clauses and fall away if one is triggered, so buyers will need to consider carefully the precise language used.
Speaking to contacts at insurance firms, we have not yet seen insurers flagging a significant change in how they insure M&A transactions as a result of the current coronavirus pandemic. That said, we anticipate insurers (like buyers) taking a more cautious approach to the jurisdictions and target sectors currently most affected by COVID-19 (or where the supply chain of the target business is dependent on those countries which are the most heavily affected).
However, in the short term, we may actually see more favourable W&I terms. Insurers may compete against each other in terms of offering the most attractive policies, as they look to protect their own market share (fearing a slowdown in global deal flow).
Whilst deal appetite seems to be remaining fairly high, we are starting to see insurers react to the risks presented by COVID-19 through additional underwriting and exclusions from coverage. Some brokers we have spoken to have flagged the potential need for exclusions from cover in the event the underwriters are unable to get comfort around the impact of coronavirus on the warranties given by the sellers at completion.
COVID-19 related warranties
We have yet to see buyers looking to add warranties specifically relating to COVID-19, although we have started to have discussions around the possible introduction of warranties going to the efficacy of the target's business continuity plans.
Most warranties are drafted fairly broadly so would pick up COVID-19 issues as a matter of course (for example, warranties as to the financial position of the target, warranties as to compliance with laws, and warranties relating to customer and supplier arrangements). However, we anticipate that insurers will pay particular attention to solvency and supply chain risks. Insurers are also likely to examine closely M&A valuations to ensure the relevant pricing metrics still add-up in light of any change to the target's revenue outlook.
Areas of increased focus for insurers
As the impact of COVID-19 on any business is (at this time) predominantly a forward-looking matter, the focus of inquiries from underwriters will no doubt be on whether the long-term impact of the coronavirus has been factored into the target’s valuation. For now, we expect the key underwriting focus areas to be on:
- business continuity and stability;
- general supply chain risks;
- financial robustness; and
- disaster recovery plans.
Data security (whilst staff are remotely working) and employment issues are also likely to be key areas of sensitivity for insurers.