Due diligenceKey areas
What are the most critical areas of due diligence in a distressed M&A transaction?
The focus of the due diligence in a distressed M&A transaction, as well as in any other M&A transaction, depends on the structure of the transaction and the industry.
In a share sale of a distressed target, the legal due diligence will typically investigate the title to shares, but also the liability of the target deriving from:
- related parties’ agreements;
- financial arrangements;
- employment matters;
- material contracts;
- litigation; and
- compliance and data protection issues.
For asset deals, the legal due diligence will concern the confirmation of the property title to the assets subject to transfer, as well as the liabilities related to the assets such as:
- TUPE risks;
- material contracts pertaining to the asset;
- financing related to the asset; and
Moreover, depending on the industry, due diligence exercises will also analyse specific regulatory issues, such as necessary authorisations and permits, as well as approvals, consents and notifications to be made prior to the transaction.Searches
What searches of public records should be conducted as part of a due diligence exercise in distressed M&A transactions in your jurisdiction?
In Romania, there are five publicly available information sources, as follows:
- Trade Registry: this is a critical source of information on almost all matters involving the corporate status and history of a company. Furthermore, specific searches can be made in connection with a specific person for determining the companies in which he or she is registered as shareholder or legal representative;
- Ministry of Public Finances: the most significant elements of the financial statements submitted by Romanian companies are publicly available on the website of the Ministry of Public Finances, such as the turnover, the registered profit or the loss, the average number of employees, value of assets or debts;
- Electronic Archive of Security Interests in Movable Property: searches made with the Electronic Archive will provide a preliminary understanding on the encumbrances given by a Romanian company to its lenders, including identifying any share pledges that may have been established over the shares of a company;
- Land Book Registry: in Romania, the publication of ownership rights and other real rights over immovable assets (including mortgage) is achieved by registration with the land book registry. However, such registrations do not currently have any constitutive effects on rights and are made only for third-party opposition purposes; and
- Courts of Law websites: all Romanian courts of law publish information regarding court cases on a website that may be freely accessed.
Except for the Land Book Registry and certain matters from the Trade Registry, all other sources can be researched online.
Contractual protections and risk mitigation
What contractual protections and other strategies are commonly used to mitigate diligence gaps in a distressed M&A transaction?
Although not used as often as in the United States, a material adverse clause (MAC) can be a mitigating factor for due diligence gaps and offer a certain degree of comfort to the buyer that the triggering of certain events will provide the possibility to terminate the agreement between signing and closing.
Given the unprecedented pandemic situation and considering that a MAC typically excludes events affecting the market in general (eg, pandemics or diseases), hardship may be another mechanism the buyer may resort to. Under Romanian law, this is possible as long as the parties have not specifically excluded its application under the contract
Considering that in distressed M&A transactions, sellers may be less willing or unable to provide warranty and indemnity protection (and even if given, due to the nature of the transaction, it will be questionable whether the sellers can stand behind it), buyers may consider ‘synthetic’ W&I insurance policies.
Depending on where the value breaks, lenders are also sometimes asked to roll over some of their value into a new structure (anticipating a better rate of recovery than would be the case on an upfront cash deal).