Legal Restructuring and M&A Transactions During COVID-19
Nations around the globe are striving to adopt the best public policy and legal measures in forms of relief and bailout packages for the respective economies, to mitigate the adverse impacts of COVID-19, which are resulting in significant operational disruption for many companies. With the engines of economy coming to a grinding halt resulting in unparalleled recession, the challenges and real possibilities of businesses may be setting up for failure are unquestionably looming large across the globe; with Kuwait and the GCC as no exception. All businesses, of which the worst effected being the SMEs are seeking to mitigate the impact of the pandemic on themselves and on their wider communities or stakeholders.
As the deteriorating conditions of the businesses are understandable, many are closely observing the trends in corporate deals and transactions including the Mergers and Acquisitions. Henceforth, from a legal standpoint, there will be consequent changes in the M&A landscape. Presently, the M&A market continues to choke and sniffle because of the unpredictable future. However, the corporate houses with strong balance sheets and cash reserves are waiting for the perfect storm to exploit the vulnerability of the stressed assets in the insolvency domain, while the banks and the entities themselves are looking to salvage such assets during and after the crisis period.
In the backdrop of M&A transactions, the industry related impact assessment shall be imperative. The hospitality, tourism, and aviation sectors, where the impact on the business is direct and most severe, have become untouchable for the investors at least during the persistence of the lockdown. Other sectors such as the fast-moving consumer goods and manufacturing of essential goods are seeing a less brutal impact. Consequently, the buyers may seek to renegotiate and reconsider the valuation due to uncertain market conditions, as the valuation becomes pertinent due to the stock market performing fairly well before the occurrence of the pandemic.
The M&A deals that are at the structuring stages will most likely be deferred to a later date, either due to the discomfort in the minds of the buyer, or by the practical difficulties for the seller. The inability to travel for the decision makers, difficulty in procurement and transportation of the crucial documents, seller driven bid processes witnessing the bidders drop-out, as well as delay in due diligence being some of the most prominent factors for such deferment. Significant delays can be expected in obtaining governmental, regulatory and third-party approvals (including from lenders and contractual counter-parties) as they are either operating with limited staff, or not operating at all.
Nonetheless, there exists the silver lining for those who seek it. The crisis throws open the opportunities to leverage the lower valuations. The primary points of negotiation for potential purchasers or investors shall be the structure of the deal or transaction, the invocation of Material Adverse Effect’/Change (MAE) clauses, detailed warranties with regard to Covid-19, regulatory approvals, Change in Law provisions, and due diligences, amongst a few. On a brighter note, closing of borders and increased localization may boost the local SMEs and sectors such as healthcare, pharma, tele-medicine or health-tech, consumer goods, IT, insurance etc. are likely to see a boom, and hence, the M&A activity is sure to follow.