by: Kimberley Wong - Senior Associate
4 June 2022
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The impacts of COVID-19 are global, and the efforts to reduce the spread of the virus are creating business disruption that should be considered from a legal standpoint. Whilst the impact of COVID-19 on M&A activity in New Zealand and around the globe is not yet known, there are certain steps that vendors and purchasers should consider.
If clients have any questions regarding COVID-19 and compliance with their transaction documents or the implications on potential transactions, clients are encouraged to contact their relevant adviser to discuss.
Consideration in Acquisition Documents
Timing Transaction timelines are likely to be interrupted and delayed. Purchasers and vendors should expect and prepare for this.
Purchasers may be reluctant to commit to an acquisition given the uncertainty of the performance of the target entity as a result of COVID-19. Similarly, if there is any element of deferred consideration, vendors may be reluctant to commit.
There are also practical issues that may result in transaction timelines being delayed.
Due Diligence
Purchasers should expand their due diligence investigations to cover potential issues arising as a result of COVID-19.
Representations and Warranties
Both vendors and purchasers should ensure that they understand the risk allocation in the sale and purchase agreement for any losses the target entity may incur arising out of the spread of COVID-19.
Interim Covenants
Vendors typically have obligations in relation to the running of the business between signing and completion. As a result of swift responses needed to address COVID-19, a vendor may undertake actions between signing and completion that breach these covenants.
Material Adverse Change
Force Majeure
Consideration in Loan Documents
Availability of Financing Borrowers contemplating new committed or other debt financing should be aware of the evolving impact of COVID-19 and their ability to not only obtain debt financing but the impact on the negotiation and documentation of debt financing.
Expiry of Existing Financing Borrowers should also consider any pending maturity dates and if they have facilities maturing in the next 12 months, bringing forward discussions with lenders about extending those maturity dates. Similarly, borrowers with a need to increase facility limits in the next 12 months should initiate discussions with their bank about their requirements.
On-Demand Overdrafts and Undrawn Amounts In the case of any uncommitted financings, borrowers should consider the practical impact of tighter debt markets, including the ability to draw on ‘on demand’ overdrafts. Borrowers should also be aware that lenders will have the ability to decline funding existing committed lines in the event of a company’s material decline in performance or where a specific condition precedent cannot be met.
Financial Covenants and Equity Cures We are expecting that many borrowers will incur some COVID-19 related expenses in the coming year. Borrowers should give due consideration whether such additional expenses create stress on testing financial covenants and whether there is any ability to treat such expenses as non-recurring, one-time or unusual charges and therefore outside the covenant calculation.
Many loan agreements also permit shareholders to contribute equity to cure a financial covenant default. If there is a risk of financial covenant default, borrowers should speak with their lenders and relationship managers as soon as possible as to whether such rights can be exercised.
Compliance with General Covenants We expect that many lenders will speak with borrowers about the potential impact of COVID-19 on their performance and almost all loan agreements will require borrowers to provide responses. A number of loan agreements will also require that borrowers make positive representations, including if they:
In addition, borrowers should review their loan documentation in the context of representations, material adverse changes, and other relevant provisions to avoid any potential default.
Lender Meetings The New Zealand market is unique in that borrowers and lenders retain a strong personal relationship and banks try to work closely with their customers and maintain regular contact. Borrowers should however be aware that many loan agreements require, or permit lenders to request, companies to hold annual or quarterly meetings with lenders.
Management should anticipate that lenders will use these meetings as an opportunity to understand various risks and mitigation strategies, and should be prepared to describe such risks and strategies.
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