The COVID-19 pandemic is affecting not only public health, but also global business operations and the economic sector. In light of reports that mergers and acquisitions are being delayed, it is important to determine the impact of COVID-19 on M&A transactions and implement measures to mitigate the risks associated therewith.
To that end, this article addresses whether COVID-19 qualifies as force majeure or hardship for contractual purposes and its impact on parties' mutual obligations. Further, it assesses the effects of COVID-19 on M&A deals.
Turkish law sets out no explicit definition of 'force majeure'. Therefore, Supreme Court of Appeals precedent and legal doctrine must be used as guidelines.
For an event to be considered force majeure, it is generally accepted that it should:
- be beyond the control of the parties;
- have external origins;
- not have been reasonably possible to foresee or predict;
- not have occurred due to a reason attributable to the affected party; and
- be inevitable and the performance of the contract must be impossible despite all measures being taken.
These requirements will be assessed individually and differently in each case. The Court of Appeals and legal doctrine accept that epidemic diseases are considered force majeure events. Accordingly, if the below requirements are met in a specific case, it can be said that the COVID-19 pandemic will be considered a force majeure event.
Under Turkish law, parties may determine the scope and mechanics of force majeure under agreements pursuant to the principle of freedom of contract. Therefore, if an agreement contains a specific force majeure provision, the interpretation of such provision would dictate whether force majeure has been triggered and, if so, its legal consequences.
If an agreement contains no specific force majeure provision, such event will fall under Article 136 of the Code of Obligations (TCO) relating to the impossibility of performance. If the performance of obligations objectively becomes impossible due to COVID-19, the affected party will be released from its obligations and in this case, there will be no breach of contract.
If an event results in a partial impossibility of the performance of a contract, the affected party would be discharged of its obligations to the extent that they have become impossible pursuant to Article 137 of the TCO. If it can be interpreted that the parties would not have entered into the agreement had they foreseen such partial impossibility in advance, then all of the obligations would be discharged and the agreement would be terminated.
In cases where performance is not fully impossible and becomes significantly more difficult, hardship rules under Article 138 of the TCO should be applied. In order to benefit from the hardship provision, which allows contracts to be adapted to the new conditions, the performance should be extremely difficult for the affected party to fulfil its obligations due to an unforeseen reason and the economic balance of obligations in the contract must have changed to the detriment of the affected party to the extent that expecting the affected party to perform its obligations would violate the principle of good faith.
In such case, the affected party may request the adaptation of the agreement in accordance with the changed circumstances or, if the adaptation is not possible, termination of the agreement by applying to the court.
COVID-19's impact on M&A deals should be determined by taking into account the current status of the deal.
If the parties are at the preliminary documentation stage (eg, non-binding letters of intent, memorandums of understanding, non-binding offers and non-disclosure agreements), parties should reconsider the timing under such documentation such as exclusivity period, due diligence dates and timing of the offers, as the process could now be different. Ceasing the negotiations for a while is another option. It is also crucial for the buyers to confirm whether their previous valuation and pricing mechanisms are still valid and applicable. Buyers are highly advised to recalculate the valuation and if possible, renegotiate the purchase price of the target(s) by taking into account the economic effects of COVID-19 on the contemplated M&A deal.
For the due diligence stage, parties should especially focus on COVID-19's impact on:
- revenues and debts;
- suppliers, distributors and customers;
- insurance policies;
- financial arrangements;
- solvency risks; and
- key contracts of the target.
Force majeure provisions in and termination rights under key contracts, new employment law and data privacy-related issues and mitigation and contingency plans and scenarios regarding the COVID-19 pandemic should also be examined.
Governmental authorities are imposing new COVID-19-related rules every day. Therefore, the buyers in M&A deals should also be aware of those new rules and assets the target's compliance therewith, such as new rules regarding employment law and workplace health and safety rules or data privacy rules on employees' personal health data or sector-related restrictions.
If the parties are at the stage of negotiating the terms of binding M&A documentation such as share purchase agreement, they should discuss some new terms regarding the representations and warranties and indemnities. As such, buyers may require longer periods due to the fact that certain statutes of limitation or activities of governmental authorities may be temporarily suspended. Buyers may also request specific warranties on any COVID-19 business contingency plans or financial assessments and financial projections. Sellers should disclose all risks relating to COVID-19 as much as possible. It may also be hard to secure an extensive representations and warranties insurance with COVID-19-related risk coverage in the current circumstances.
Parties should assess the pricing risk between signing and closing given the difficulty in assessing the ways COVID-19 may impact a target's business over time; address this issue in the share purchase agreement by choosing the right pricing mechanism suitable for the deal.
If the parties have already signed a binding M&A documentation such as a binding offer or share purchase agreement, and the deal is not yet closed, then material adverse change (MAC) and force majeure provisions (if any) under such agreements may be applied if any party applies to the court for the enforcement of those provisions. If the M&A documentations include MAC or force majeure provisions, then the mechanisms under the agreements will be applied. If the agreement is silent on MAC and force majeure issues and the governing law is Turkish law, then Article 136 of the TCO relating to the impossibility of performance, Article 137 of the TCO relating to partial impossibility or Article 138 of the TCO relating to hardship may be applied, depending on the circumstances. Effects of COVID-19 will probably not trigger standard MAC and force majeure provisions which do not have any specific COVID-19 wording agreed after the news of the virus was widely reported.
Parties should carefully consider the decision-making process and interim period covenants regarding a target's response mechanisms to the COVID-19 outbreak after the signing of binding M&A documentation.
Parties should also consider the effect of COVID-19 on financing conditions of deals with financial institutions and carefully plan the post-acquisition funding.
As a significant number of governmental staff started working remotely or were allowed mandatory leave due to the COVID-19 outbreak, there might be some delays regarding governmental authorisations between the execution of the agreements and closing of the M&A transactions (eg, approvals of the Competition Board Authority of Energy Market Regulatory, the Banking Regulation and Supervision Agency or the Radio and Television Supreme Council). Parties should consider such delays and extend long stop dates if possible. Currently, there are also delays in trade registry offices, so parties should take this into consideration along with travel restrictions and the improbability of physical meetings on the date of closing of the M&A transactions. Parties may use electronic signatures to sign and close processes if possible. They should also amend the target's articles of association to allow electronic or remote board and general assembly meetings following the closing of the transaction.