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COVID-19: Transactional due diligence in a post COVID-19 world

Insights / 27-07-2020

It is clear that COVID-19 has had an impact on M&A deal flow globally across many sectors.

However, with lockdown easing and deals picking up it is imperative that buyers are addressing the aspects of due diligence highlighted by the many business changes that COVID-19 has brought about.  The content of due diligence investigations must change to look more carefully at issues previously considered low risk such as the security of supply chains and events based termination of material contracts.

While this Q&A focuses on considerations from a buyer’s perspective, a seller or target company might also find it helpful to understand the buyer’s approach in respect of COVID-19 issues. Identifying the buyers potential areas of concern early on may allow the seller to prepare in advance for a future or potential deal and may also assist the seller to finesse and improve its existing operations.

What COVID-19 related issues should we consider incorporating into our customary due diligence?

Buyers should add to, and customise, their usual due diligence in order to understand the impact that COVID-19 has had and may continue to have on a target company’s business. Although not an exhaustive list, some key issues to consider and incorporate into your due diligence investigation might include:

    Business Operations

  • What operational changes have occurred within the target’s business as a result of COVID-19?
  • What operational decisions did you make to manage the impact of COVID-19?
  • Has the pandemic had an impact on operational costs?
  • How prepared is the target business for a second wave of the pandemic should one arise?
  • Has the target company updated its business plan to reflect changes caused by COVID-19?

    Commercial Leases
  • What is the current position with property leased by the target company?  Has the target business pushed for force majeure or has the landlord sought to terminate?
  • Has any rent holiday or rent deduction been agreed with the target company’s landlord(s)?

    Insurance
  • Has COVID-19 impacted the terms and conditions of any insurance maintained by the target business e.g. cost, coverage, renewability etc.
  • Have any COVID-19 related insurance claims been made (or likely to be made) by the target company? 
  • Where a claim has been made has the target company complied with the notice (and any other) requirements under the applicable insurance policy?

    Employees
     
  • Has the target business complied with COVID-19 related legislation relating to the health and safety of its employees? 
  • What measures has the target company adopted and applied to ensure the safety of its employees, including those working remotely?
  • Have there been any issues with remote working?  What has been the impact on relationships with third party suppliers, service providers, customers etc.
  • Has the target company received any complaints or employee claims for failing to provide a safe work place in relation COVID-19?
  • How many employees are working remotely and what impact has this had on the target’s business?
  • Have any employees been furloughed? 
  • Has COVID-19 caused any workforce disruptions for the target company such as a reduction in staff, redundancy or material changes to terms and conditions of employment?
  • If the target company is in receipt of funding under the UK’s Coronavirus Job Retention Scheme what steps is the target company planning to take to manage the positon once this funding ends?

    Supply Chain
     
  • Has COVID-19 impacted the target company supply chain?  How?
  • Has the target company been unable to manufacture goods or provide services as a result of the impact on its supply chain?
  • Has the target company sourced alternative suppliers or providers where product or service delivery has been impacted?
  • Has the impact of COVID-19 on the supply chain increased costs for the target company either in respect of production or as a result of the difficulties faced by suppliers/service providers?

    Material contracts
  • Has the target company issued or received any force majeure notices to allow for non-performance of contractual obligations due to business interruptions caused by COVID-19?
  • Have any material contracts been renegotiated as a result of COVID-19 e.g. modified, accelerated, or have material terms of any such contracts been waived?
  • Has there been any threatened or actual breach or default of any of the target company’s material contracts due to business interruptions caused by COVID-19?
  • Has COVID-19 impacted the revenue generated (e.g. reduced customer spend) on any of the target company’s material contracts?
  • Have any material contracts been terminated (or received a notice to terminate) due to COVID-19?

    Debt Obligations
     
  • Has the target company been able (and will it continue to be able) to comply with the warranties, representations and covenants in its existing facility arrangements with its lenders?
  • Has the impact of COVID-19, or the target company’s response to COVID-19, triggered any default (or events of default) or notification requirements in the target company’s existing facility agreements?
  • Has the target company agreed any amendments to any facility arrangements with its lenders?

    IT Systems
     
  • How have the IT systems of the target company coped with remote working and any changes to business operations?
  • Has there been (or will there be) any investment into IT to support (continued) remote working? 
  • In light of COVID-19 have any changes been made to existing disaster recovery plans?  What cost implication does this have for the target company’s business?

    Government Funding
     
  • Has the target company taken advantage of any of the government funding or tax incentives as a result of COVID-19?
  • Is the target company dependent on the government funding?

    Compliance with laws
     
  • Is the target complying with all applicable laws, regulations and guidelines which have been implemented as a result of COVID-19 e.g. employment, data protection etc.?

Although COVID-19 has produced challenges to the due diligence process and raised new areas of concern for the parties to consider, a proper assessment of these issues now will allow the parties to better understand how COVID-19 has impacted (and may continue to impact) a target company.  For deals in a post COVID-19 world this is crucial as it will allow the parties to assess value and apportion risk to the satisfaction of both parties.

We are still facing challenges around physical inspection during COVID-19, how can we address this?

Inability to access or travel to seller sites and property has been a challenge for many whilst trying to complete their due diligence even with the recent relaxation of lockdown.  Consider alternative methods such as drone technology, google Earth, satellite images and similar technology can still assist. 

Whilst the use of such technology may not be a substitute for an on-site physical inspection such methods coupled with a careful consideration of historical site information may allow a buyer to ascertain any risks and address any concerns it may have.  Where the use of such technology proves difficult (e.g. inability to access airspace above the site) or the results of such inspection provide insufficient comfort for the buyer the parties might agree to address this by way indemnification protection.

This Q&A does not constitute legal adviceShould you have any queries, or you would like our assistance in considering the issues raised in this Q&A then please do not hesitate to contact the author of this article or your usual contact at Ince. Our team stands ready to assist.

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Mona Patel

Mona Patel Partner

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