The wheels of economic growth have been punctured by the Pandemic and we are heading towards an unprecedented global depression. The pulse of the corporate sector is bleak, owing to aslump in investment, growth and cash inflow among other variables. One of the sectors bearing the impact of the current crisis is Mergers and Acquisitions. Worldwide, Mergers and Acquisitions have been at the forefront, taking the worst hit due to economic slowdown. India too does not remain unaffected by the same. There is a dire need to come up with suitable measures to ensure their survival. Further, significant changes are expected in this field, changing the dynamics of its operations shortly.
II. Current difficulties and desired changes
The ongoing activities of M&A have already been affected by the said pandemic. There is considerable ambiguity in areas such as a change in business outlook, concerns regarding valuation of the companies, liquidity crunch due to reduced lending by banks etc. Due to the closure of international borders, the cross-border transactions have been severely impacted too.Thorough scrutiny is required to deal with the obscurity that has surrounded this field.
i. Key areas to focus on
The areas that require a study during this pandemic time can be categorized into:
1. Areas that were directly affected such as aviation, hospitality and tourism. Here the parties might want to look away from the transactions due to uncertainty in the revival
2. Areas that were indirectly affected/ where the impact was less severe such as manufacturing, consumer goods etc. Here the buyers might want to reconsider their valuations or would prefer going for a downward price adjustment.
These two areas assume importance since the Indian Stock Markets saw an all-time high in the recent period and buyers may wish to re-consider their valuations in the light of the present situation.
ii. Recommendations to the setbacks faced due to COVID-19 outbreak.
> In this context, there is a possibility of invocation of ‘Material Adverse Effect’ clauses in the investment, which would then allow purchasers the Right to Walk Away from transactions. It will be a case-to-case base analysis determinable by the factors such as the scope of MAE clause in the respective contracts, the industry/sector and geography in which the target company/business operates, as also specific exclusions to the said clause. This would not only go with this pandemic situation but might contain other exclusions such as those events that have a great impact on the industry, grave economic conditions, change brought about in law.
> There might be a possibility where the parties still want to proceed with the completion of the transaction. In that case, the parties’ ability to fulfil the pre-closing covenants and conditions precedent should be significantly taken into account. The necessities such as governmental, regulatory and third-partyapprovals might take a significant amount of time in these cases due to the reason that the banks, government departments are operating with a limited staff. For this, a fast and secure method has to be developed to aid cut off the time-periods.
> Courts and tribunals like NCLT are only hearing urgent cases. Due to this, M&A activities that include group restructuring through court-based schemes are likely to be delayed. Pragmatically, physical verification of inventory for consideration adjustments of working capital may not be feasible and stamping, registration of documents will be an issue shortly, given the current restrictions. The above issues which might be regarded as cumbersome processes should be reprogrammed to make the process swift. Taking note of the above, parties might need to consider extending the ‘long stop date’ for closing under the agreements.
III. Analysis of the outcome brought about by various factors in the light of the Pandemic
This period and immediately thereafter may bring about a downward trend in M&A activities in India. The following indicative outcomes may be possible.
i. Possible Outcomes
1. Delays and Dropouts: The M&A deals that were at structuring stages will now be referred to a future date to wait for the settlement of the crisis brought about by this pandemic. There might be drop-out in no. of bidders for the bid processes that were seller driven.
2. Opportunities: There might be a possibility that buy-side opportunities are opened up, leveraging on the lower valuations in the short term to seek a higher return on the capital in the long term. This helps to buy the ‘stressed assets’ during such times in cheap.
3. Stimulants and Catalysts: There could be a list of factors that might ease the M&A process. This may include tax relations brought about by Union Budget 2020, relaxations of compliance norms by regulatory bodies such as SEBI, RBI and MCA. These provisions will act as a catalyst and will further impact the M&A sector by easing up the process.
4. Limitations: The transactions that are entered into during this period, need to be subject to limitations posed by the present crisis, and will need to be recalibrated to address the prevailing risk.
5. Due Diligence: The due diligence process will start relying more on virtual date rooms. It will focus on the consequences upon the failure of the target to perform the obligations assigned, the ability to pay off the debts and insolvency risk, liabilities towards the health and medical care of employees and compliance with data protection laws.
6. Preferred Structures: Parties will try to accommodate those structures, that involve least regulatory interface (given the potential delays in obtaining regulatory approvals). Thus, a share acquisition scheme will be preferred over a court-approved scheme. Further, the consideration adjustment provisions linked to key business parameters may need to be hardcoded in the transaction documents, to provide the deal certainty as well as value certainty.
ii. The provisions in the transaction documents that are likely to be heavily negotiated
1. MAE: It is to be pre-determined by the parties as to what would be the impact arising out of the present pandemic situation.
2. Changes in Law: The government is doing its best in shaping the law according to the needs and demands of the parties doing transactions. Given the limitations involved on the account of ‘due diligence’, the purchasers are likely to ask for inclusion of satisfactory bring-down diligence as a condition precedent to closing
3. Warranties:The purchasers would like to keenly look into the warranties by using proper knowledge and materiality qualifiers. Additionally, the requirements in the disclosure letter will further include information about specific facts, warranties and indemnity insurance and policy coverage.
4. E- Signing: It is true that to ease the process e- signing and e-execution will prove to be helpful, yet stamping and registration of the agreements will remain a great concern in this period.
5. Corporate Approvals: Board and committee approvals might now be obtained over video-conferencing or any other audio-visual means and shareholder’s approval via remote e-voting.
6. Regulatory approvals: In the new changes, SEBI and RBI have permitted filling of applications electronically. The CCI in March 2020, has permitted filing the combination applications electronically and pre-filing consultations concerning combinations through Green Channel route through video conferencing. Although these measures make the whole process easier than before, the consent required from state/local or municipal authorities is still a matter of concern.
IV. What future holds (An Analysis of the Perspectives)
The pandemic is most likely to give a new outlook to how mergers and acquisitions are done in the country. These changes are already signed in various sectors. For instance, this pandemic has already helped in concentrating towards sectors such as health care and pharmaceuticals leading to increased efforts in evolving the connected fields such as medical research, medical devices etc. This will not only bring about opportunities for increased localization but also it will result in further consolidation.
There are newer business opportunities created, in the ‘health-tech’ space when the government permits the practice of telemedicine, through video/phone/internet- based platforms, or when it helps to facilitate the required drugs at the doorstep of the consumer. Furthermore, areas such as innovations in technology combined with prospects of artificial intelligence in the sector create a whole new level of areas that are ready to be explored.
In a nutshell, it can be concluded that it is true that this humanitarian crisis has a significant business and economic impact but as the old saying goes “when one door is closed, there is another door which automatically gets opened.” We shall, therefore, explore the brighter side and constructively shape our policies in the light of the same.
Ashika Jain | 2nd Year| B.B.A. LLB | Gujarat National Law University, Gandhinagar, Gujarat
Lakshay Garg | 3rd Year| B.Com.LLB | Gujarat National Law University, Gandhinagar, Gujarat