Barely any region, sector or business remains unaffected by the exponentially growing pandemic. Stock market values, and thus also valuations for private companies, are plummeting due to the existing uncertainties.
Against this background, the question arises of how to deal with signed share or asset purchase agreements, if closing is still imminent. From the buyer's point of view, a valuation from the time before the COVID 19 crisis may now appear very expensive. The pandemic may trigger not only contractual provisions but also various legal remedies.
1. Contractual provisions
If they have not already done so, the consequences of the coronavirus will significantly worsen the performance of many companies and businesses. In order to expressly regulate such scenarios in the case of (private) M&A deals, agreements may contain the following particular provisions:
- Material Adverse Change‑clauses (MAC‑clauses): The buyer is granted a right of rescission or a claim for compensation, if a material adverse change occurs before closing. The adverse change does not need to be in the sphere of a party or the target but may originate in the neutral sphere. MAC‑clauses might therefore, for example, only refer to the deterioration of predefined financial key figures of the target – such as revenues or EBIT(DA) – over a certain period of time. Due to the magnitude of the current COVID‑19‑crisis, MAC‑clauses are likely to be triggered. The agreed clauses may again contain carve‑outs: the MAC‑clause – for example – is not considered triggered if the adverse change in the target is related to force majeure or the negative development of the overall economy.
- Force‑Majeure‑clauses: Typically, a right to withdraw or the terminate the agreement is linked to the occurrence of a subjectively unforeseen and objectively uninfluenceable circumstance (e.g. war, natural disasters or epidemics). Whether a force‑majeure‑clause has been triggered in the current situation depends on the specific wording of such clause (see also the CMS Expert Guide to Force Majeure).
- Conditions Precedent: The purchase agreement may also provide for conditions precedent, which, due to the effects of the COVID‑19‑crisis, can simply no longer be fulfilled (in time) (e.g. due to delayed reaction by the authorities).
In the (at least until recently) seller-friendly European market, agreements often lack of contractual provisions that adequately address events such as the COVID 19 crisis. For example: Only about 16% of the M&A deals carried out in the European region have been subject to MAC clauses; 15% of such MAC-clauses provide for carve outs relating to force majeure and 22% provide for carve outs relating to negative developments in the economy (see also the CMS European M&A Study 2020).
2. Statutory fall-back provisions
Since in most cases there is no contractual provision that sufficiently addresses the COVID 19 crisis, it is necessary to examine the statutory (fall-back) provisions. According to Austrian law, the seller bears the risk of deterioration of the object of purchase until the time of the agreed transfer (zufällige nachträgliche Unmöglichkeit, sections 880, 1447 Austrian Civil Code (Allgemeines Bürgerliches Gesetzbuch, ABGB)). However, the following provisions are of particular relevance, if not waived:
- Section 1049 in connection with section 1066 ABGB: Pursuant to section 1049 paragraph 1 ABGB the seller bears the risk of an accidental loss of value of up to 50% of the object of purchase until the agreed transfer; the buyer would have to pay a correspondingly lower purchase price. Lump-sum transactions are excluded pursuant to section 1049 paragraph 2 ABGB (Kauf in Pausch und Bogen pursuant to section 930 ABGB): the risk of an accidental loss of value (up to 50%) is borne by the buyer in this case. Whether a share deal or an asset deal falls under this exception has not been conclusively clarified. However, there are good reasons to argue that they are a lump-sum transaction.
- Subsequent laesio enormis: According to section 1048 in connection with section 1066 ABGB, a transaction is deemed null and void, if the business being purchased accidentally loses more than half of its value between signing and closing, which is not unthinkable given the severity of the COVID‑19‑crisis. If the buyer can prove such a loss of value, the buyer is entitled to withdraw.
- Frustration of purpose (Wegfall der Geschäftsgrundlage): If a typical condition for the acquisition of a company or a business ceases to apply (to be examined on a case-by-case basis), such acquisition may be countervailable, if it (i) was not foreseeable for the party concerned, (ii) did not occur in the relevant party’s own sphere, (iii) causes a serious disruption of equivalence or frustration of the intended reason, and (iv) neither the agreement nor the law provides for any other possible action for the party concerned. Whether these conditions are met will have to be clarified on a case-by-case basis. We tend to consider a serious breach of equivalence or frustration of the intended reason to be rather unlikely.
- Laesio enormis: According to section 934 ABGB, a transaction is contestable if the company being purchased does not even have half of the value of the purchase price on signing date.
- Non-performance of the contract (Einrede des nicht gehörig erfüllten Vertrages): If representations regarding the target (e.g. achievement of certain financial key figures) were made in the purchase agreement and if these representations are violated on closing date, the buyer may be entitled to refuse performance according to section 1052 paragraph 1 ABGB.
It should be noted that the aforementioned legal provisions (at least outside of consumer protection laws) are dispositive provisions and an exclusion is therefore legally effective in principle. However, waivers must be interpreted restrictively and examined closely: according to section 937 ABGB (per analogiam), waivers in advance are ineffective if they are not sufficiently specified.
If the COVID 19 crisis affects one of the entities involved in such a way that even insolvency proceedings are opened, the following specific aspects must be taken into account:
- Insolvency of the buyer or seller: <br/>Section 25b paragraph 2 Austrian Insolvency Act (Insolvenzordnung, IO)<br/>: The insolvency of a party does not trigger a right to rescind of the other party. A deviating provision is null and void (section 25b paragraph 2 IO). Since the target is usually not a party to the share purchase agreement, the insolvency of the target can be agreed as a right to rescind in favour of the buyer.<br/>Section 21 IO<br/>: The insolvency administrator of the insolvent party) may rescind the purchase agreement, if the purchase agreement was concluded before insolvency proceedings commenced but has not been completely fulfilled by at least one party at the time insolvency proceedings are opened.<br/>Sections 27 et seq. IO<br/>: The insolvency administrator (of the insolvent party) may challenge the purchase of the company or business, if the transaction was to the detriment of the insolvent party and particularly if there was knowledge of the insolvency. Whether such actions of the insolvency administrator might be successful must be examined on a case-by-case basis.
- Insolvency of the target: In the case of a seller-friendly purchase agreement, the buyer may ultimately have to take over the (now) insolvent target. In any case, the positions of the parties in such a scenario depend on the wording of the purchase agreement.
The steady spread of the COVID 19 pandemic has inevitably led to a dramatic deterioration of the economic situation in most industries and sectors. Possible pitfalls on the way to the closing of (private) M&A deals must therefore be examined in any individual case. A review of the existing contractual documentation creates the opportunity to develop options for action and – where appropriate, by reopening negotiations – to save deals or successfully withdraw as a buyer.