Mergers and Acquisitions in Times of COVID-19

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Are you beginning to evaluate certain business opportunities? Are you in the process of a merger or a purchase/sale of a company? Here are a few elements to take into account in order to ensure that your transaction is adapted to the new COVID-19 reality.

The current pandemic continues to have major impacts on the Canadian economy. These impacts are also being felt on prospective and ongoing M&A transactions. Now more than ever, buyers and sellers need to work together and adapt to the situation so that transactions can be completed. This article provides insight as to how parties can manage their transactions in order to maximize its chances of success.

Due Diligence


For example, physical inspection of the premises or access to certain documents may be more complex if the target company is still subject to restrictions on the opening of its physical premises. The gradual loosening in the confinement rules in Quebec will certainly facilitate the process in the upcoming weeks, but target businesses should still prepare themselves adequately before the due diligence process begins in order to ensure it is efficient and secure. It is strongly recommended that all key documents and contracts be made available electronically, and that a plan for any site visit is prepared to ensure the health and safety of the buyer’s and seller’s representatives.

During the pre-purchase analysis, the purchaser will have to validate the measures taken by the target company in response to the COVID-19 outbreak. Indeed, the buyer will want to ensure that the target company has implemented sufficient measures to reduce potential risks and negative impacts, especially to ensure compliance with applicable labour laws and confirm the buyer’s financial projections with regard to the target business.

It will also be important for the buyer to review the target company’s main contracts with its clients and suppliers to obtain a complete picture of the stability of the relations between the contracting parties, the target company’s vulnerability to contractual risks and its ability to continue conducting its business following the transaction. The analysis of insurance policies and their coverage should also be completed thoroughly, especially with respect to protection against business interruption losses. This analysis will help the buyer appraise the short, medium and long-term financial health of the target business.

Effects and Material Adverse Changes (“MAC”) During the Interim Period

The interim period is the time elapsed between the execution of an agreement and the closing of the merger or purchase and sale transaction provided therein. A number of undertakings applicable during this period are included in the agreement, to protect the buyer and ensure a certain control over events that could occur and impact the target company, potentially creating a fluctuation in the value of the assets or shares purchased. A MAC clause is typically one of these interim commitments that allow the buyer to withdraw from the transaction if a MAC occurs during this period.

Buyers and sellers will need to consider adapting their MAC clause to the current context. To do so, they will have to analyze the financial situation of the target company and determine which potential impacts arising from COVID-19 would be serious enough to qualify as a “material adverse change” and adjust the definition of this term provided in the agreement.

In the case of ongoing transactions for which the interim period began before the COVID-19 outbreak and crisis, the parties will have to consider whether the impacts are serious enough to trigger the application of the MAC clause. They may want to amend or terminate their agreement, subject to the wording of the MAC clause already in place.

In the current circumstances and to ensure the continuity of M&A activities in the market, it is recommended that the parties negotiate and determine whether the impacts of the pandemic, as a whole, should be excluded from the analysis of the financial situation of the target company. If they are not, the parties could instead establish a threshold for loss of business income attributable to COVID-19 that would allow the buyer to terminate the transaction using the MAC clause if the threshold is reached.

While it is too early to assess how courts may qualify COVID-19 impacts in the context of the application of MAC clauses in ongoing transactions, it is clear that this is a major issue for buyers. Indeed, a recent case in the United States exemplifies this new reality: in the context of the purchase of Victoria’s Secret, the Delaware Court of Chancery received a request from the buyer to terminate the purchase process as a result of COVID-19. This dispute was settled on May 4, 2020, proving that reaching a settlement between the parties is still the most promising avenue under these uncertain conditions.

Purchase Price Adjustment and Valuation

The parties should also consider reviewing the calculation methods for the purchase price adjustments, since some of the variables may be affected by the economic consequences of the pandemic.

Under normal circumstances, a working capital target based on the target company’s average historical data is established and must be met as at the closing of the transaction. If, at closing, there is a difference between the target chosen by the parties and the actual value of working capital, an upward or downward adjustment to the purchase price would normally be applied.

However, the current economic uncertainty makes it more difficult to achieve the working capital target and makes it more arduous to determine a target that is a fair representation of the target business’s working capital. Indeed, the working capital target depends, among other elements, on the company’s revenues which will most likely be affected by the health crisis, as well as on its accounts receivable, which may be more difficult to collect. These variables will necessarily have a significant impact on working capital. The parties could rather choose a different adjustment method, namely floating targets, that take into account the significant fluctuations caused by the COVID-19 outbreak.

Furthermore, if the parties cannot agree on a common valuation of the target company and a valuation gap remains, they could agree to add a contingent consideration clause. Such a clause would allow the parties to predetermine targets with regard to future results of the target company and would make a portion of the purchase price conditional on the achievement of those targets. Therefore, the purchaser can defer the payment of a portion of the purchase price at closing and allocate that differed portion to specific future dates, subject to the achievement of the negotiated targets on said dates.


Despite the current economic situation and the unusual conditions that may present during the negotiations, the parties must remember that they are working towards a common goal: the conclusion of the transaction. To achieve this, they must be prepared to openly discuss new issues that may arise and cooperate to appropriately allocate the risks arising from the current crisis. Each transaction is unique and will require a thorough risk analysis.

This article provides general information and is shared for informative purposes only. It does not constitute legal advice and should not be construed as such. In order to fully understand all of the legal elements discussed herein and to obtain a legal opinion on your particular situation, we suggest that you consult your legal advisor.


In collaboration with Philippe Blais