This note setting out considerations in the UK follows a similar review looking at the US position
As a result of COVID-19 and the ensuing lockdown it has become increasingly difficult to complete M&A transactions for a multitude of reasons, not least pricing and clarity on when the lockdown will end. As a result the number of M&A transactions that are currently being seen in the market has fallen dramatically. For those transactions that are ongoing it will be necessary to take into account a number of COVID-19 specific considerations. This note looks at the impact of COVID-19 on due diligence in M&A transactions and at some of the areas that should be of particular concern for would be buyers.
Material Contracts of the Target
- Whether there are MAC, force majeure, termination or similar clauses in the target company’s key contracts (including customer contracts) that could materially change the parties’ obligations, including potentially allowing a party to temporarily/permanently suspend its performance under the contract (See also Operational & Supply Chain Considerations), or whether it could rely on the doctrine of frustration to achieve the same result.
- Whether the target company anticipates a failure to perform, or a failure of any counterparty to perform, obligations under any material contracts.
- Whether any material counterparty to the target company’s agreements (e.g., customers, suppliers, distributors, creditors) has been significantly impacted by COVID-19 especially where that supplier cannot be easily replaced.
Operational & Supply Chain Considerations
- Whether any of the target company’s suppliers have declared force majeure under existing material contracts or otherwise declared themselves incapable of performance.If so, a buyer would want to understand whether the target company is able to obtain alternate suppliers, the cost of using any alternate suppliers and whether the target company has sufficient stock to meet its present needs for the foreseeable future.
- Whether the target company has experienced, or expects to experience, an effect on end market demand for its products or services, including any revenue exposure to countries or regions under containment, lockdown, travel bans, border closures or similar restrictions and to what extent the target company expects COVID-19 to alter customer behaviour.
- Whether the target company plans any changes to its supply chains in response to COVID-19.
Data Privacy Considerations
A buyer would want to ensure that the target company is complying with data privacy protections, and should obtain information regarding the types of health data (e.g., temperature readings, symptom information) the target company has been collecting from employees or non-employees in connection with COVID-19 (e.g., office visitors), how it has been collecting this information, how it has been using or sharing this information and any notices or consents the target company provides to or obtains from its employees when collecting this information. In addition a buyer would want to:
- ensure that the manner in which the target company has processed the information is compliant with the GDPR; and
- find out whether the target company has implemented any other measures in response to COVID-19 (e.g., tracking its employees). Depending on the measures enacted, additional compliance may be required by the target company.
- Whether the target company has taken any steps with respect to tax payments and deposits in light of COVID-19 (e.g., has it deferred payments of income taxes, employment taxes, or VAT or other sales taxes in any jurisdiction pursuant to any COVID-19-related tax deferment measures, or has it entered into a "time to pay" or other payment arrangement with any relevant tax authority).
- Whether the target company has considered the impact of indirect taxes and customs duties if a supply chain has been or is proposed to be modified in light of the COVID-19 crisis, including whether any additional registrations or other compliance obligations arise, whether the correct invoicing and accounting procedures have been followed, and the economic impact of any changes to the applicable indirect tax and customs duties regimes.
- The target company’s distribution structure and plans to either push down COVID-19 costs to its affiliates or adjust intercompany pricing to temporarily reallocate profit or loss between different group companies and/or jurisdictions.
- Whether the target company's transfer pricing arrangements are/remain appropriate in light of the revised economic climate or changes to supply chains.
- Whether COVID-19-related travel restrictions or remote working arrangements could affect the tax residence position of the target company (or any subsidiaries), for example if a company has held or expects to hold video or telephone board meetings and this results in the central management and control or strategic direction of the company being elsewhere than the company's usual jurisdiction of tax residence due to the physical location of each of the directors at the time of the meetings.
- Whether target company employees working remotely could result in the target company having a permanent establishment or other taxable presence in new jurisdictions or alter the company's employment tax obligations and whether any additional tax compliance obligations have been identified/satisfied.
- The likely impact of COVID-19 on the target company’s future financial performance.
- The actual and potential liability exposure not yet captured by financial forecasts.
- Whether there is any solvency risk or risk of an inability to comply with covenants under any credit facilities.
- The impact of COVID-19 on the target company’s access to liquidity and whether the target company will be able to meet any conditions to borrowing.
- Whether the target company expects to disclose or incur any material COVID-19 related contingencies.
- The impact of COVID-19 on the target company’s ability to deliver its financial statements and audits in a timely manner.
- Whether the target company has experienced, or expects to experience, any adverse effects on the target company’s maintenance of operations, including financial reporting systems and internal control over financial reporting and related disclosure controls or procedures.
- If applicable, whether the target company anticipates making any public disclosures or updated risk factors concerning COVID-19’s impact on its business.
- If applicable, whether there have been any communications from ratings agencies affirming the target company’s ratings or taking ratings actions attributable to the effects of COVID-19.
HR & Employee Benefits Considerations
A buyer would want to get a sense of how COVID-19 has impacted HR (including changes in the target company’s work force attributable to COVID-19), as well as existing company benefits available to affected employees.
- Whether the target company experienced any reductions in force, layoffs or furloughs as a result of COVID-19. If yes, then:
- In the case of furloughed staff, has the decision to furlough been confirmed in writing to the employee(s) and a record of that communication kept as a matter of record in accordance with the latest guidance note on the Coronavirus Job Retention Scheme (commonly known as the “Furlough Scheme”) by the UK government.
- In the case of redundancies, has the target company complied with the usual rules regarding consultations.
- Whether the target company has received any complaints or concerns from employees regarding leaves of absence, paid sick time, etc., related to COVID-19.
- Whether in furloughing any unwilling employees, the target company has taken into consideration any potential for discrimination cases to be made against it.
- Whether the target company has been active in reporting any cases of COVID-19 in its workforce. New guidance under RIDDOR outlines severe consequences for failing to report cases including an unlimited fine or even potential for custodial sentences.
- The target company’s efforts to abide by NHS and general government guidelines, such as social distancing, cleaning, etc.
- See also Existing Coronavirus Protocols & Mitigation Plans
Existing Insurance of the Target
- Whether the target company has made (or anticipates making) any claims on existing insurance policies, including business interruption insurance, as a result of COVID-19. If any claims have been made, understand the nature and status of the claims.
- Whether the target company anticipates making any claims on existing insurance policies to cover losses arising from supply chain disruption as a result of COVID-19. If any claims have been made, understand the response of the insurance provider to-date.
- Whether the target company maintains any insurance coverage for matters related to COVID-19 activities, including whether the policies have pandemic coverage.
- Whether the target company is holding cash in escrow, at fund level or on its balance sheet that might be released using cash release insurance, freeing up the additional liquidity for the target company.
- Whether the target company has experienced, or expects to experience, any increase in workers’ compensation claims and whether such workers’ compensation and related insurance for employees is adequate.
- Whether any of the target company’s insurers have provided any communications relating to insurance coverage matters, premiums or risk management in connection with COVID-19.
Remote Work Capabilities
- Whether the target company has a written remote work policy or practice.
- The impact of remote or stranded employees with respect to the target company’s decision-making (including holding board meetings and related functions, and availability of key personnel).
- Whether the target company has sufficient information technology capabilities to ensure productivity and provide network access to employees working from home or remotely, which includes understanding:
- the capacity the target company has to support the maximum number of users on its system;
- how the target company’s remote access platform is configured to protect the transfer of sensitive information;
- the information technology support available during remote working situations;
- whether remote access to business critical applications and services is available; and
- what video and audio-conferencing tools the target company has in remote working situations.
- Whether the target company has enacted any new cybersecurity measures or identified any areas of exposure given moves to remote working.
- Whether there is any pending or anticipated litigation or a dispute that could lead to litigation regarding contractual or labour and employment matters arising from the COVID-19 pandemic.
- See also HR & Employee Benefits Considerations.
Existing Coronavirus Protocols & Mitigation Plans
- Whether there are any contingency plans or mitigation efforts in place regarding supply chain or other operational issues arising from COVID-19.
- Whether the target company’s business continuity and disaster recovery plan include measures and controls for situations in which workers are not permitted to (or agree not to) access the target company’s facilities due to acts of force majeure, including risk of infection.
- Whether the target company has protocols in place to enable the target company to issue guidance to employees and customers on public health and safety matters as they arise and how such protocols are developed, who at the target company is responsible for dissemination of the protocols and responses to inquiries regarding the proposals.
For more information about the topics raised in this Legal Update, please contact the provider of this note or your usual Mayer Brown contact.