The Pérez-Llorca/IE Chair analyses the impact of COVID-19 on M&A transactions

The latest Pérez-Llorca/IE Chair on Commercial Law event, jointly organised with the North American firm Skadden, Arps, Slate, Meagher & Flom, covered the M&A sector’s current situation and, in particular, the main trends which are emerging in the M&A sector as a consequence of COVID-19. The session was opened and moderated by Sara Sánchez, doctor in law, researcher and professor at IE University. Speakers at the event included Pedro Marques da Gama, partner at Pérez-Llorca, and Paola Lozano, partner at Skadden, Arps, Slate, Meagher & Flom, based in New York.

Sara Sánchez began the session by considering the consequences of the COVID-19 crisis, asking the speakers about the impact it will have when structuring M&A transactions and looking for capital injections.

Next up, Pedro Marques da Gama and Paola Lozano began analysing the current situation of M&A transactions in Spain, the United States and Latin America, agreeing that the health crisis has reduced both the number of M&A transactions and their value. Equally, they indicated that the tourism and transport sectors, among others, have suffered a greater impact, meaning that the effect on the economy is uneven.

Likewise, both speakers explained the importance of contractual and legal mechanisms such as force majeure and rebuc sic stantibus clauses. In the face of exceptional situations, these clauses may, under certain circumstances, allow a party not to close a contract on the grounds that performance has been impossible. The Pérez-Llorca partner signalled that these types of clauses are especially important at the moment, due to the fact that, in Spain, they open the possibility that parties to a contract may avoid performing it in the event that it becomes impossible for some reason, such as circumstances arising from COVID-19. In this regard, special reference was made to the doctrine of rebus sic stantibus, which has already been addressed in other Pérez-Llorca/IE Chair on Commercial Law seminars. Paola Lozano also analysed the material adverse effect or MAC/MAE clauses in North American jurisdiction and the difficulty they present when regulating a situation as extraordinary as the COVID-19 crisis. Among other issues, she explained the elements that the New York courts would evaluate to determine the rights of the parties and the assignation of risk between them.

Next, both partners went into depth about the new opportunities that the health crisis has created and may continue to create in the near future. In this context, they noted that, in times of crisis, there are a large number of investors on the hunt for companies with liquidity problems in order to access their share capital at a lower rate. Some of the most popular forms of investment in these cases include debt that can be converted into equity and differing forms of value such as earn-outs and post-closure price adjustments. In this way, companies gain an injection of liquidity that allows them to overcome the current crisis and the investing companies obtain access to shareholders, with a relatively controlled risk.

In relation to this point, Lozano emphasised that the current crisis is not financial. That is, banks are not currently seriously affected by the crisis. However, he explained that, should the current crisis extend indefinitely, the most logical consequence would be financial institutions finding themselves affected by it. Lastly, the partner indicated that another structure that investors are currently using to contend with the uncertainty is the creation of joint ventures or similar vehicles, which allow them to safeguard liquidity and not compromise the capital structure, while also expanding their platforms and penetration through strategic alliances.

The event ended with a Q&A session directed by Sara Sánchez in which the speakers responded to questions asked by the attendees.