Analysis

How The Coronavirus Pandemic Will Affect Your M&A Practice

By Benjamin Horney
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Law360 (March 20, 2020, 4:51 PM EDT) -- The coronavirus pandemic is causing economic turmoil across the world and forcing entire countries to practice extreme forms of social distancing, but mergers and acquisitions attorneys must still counsel deal-hungry clients through this period of uncertainty. 

Here, Law360 explores the effects of the global outbreak of COVID-19 on M&A practices across the United States.

Goodbye To Business As Usual

The legal industry, like many others, has been forced to grapple with a new normal. Law firms across the country are encouraging attorneys to work from home, meaning meetings are now being held via video conference, and parents must take client calls while their children romp around the house.

“It’s not perfect,” said Jeff Ross, a partner at Debevoise & Plimpton LLP who is also chair of the firm’s finance group and a member of its private equity group. “We’re very conscious of the fact that it’s difficult to collaborate with our colleagues while all working remotely. In the office, it’s easy to poke your head in and say, ‘Hey, I’ve got this really difficult problem, what do you think?’ It’s not as natural to do that when working remotely.”

Having to work remotely can take a toll on the human psyche, and finding safe ways to battle your own brain can be very beneficial. Bill Chudd, a partner in Davis Polk & Wardwell LLP's corporate department and co-head of the firm's private equity group, said that some attorneys in Davis Polk's M&A practice even started a virtual running group.

"We are able to track our colleagues’ progress and cheer each other on through a mobile app and e-mails," he said.

Meanwhile, this is a good test of just how much deals work can be done remotely and virtually, according to Frank Aquila, a partner at Sullivan & Cromwell LLP and global head of the firm’s M&A practice. There has been a massive leap in technology since the 2008 financial crisis — today, lawyers can hold video conferences with colleagues and clients, for instance.

“Today, you can be more productive with people working in their homes spread around the world than you could have just five years ago,” he said.

Despite all the difficulties the situation has presented, attorneys are noticing that the pandemic is also bringing people together.

“It’s humanizing to see how folks are trying to look out for each other,” said Alisa Waxman, a corporate associate at Debevoise and a member of the firm’s investment management group. “As a group, we are making sure everyone feels supported and are aware of what’s going on in everyone’s lives.”

There Can Still Be Deals, But It’s Complicated

Clients are now more in need of legal guidance than ever because everything is so fluid, according to John Pollack, a partner at Gibson Dunn & Crutcher LLP who is a member of multiple practice groups at the firm, including its M&A and private equity practice groups.

“The answer three days ago may be different today because of changes in regulations and the impact of the virus on the markets, on companies, on people,” he said. “Many in the market today have suddenly found themselves facing a rising sea of questions amid a storm of uncertainty.”

The uncertainty is leading to numerous challenges, both immediately and potentially in the future, according to Pollack.

“Right now, we’re on the front lines with our clients, as all hands on deck are needed to sort through developments, solutions and next steps on a real-time basis,” he said.

One of the most basic questions clients are considering is whether they should still be trying to do deals, or if it would be better to wait for a little more stability. The advice you should be giving really depends on the specifics of the situation, but, in general, it seems as though deals that were signed before the pandemic forced everyone into isolation have a better chance of going through than deals that were merely in the process of being negotiated.

According to Brian Richards, a partner at Paul Hastings LLP and chair of the firm’s global private equity practice, many deals that were in the works are now being put on ice. Speaking from the firm’s Chicago office on the final day before Paul Hastings began requiring people to work remotely, Richards said that deals that were already signed and had been progressing towards a closing before the outbreak became major news were not disrupted, but otherwise, the deal pipeline has “virtually stopped."

“We don’t know whether that’s for a day, a week, a month, or permanently,” Richards said. “But they have pressed pause.”

Part of that is because there is uncertainty regarding whether lenders will go forward with providing debt. In a number of cases, there were lenders in the middle of doing due diligence who had said, in a non-legally binding way, that they were planning to fund deals, but have since decided to back off.

“Sometimes it's the lenders, but sometimes it’s the buyer or seller backing away,” Richards said. “I haven’t seen anybody breach an agreement if they have a legal obligation.”

Another major reason that deals are being halted is that the extreme economic impact is making it difficult for buyers and sellers to come to terms on prices, according to Ross.

“It’s hard for them to come to a consistent view on what the enterprise value for a company is right now,” Ross said. “It’s pretty tough for a seller and a buyer to agree on a price.”

Many deals that were already signed can still be completed, depending on the specifics of the transaction. Clients believe certain deals make sense in the long term and still want to close, while in other situations they find themselves wondering whether a particular deal still makes sense to go forward with in this climate. 

In the latter instances, attorneys will be called upon to help determine what rights a client has if they don’t want to close a deal. Issues can include whether there is a material adverse effect clause triggered if a client pulls out of a transaction, as well as whether the target is going to be solvent.

When it comes to deals that are moving ahead, many sellers are specifically excluding adverse impacts arising from COVID-19 from material adverse effect definitions, according to Anthony Vernace, a corporate partner at Simpson Thacher & Bartlett LLP.

Depending upon what industry a deal-hopeful client works in, it’s still possible to start the process now and get from start to finish. For instance, a distribution business looks pretty attractive in the current environment, according to Ross, and certain types of software deals could also still be clinched, because the software industry is likely to be less negatively affected by the pandemic.

“Those types of deals which are less likely to be impacted by this, they might be impacted in a positive way,” he said.

Meanwhile, some clients are showing interest in going through the process but then holding off on actually formalizing an agreement, according to Ross.

“They want to get to a point where the deal is as baked as it can be, and then just hit pause,” he said. “People are hoping to come back to these deals when the world returns to normal, whenever that may be.”

This Isn’t The 2008 Financial Crisis

Because of the dramatic economic impact the coronavirus chaos has caused around the world, many comparisons have been made to the 2008 global financial crisis. But while some similarities may exist, this is a definitively different animal.

Aquila is a veteran enough lawyer to have lived through a number of events that shook major economies, including the dot-com bubble in 2000, the 9/11 terror attacks and the 2008 global financial crisis. 

“There is a certain cadence to how major crises play out, at least with respect to the financial markets and the M&A market,” he said. “I have to believe that what we have seen in the past will apply here as well, assuming that the [U.S.] government, and governments around the world, do what is necessary to make sure there’s liquidity in the market — that they put together the right economic incentives so that the U.S. and global economy rebound relatively quickly.”

According to Aquila, one major difference between the coronavirus crisis and the 2008 financial crisis is that the major U.S. financial institutions are better positioned now than they were then.

“The stress testing that’s been done over the last decade has really ensured that we have strong financial institutions in the U.S.,” he said. “So, again, assuming there are not a lot of major missteps here [and] we get through the crisis, we should be in a position to rebound. Even though it may take a long time to get through the crisis.”

Importantly, governments, mostly at the state and local levels, are actively attempting to help ensure that business, including M&A, doesn’t completely stagnate, according to W. Todd Holleman, a partner at King & Spalding LLP and leader of the firm’s corporate, finance and investments practice group.

“One thing I think you’ll see more of, which we’ve started to see, is regulators and legislative folks being more willing to step in and provide real-time, commonsense solutions,” Holleman noted.

That’s different from the 2008 financial crisis, when it was difficult for governmental authorities to deal with such entities because they were dealing with bailing out the biggest financial institutions in the country.

“We’ve seen situations where practical solutions have been enacted very quickly, and you can see it publicly in things like relaxing [U.S. Food and Drug Administration] requirements on food delivery in order to keep the food supply chain going,” Holleman said. 

Holleman has seen this in the real estate realm as well; for example, authorities have allowed inspectors to continue coming out for projects that are under construction so that they can move forward.

“These are things we’re talking to our clients about, finding out if there is some kind of solution for an issue, be it through the executive branch at the state level, or if you can communicate with regulators,” he said. “In many cases, the government is, in real time, looking for levers to pull if there are roadblocks from a regulatory standpoint.”

--Editing by Alanna Weissman.

This is part one of a two-part series on how the coronavirus pandemic is affecting M&A and private equity legal practices.

For a reprint of this article, please contact reprints@law360.com.

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