Posted by Tony Roberts, Partner
Coronavirus: will it wreck the sale of your business?
The coronavirus implications are particularly acute for those who are trying to sell a business in an affected sector, such as travel, leisure, hospitality or entertainment.
The legal position depends on what stage the sale process has reached.
If you have entered into a contract to sell your business but the deal has not closed
Where contracts have been exchanged but the transaction has not completed, the sale and purchase agreement will be the key document which regulates the rights and obligations of the parties.
In general, the economic risk in the target business passes to the buyer when the deal is signed and if a problem affecting the business emerges in the period between exchange and completion, the buyer will have no ability to walk away from the deal. The buyer must complete on the basis of the agreed price on the designated completion date or will be in breach of contract.
Of course, if the value if the business has plummeted in the meantime due to the coronavirus outbreak, the buyer might want to back out of the transaction and leave the hot potato in the hands of the seller.
Very occasionally, it might be that the seller would look to break a deal. If, for instance, somebody agreed to sell a medical research business for a cheap price and then that business suddenly invented a cure for the coronavirus, the value would rocket and the seller may well wish to pull out and sell it for a much higher price, in a gazumping-style scenario. But normally it would be the buyer which wishes to withdraw and so that is the focus of this note.
Can the buyer cancel the deal?
Some contracts contain a material adverse effect provision (known as a “MAC clause”) and on the occurrence of a MAC the buyer may be able to exercise the right to rescind (i.e. cancel) the contract.
Whilst the MAC clause would need to be analysed in each individual case, it would be very unusual for a buyer to be able to invoke a MAC clause on the basis of a phenomenon such as the virus.
MAC clauses are not generally aimed at insulating buyers from macroeconomic trends or medical, social or political factors which apply to the world at large. If they did, they would act as a kind of insurance policy which protects the buyer but does nothing for the seller.
A buyer would not expect this sort of protection in other contexts. For example, if a person exchanges contracts to buy a house he has the responsibility to insure the property from that date (rather than the date on which he moves in). If the house gets struck by lightning, they buyer must still buy the damaged house and must claim under the insurance policy. The buyer cannot simply walk away.
In the M&A scenario, MAC clauses are normally designed to be triggered if specific factors relevant to individual business come to light before the deal is closed. For example, the buyer may be able to rescind the contract if the buyer discovers that the seller has misled it by giving false warranties about the state of the target business.
Can the buyer wriggle out anyway, regardless of what the contract actually says?
Even though a MAC clause is intended to latch upon specific problems with an individual deal, human nature is such that many buyers who have signed a contract to buy a virus-decimated business would rather toss the deal onto the scrapheap and keep their cash instead.
Bullish buyers might just pull out of the deal anyway, regardless of the legal rights and wrongs. The onus would then be thrown back onto the seller to take legal action to try to enforce the contract and claim any damages from the buyer to compensate the seller for any delays or other costs incurred by the seller.
Even if the seller were ultimately to win, however, the seller would obviously be put to great expense and trouble in the interim, including the need to ensure that the target business continues to weather the storm in the meantime.
Matters may be out of the hands of the buyer and the seller. The target company might collapse; the seller might collapse; the Government might or might not introduce special laws seeking to help particular industries or otherwise move the goalposts in some unforeseen way.
There are lots of known unknowns and many unknown unknowns. Against that backdrop, it would not be surprising if in some cases the buyer could browbeat the seller into renegotiating the deal, irrespective of their black-letter rights under the original contract. There will not always be any middle ground but sometimes the commercial pressures may lead to the seller swallowing a price reduction rather than risk losing the deal completely.
Don’t act without taking legal advice
The strict legal analysis is an important factor in the equation, but we are the first to recognise that it is not the only one.
It is nevertheless crucial for any buyer or seller to take legal advice on their individual contract. This is an essential ingredient in the formulation of the wider strategic and commercial matrix and any party who proceeded without it would be foolhardy.
If you have not entered into a contract to sell your business
If a seller is in the midst of a sale process but it has not reached the contract stage, the key decision will be whether to terminate the process until the crisis has passed or seek to press ahead anyway, realising that the terms are likely to be much less favourable to the seller than they would otherwise have been.
Not all buyers will be frightened off by the virus panic; some buccaneers may take a deal if the price is right.
Deals may well incorporate unusual provisions in this turbulent environment but many in the business world will carry on their buying and selling activities, even if there are bound to be some changes.
Can the business continue if the deal falls through?
In extreme cases, if a seller cannot sell a business and sees no prospect of an improvement in conditions on the horizon, it might need to look at whether to cut its losses by running an auction process to offload the business cheaply or possibly closing down the business altogether.
In some cases, insurance policies or perhaps some sort of Government-led bailout might help, but often the harsh reality will be that the seller will have nowhere to turn and will need to decide whether to try to trade through the difficulties or pull the plug.
Keeping an eye on other problems
Although it is dominating the news headlines, the virus is just one of many issues causing business uncertainty, including:
- The difficulties in agreeing a UK-EU trade deal, given the EU’s aggressive stance
- The challenges facing the UK in striking wider deals with the US, India and others
- The broader pressures on the EU market, including the worsening migration crisis involving Turkey and the imminent departure of Angela Merkel
- The unpredictable landscape of the US elections
- Regular but unpredictable terrorist attacks across the globe
In the end, any virus-inspired stasis must be broken. Businesses must deal with a wide variety of uncertainties, with some of them being of unpredictable duration. The commercial world does not exist in isolation and is not immune from wider public sentiment, but experience shows that business does ultimately move forward.
Expert coronavirus help from Royds Withy King
Royds Withy King is guiding clients through all aspects of the coronavirus crisis.
If you have any enquiries, please contact Tony Roberts on:
020 7842 1473 Email us
Keeping you informed about Corporate news, events and opinion.