The economic chaos unleashed by the coronavirus pandemic has left corporates, funds and their advisers rushing to probe the terms of already agreed M&A deals that have not yet reached completion.
One senior City deal lawyer said: “Every M&A lawyer that has deals between signing and closing has probably been asked to check the robustness of being able to walk away.
“That is not to say people are searching for the exit door, but people want to know their options and their best or worst case scenarios.”
Another City lawyer said: “Every deal is going to be looked at on its own merits. Is there a way to get out of it? Either using the express provision of the agreement, material adverse change clauses, or can they renegotiate? That is all bespoke, deal-by-deal. But obviously people are looking at deals right now.”
A private equity lawyer said: “Judging by the questions we are being asked, people are testing quite hard. They want to know where they stand if they walk away.”
In this new world, deals that previously made sense may now look expensive or illogical.
However, pulling out of an agreed deal remains very challenging.
The private equity lawyer said: “It is very difficult to do and it’s often litigated. It’s very unusual to walk away from a deal and that be the end of it.”
In 2001, Sir Martin Sorrell’s advertising conglomerate WPP tried to pull the plug on its £432m bid for media buyer Tempus, arguing that the September 11 attacks triggered a “material adverse change” in Tempus’ prospects.
However, the Takeover Panel ruled that the deal must go ahead, cleaving to a long-held policy that market fluctuations were part of the risk companies take when pursuing deals.
The first M&A lawyer said: “Covid-19 is not a get-out-of-jail free pass. This probably is bigger than 9/11, but the panel was tested on that 20 years ago and demonstrated bids are not that easy to walk away from.”
But added: “Private deals you have to be in the detail. Every termination right is bespoke.”
The private equity lawyer said they have received a flood of requests to examine previously agreed private deals, but said they had not yet heard of anyone reneging on a deal.
“I am not aware of people actually walking away from deals at the moment. Either because they recognise that force majeure and material adverse change are high bars to cross if you have to test them through the courts, or because of the risk of reputational damage,” they said.