Due Diligence, Managing the Covid 19 risk

posted by Helen Bull

The Coronavirus pandemic and associated government interventions have affected all aspects of life. The result has been a significant blow to the economy and new challenges for companies. Businesses, more than ever, are required to be agile and to adapt to the new normal when making commercial decisions. Companies contemplating corporate transactions, whether that be an acquisition, disposal or restructure are no different and will need to manage the risks associated with the pandemic.

In this article, we set out what our clients can do to limit their exposure to pandemic related risks when negotiating deals:

Key areas of risk

In most corporate transactions, the buyer will typically conduct some degree of due diligence in relation to the Target company, to identify any legal or commercial risks before proceeding. However, it is particularly important for companies to tailor due diligence to the new commercial landscape, considering the new risks that the pandemic has presented.

The specific matters that may require enhanced COVID-related due diligence will vary for each transaction and will need to be tailored specifically to the Target company, the sector in which it operates and the circumstances surrounding the transaction. However, some key areas for potential Buyers to consider will include:

  • Contracts & Trading:

This should include an assessment of the Target company’s exposure to potential supply chain disruption and how that may in turn affect its ability to comply with its own contractual obligations. It is important to consider whether the Target company is already in default of its obligations under key contracts, due to pandemic pressures, or whether contracts have been successfully re-negotiated to reflect the pandemic position of both parties.

  • Regulation & Compliance

The legal landscape is continually evolving to reflect the need to control the pandemic and this means new obligations on businesses. Social distancing regulations, for example have limited the capacity of social venues and workplaces across the country. In turn, businesses have had to adapt their premises to allow for social distancing, as well as limiting customer and/or employee numbers on their premises at any given time. Buyers should consider the extent to which the Target’s activities have been restricted or forced to adapt to pandemic prompted changes in the law. Compliance with new emergency laws to control the pandemic will be a key area of risk for a prospective Buyer to consider and manage.

  • Insurance

Potential Buyers should consider whether the pandemic has impacted the terms and conditions of any insurance policies maintained by the Target. Equally, Buyers should determine the extent to which the Target can claim for losses arising from a business slowdown or stoppage caused by the pandemic.

Practical solutions:  

  • Restructuring the Deal

Buyers will increasingly be looking at ways to mitigate the risk of pandemic era transactions. One way of limiting risk is through careful structuring of the transaction. For example, acquiring a majority stake in a company rather than purchasing the entire issued share capital may enable parties to strike a lower risk deal during the crisis. This could also include an option for purchase of the remaining shares once the pandemic dust has settled.

  • Negotiating Warranties

Buyers can also reduce the risk of a transaction by requesting, or negotiating, Covid-19 related warranties, and elicit more information about the potential impact on the Target company’s business. This will also help protect the Buyer from any unexpected or unforeseen effects of the virus, by ensuring a remedy is available in the event the Target business is not as “Covid-19 proof” as promised by the Seller.

Summary  

Here, at Berry Smith, we have a dedicated and specialist Transactional Business Services Team. Our team provides the right level of expertise and experience, at a realistic cost and our service is always matched to the scale and complexity of the deal. If you need advice on any anticipated corporate transactions or wish to discuss matters on a confidential, no-obligation basis, then please contact us on corporate@berrysmith.com or call 029 2034 5511 and ask for the Corporate team.