Dealmakers See Range Of Renegotiations As Virus Spreads

By Elise Hansen
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Law360 (March 12, 2020, 5:16 PM EDT) -- Deals are still getting done amid the spread of the new coronavirus, but the pace and the terms are seeing some adjustments, attorneys tell Law360. Meanwhile, the virus's shift to Europe and the U.S. has markets in turmoil and dealmakers watching closely for what's next.

As the spread of COVID-19 disrupts travel, global supply chains and daily business operations, even fundamental deal terms such as pricing can be back on the table, David Makarechian, chair of the emerging technologies group at O'Melveny & Myers LLP, told Law360.

Makarechian said at least one deal he's currently working on has already seen a price renegotiation. He believes the change reflects shifting expectations about the company's chances in the wake of the virus and its possible impact on markets.

"I think [the renegotiation] is directly related to pessimism in terms of the company's performance and what's going to happen in its prospects," Makarechian said.

For some companies, what stage negotiations are in could affect a deal's susceptibility to changes. Discussions that kicked off before the market upheaval could be up for reevaluation, Makarechian said.

"I've seen some deals slow down — perhaps indicating that buyers are taking a bit of a 'wait and see' approach, but others speed up — both sides concluding that it is better to complete a deal that's currently in process rather than prolong things in a period of uncertainty," he said.

The pandemic has also led to renegotiations of deal terms such as closing conditions, said Brian Richards, chair of Paul Hastings LLP's global private equity practice.

"The definition of 'material adverse effect' is being revised in just about all the agreements we're seeing," Richards said. "Everyone knows about COVID-19 now, so a buyer shouldn't be able to use that to get out of a deal."

Other terms present thornier issues, such as the promise to continue the ordinary course of business between a deal's signing and its close.

"What does that mean when there are travel bans?" Richards asked. "What does that mean when there are quarantines or supply chains are disrupted?"

The key, Richards said, is to give the seller enough flexibility to take reasonable precautions and comply with government measures without making the carveout overbroad.

"It's been a balancing act, and we're trying to find that fair middle ground," he said.

Heightened travel restrictions have also at times pushed back the timelines for negotiations or moved meetings online, Lee Weinberg of Weinberg Gonser LLP said. While online meetings theoretically may not slow things down, they can lead to increased deadlock on thorny questions, Weinberg said.

"We're having more time issues with negotiations," Weinberg said. "If you can't get everyone in a room and you're dealing with a videoconference at best or telephone, you tend to get more rigid position-taking."

Due diligence that happens on-site has also been delayed in some instances, particularly when international travel is involved, Weinberg said.

The virus is also intensifying aspects of due diligence that weigh a company's resilience to major disruptions. Businesses that market remote working tools and in-home entertainment may be viewed as safer bets, while companies in the travel and hospitality industries are taking a hit. But shock resistance can apply to any company, regardless of industry. The virus is shining a spotlight on remote work policies, insurance coverage and supply chain stability, Richards said.

"I think it's really putting a focus on companies' ability to function in not-normal environments," he said. Buyers are carefully considering "how well you are positioned and organized to deal with other, future disruptive events like this, whether it's a virus, a terrorist attack or a weather event," he said.

Businesses from all geographies are under scrutiny as the response to the virus intensifies in the U.S. and Europe. Certain areas of China, meanwhile, are experiencing something of a reprieve, said Yan Zhang, a partner at Baker Botts LLP. The number of new cases in the country appears to be dropping off, and certain areas have eased some of their restrictions on residents' daily lives.

"Many of my clients based in China have returned to kind of a normal working schedule," Zhang said. "At least from what we've learned, Hong Kong is starting to get back to normal, and in lots of parts of China, people are starting to resume regular activities and put deals together."

That's not the case for the entire country, and cross-border deals are still a challenge, Zhang said. But deals within China and Hong Kong are beginning to move again, he noted.

"It's still not very convenient: There are still travel restrictions and people are still cautious about holding in-person meetings," he said. "But I got the sense that people are getting back to normal; perhaps even a bit of overcompensation [because of the time missed]. People are trying to catch back up."

That could be an encouraging signal for those worried about long-term market impacts, but the U.S. and Europe need to weather the outbreaks on their own soil as well. Zhang said he's hopeful the situation in the U.S. won't be as bad but that the possibilities are serious.

"In the U.S., I think it's starting to sink in [that] this is for real; this is not just something happening elsewhere," he said.

The long-term effects on markets will be key to future dealmaking, but it's not yet clear how things will shake out. One option is that valuations will descend from their recent sky-high levels, which could actually promote dealmaking, Makarechian said.

"If the market values correct and equity values drop to a little bit of a more reasonable level, one would expect that to make it easier to get deals done," he said.

Richards echoed that sentiment, saying that there's still a lot of capital waiting to be deployed, and businesses with strong fundamentals are still attractive targets for many buyers.

"I think some firms that are taking a more calm approach are seeing that there's an opportunity to buy those companies they really like," Richards said. "[The situation] is creating the opportunity to buy those companies where they might have been outbid before."

But for those bets to pay off, markets would have to stabilize after their recent drops. And it's not clear when or whether that will happen. If consumer confidence continues to slide and economies are too hard-hit, the U.S. could slip into a recession, which would hamper many good deals.

"We're literally in the middle of it right now, so we don't know where this is going," Makarechian said.

--Editing by Jack Karp.

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