The emergence of the COVID-19 pandemic has forced buyers, sellers and their advisers to adapt to the rapidly-changing environment in which M&A transactions are now being pursued, evaluated, negotiated and closed.
The ensuing post is the first in a three-part series intended to provide a focused review of certain fundamental considerations applicable to M&A transactions in Western Canada – as impacted by the pandemic. Read part two of this blog series on the topic of Closing Risks and the Interim Period. Read part three of this blog series on the topic of Closing Mechanics and Purchase Price Adjustments.
Acquisition Financing
In light of the pandemic, purchasers relying on the availability of acquisition financing need to be more diligent than ever and work collaboratively with their lender(s) to ensure requisite funding is in place for closing — and on terms conducive to the current, and forecasted, operating environment.
Whether a purchaser is relying on new or existing credit, the pandemic has created an environment which requires purchasers to be proactive to ensure that they have alignment with their lender on the status of any pre-funding conditions, the general availability of funds, and any other matters which may impact the pending acquisition and/or future compliance with the underlying terms of the credit facility.
As one example, most credit documents will include a “Material Adverse Effect” (MAE) clause which would, among other things, typically relieve the lender from its obligation to advance any credit if a MAE has occurred with respect to the purchaser. As will be discussed in greater detail in Part 2 of this series, the application of most MAE clauses due to events relating to the pandemic is not a black and white assessment and therefore, purchasers should take additional steps to obtain positive confirmation from their lender(s) that there are no impediments to funding.
Similarly, purchasers need to be cognizant that there are various internal and external regulations that may impact their lender and its availability to extend credit. Whether the purchaser is dealing with a large Schedule I bank or a small private lender, it is likely that the pandemic has impacted the lender which may in turn limit the lender’s ability or willingness to extend additional credit. The foregoing considerations are of greater importance when the credit being sought has not yet been committed to the purchaser.
Aside from the above limited examples, there are a myriad of other factors which could ultimately have an impact on the availability, and terms, of acquisition financing for transactions proceeding and closing during the pandemic. Accordingly, it is important for purchasers to have open lines of communication with their lender to uncover potential issues before the purchaser has unconditionally bound itself to close the related acquisition or otherwise committed itself to a significant break fee.
Purchasers relying on acquisition financing during the pandemic also need to consider their continued ability to comply with their financial covenants (and other obligations) under the applicable credit documents. In most cases, this assessment will require the purchaser to take into account the current and forecasted impact of the pandemic on its existing business and that of its target. Prior to adding leverage for a potential acquisition, it will be important for purchasers to closely review their existing or proposed financial covenants to ensure appropriate allowance is made for the added leverage, combined with the extraordinary or unusual costs and expenses which may be incurred, or revenue reductions experienced, due to the pandemic.
While the situation is fluid, and is affecting businesses in dramatically different ways and varying degrees, working with qualified legal counsel will allow purchasers to understand what options they have and to ensure they are benefitting from quickly evolving “market” practice and terms.
Due to the added strain on government resources and private business which has resulted from the pandemic, purchasers will also need to be cognizant of the extended time frames and other complexities which may be associated with obtaining government authorizations, security registrations, and third-party consents/waivers which may be required as a condition precedent to the advance of any acquisition financing.
If you have any questions with respect to the above, please reach out to the author(s), any member of the M&A practice group or your current contact at MLT Aikins.
This article is of a general nature only, is not exhaustive of all possible legal rights or remedies and is only current to the date it was posted. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.