Apr 3, 2020
For further information on the changes below, please contact Niko Veilleux or any member of our Mergers and Acquisitions or Corporate Governance Groups.
Considering Canada, the U.S. and most of the world currently look like some kind of dystopian film with populations in lockdown, empty streets, closed borders, grounded aircraft and lineups in front of grocery stores, it would appear premature to be planning for corporate growth generally, and via mergers and acquisitions particularly.
Au contraire. According to a recent survey of more than 2,900 C-suite executives globally, more than half (56%) are opting to transform through deal-making, and plan an acquisition over the next 12 months. 
Strong senior management teams, boards of directors and investors need to consider the COVID-19 crisis in the long- as well as short-term, responding with urgency now, preparing for the next phase and also thinking beyond.
Understandably, executives are focused on navigating the immediate impact that this global pandemic is having on liquidity, supply chains, revenue and profitability. There is no playbook for this situation. Executive teams are reconfiguring and readjusting their responses in real time as events evolve rapidly.
This crisis also needs to be considered in the longer term and it’s never too early for the C-suite to work towards ensuring continuing growth in market shares, revenue and profitability margins.
Current M&A landscape
We have already seen a material slowdown in M&A activity. Uncertainty is a key contextual factor that affects the decision-making of corporations on many types of operations, notably M&A. When you do not have any clear sense of the direction that the world is taking, it is very difficult to make an informed decision.
Many of our strategic and financial clients are interested in buying businesses because they know some are not going to weather the COVID-19 crisis very well, but they also are being conservative because they are not sure if this is a six-week, six-month or one-year situation.
As concerns about a slowing economy have materialized in a shocking way over the past three weeks, public companies, private equity firms and other potential acquirers are contemplating adjustments to investment strategies and asset allocation. The amount and diversity of capital available for business investment, including acquisitions, going into 2020 may have been unprecedented: corporate cash on-hand, private equity dry powder, bond issuance, and borrowing capacity, especially at historically low rates in Canada, the U.S. and other large economies. Companies that can leverage that capital and make deals early in a downturn could see better returns than others in their industry.
Indeed, data show that the post-global financial crisis downturn in 2008-2010 was an opportunity to make bold transformational strategic moves, including acquisitions of high-quality assets that would have fueled faster growth in the upturn.
Also, an analysis of Capital IQ data by PwC shows that investors who are opportunistic in a downturn can benefit. In the 2001 dot-com bust recession, shareholder returns for companies that made acquisitions outpaced their respective industries in the following months, rising as high as 7% one year after the transaction was announced. 
But for that growth to be realized, those companies have to be prepared. Along with sufficient capital, they need to be prepared, psychologically as well as operationally, to act on buying opportunities as target company valuations decline, including making opportune decisions on the basis of incomplete or uncertain information.
As part of their immediate planning, companies should carefully think through key aspects of deal documentation to ensure the negotiation of proper deal protections, tailored to allocate the increased risk during a period of economic turmoil. Among others, force majeure and material adverse effect (MAE) provisions should be very carefully considered and thoughtfully negotiated having regard to the current crisis and the possible “second peak” that has been discussed by health experts.
MAE clauses, including the negotiated exceptions to the MAE definition, which are complex and can be of importance in the best of times, should be of particular focus in this period of volatility and uncertainty. Parties to large merger agreements signed since the pandemic became a significant global health emergency, such as the agreement governing Aon plc’s $30-billion acquisition of Willis Towers Watson plc and the one governing Morgan Stanley’s deal for E*Trade Financial Corp., have addressed the COVID-19 risk in the exclusions to the MAE clauses. The parties have tended to specify that any negative effects of the pandemic on one or both companies will not constitute an MAE unless the company is disproportionately affected. Every deal is different and dependent on the particulars of the situation. However, these recent examples from mega-deals provide some indication of what we can expect to see in agreements to come.
Moreover, buyers in M&A transactions would be prudent to consider inserting COVID-19-specific representations and warranties into their purchase agreements to learn more about the exposures of the target businesses and the safeguards implemented to protect them and any associated operational and financial effects. A party that agrees to provide representations, warranties and indemnities should pay close attention to its drafting in order to fully address the impact that the COVID-19 pandemic may have on its business.
In M&A transactions in Canada and the United States, representation and warranty insurance (“RWI”) is a popular tool for buyers to counteract some of the risk associated with the seller’s representations and warranties being untrue. Buyers can expect that insurers will want to confirm that the transaction parties have considered the effects of the COVID-19 pandemic on all aspects of the deal and will likely propose some form of policy coverage exclusion in relation to the pandemic. If RWI insurers exclude these types of risks, the allocation of such risks between the buyer and seller via the representations and warranties and related indemnities becomes even more critical. For more information on the impact of the pandemic on RWI, view our earlier Update.
Of course, nobody can accurately predict the future — and that is particularly true at a time when much of the world is on hold because of the worst public health crisis in a generation. However, we do know that we can often find clues to the future in the past. History has shown that companies that made deals during prior downturns and recessions have often fared better in the longer term than their more timid peers. As the world comes to terms with the coronavirus crisis, executives must address the extraordinary immediate challenges, but also plan for the next phase and think beyond even that.
 EY, Global Capital Confidence Barometer survey, March 2020 (ey.com/ccb).
 PWC, Succeeding through M&A in uncertain economic times, p.7.