The coronavirus has caused restrictions to social and economic life, which were unknown for decades and reach levels that were hardly conceivable for an open society with a free market. The drastic developments that can be expected to further evolve in the weeks and potentially months to come will pose challenges to the performance of contracts, including transaction agreements entered into in an M&A context.
The traditional approach for buyers in an M&A context to achieve protection in the event of a material adverse change (MAC) between signing and closing is the agreement on a respective closing condition in the sale and purchase agreement (SPA). Under these so-called MAC clauses, the obligations of the parties to consummate the SPA are subject to the condition precedent that no MAC has occurred prior to the closing date. MAC clauses can comprise effects which have a material adverse impact on the market or a certain market as a whole (market MAC) or be limited to events that specifically relate to the relevant target businesses (business MAC).
As deal certainty is typically paramount to sellers, the introduction and wording of a MAC clause is a hot topic in SPA discussions. If accepted, MAC clauses in SPAs are often reduced to business MACs which are tailored to specific risks with numerous exceptions and counter-exceptions. As a consequence, many MAC clauses are not triggered by pandemic events, unless the target is disproportionally affected compared to the market as a whole or (even stricter) compared to other companies operating in the same industry. As MAC clauses vary widely from case to case, it will be necessary to carefully analyze the applicability of any MAC clause considering the facts and particularities of each individual situation. Particular challenges may arise if the respective provisions of the SPA and of other transaction documents such as debt financing commitments are not fully aligned – a situation which may leave the parties in a place where they are obliged to close a deal under the SPA even though the financing of the purchase price may no longer be available or become very expensive.
Driven by a desire for utmost deal certainty, numerous transactions were agreed without a MAC clause in the rather seller-friendly market of recent years. In many SPAs, the parties explicitly excluded any legal means to refuse performance of, or withdraw from, the SPA except to the limited extent explicitly set forth otherwise in the SPA or legally required under mandatory statutory law. These exclusions typically contain an explicit reference to the legal doctrine of the so-called “clausula rebus sic stantibus” (Störung der Geschäftsgrundlage), a doctrine which was used by the courts to address hardships arising from the performance of contracts following unexpected adverse changes in previous crises such as hyper-inflation events in the 1920s. It remains to be seen how the courts will make use of the doctrine and treat respective contractual exclusions in the current corona crisis.
If parties enter into an SPA in the current situation and agree on corona-related scenarios where the parties shall no longer be obliged to perform the SPA as originally agreed, it will be crucial to be both explicit and specific. The parties should in particular be explicit that the provisions shall apply irrespective of the coronavirus being a known pandemic development rather than an unforeseeable event that only occurs after signing. As an alternative to a closing condition or withdrawal right, the parties may consider reflecting uncertainties through earn out arrangements, downside adjustments or other forms of contingent or deferred purchase price elements.
Similar challenges as for SPAs arise for numerous other types of commercial contracts. For certain types of contracts, the German legislator has even enacted special statutory provisions to specifically address the corona situation, among them an exclusion of certain termination rights for lease agreements. Apart from these special corona-related provisions, the challenges to contractual performance mainly concern traditional areas of contract law such as force majeure, frustration of contract, legal, actual or economic impossibility or contractual interpretation to fill unintended gaps under bona fide principles – situations that will require careful analysis, sophisticated legal argumentation, precise drafting, creative solutions and strong judgement calls.