DealMakers - Q1 2020
Coronavirus (COVID-19) | considerations for closing commercial transactions during lockdown
by Zeyn Bhyat and Sarah Binge
As a consequence of the current COVID-19 pandemic, South Africa is currently under a nationwide lockdown.
Other countries, both in Africa and elsewhere, have or are in the process of implementing various lockdown and other mandatory social distancing measures to curb the spread of the virus. Many organisations are continuing to operate as best as possible via remote working and reallocation of resources. The current situation creates uncertainty and gives rise to practical challenges for parties to existing (or new) commercial transactions that were signed, and where parties are working towards or are scheduled to “close” during the lockdown period. Parties should carefully consider the effects of COVID-19 on their transaction agreements and work together to find practical solutions in order to manage these. We touch on some of these considerations below.
Timing implications and monitoring of conditions precedent
Depending on the specific conditions precedent to be fulfilled, it may or may not be possible to fulfil those within the originally stipulated time period. In these circumstances, the parties can (and should) agree to extend the deadline for fulfilment. For less material conditions, parties can consider amending the transaction agreement to remove those conditions and, instead, deal with these aspects as closing or post-closing deliverables.
We note that parties may also encounter practical difficulties in respect of fulfilment of those conditions precedent that require engagement with, or cooperation from, third parties such as banks, competition authorities and other regulators. It is likely that there will be an impact on transaction timelines (notwithstanding remote working etc.) attributable to, amongst other things, delayed regulatory processing and extended statutory timeframes for matters to be considered. In such instances, it would be advisable for the parties to engage with these third parties earlier than usual to attempt to understand the impact on transaction timelines, and to arrange and, if necessary, agree to practical solutions to any foreseen issues.
Material adverse change
Many transaction agreements contain a material adverse change (MAC) clause, the purpose of which is to allocate the risk of negative changes to a target or its business between signature and closing between the parties to that agreement. Any MAC provision will depend, amongst other things, on the parties’ appetite for risk, their negotiating power and the impact of certain events (actual or foreseen) on the target. As such, MAC provisions generally include a highly negotiated definition of what constitutes a MAC. These clauses can include, for example, a change in the general financial position or prospects of the target, or events or circumstances impacting on a particular industry, as well as events that meet certain financial or materiality thresholds. In the current circumstances, parties to commercial transactions would need to carefully consider the impact of a MAC clause in their transaction agreement to determine if, and to what extent, the MAC clause impacts on the transaction and, for example, whether a party has a right to terminate the agreement, to walk away from that transaction, or simply to refuse to close the transaction as a result of a MAC. Specific advice should be sought to evaluate ones’ rights and obligations.
Interim period undertakings
In transactions where there is a delay between signature and closing, it is usual for transaction agreements to include restrictions on the activities the seller (or target) can undertake during this interim period. Such restrictions often include a positive obligation to continue to operate the business in the ordinary course. Complying with such an obligation may not be possible in the context of a lockdown, and parties should thus consider whether any amendments to these provisions are necessary to enable the seller to respond to the lockdown and other regulations affecting their industry. Again, specific advice should be sought to evaluate one’s rights and obligations, and generally to ensure that one is not in breach of one’s obligations. No one would wish to face expensive litigation post the lifting of the lockdown.
Warranties and representations
It is fairly common for buyers to insist on repetition of seller's warranties both at signature and at closing. In the circumstances, consideration must be given to the legal impact of repetition of a warranty or representation at closing, during the lockdown. Will this repetition constitute a default or is there a possibility of post-signature disclosure? Whilst these issues are likely to be strong negotiation points in future M&A deals, specific advice should be sought to better understand current rights and obligations.
Electronic execution and exchange of documents
The ability to exchange closing deliverables and sign documents electronically for the purposes of closing a commercial transaction depends on the nature of the transaction and the closing deliverables in question (for example, it is not possible to register property transfers or mortgage bonds during the lockdown) and parties should bear the provisions of the Electronic Communications and Transactions Act, 2002 (ECTA) in mind.
ECTA facilitates both electronic exchanges of documents and their validity, which would include usual closing deliverables. Among other things, ECTA provides that documents in electronic format have legal force and may be binding. If certain documents need to be signed, an electronic signature will often suffice and will be valid if a link can be shown between the sender’s identity and that person’s intent to sign the document sent. It is important to note, however, that there are instances where an “advanced electronic signature” (as defined in the ECTA) is required and there are also exceptions for certain types of agreements that may not be validly concluded electronically, such as an agreement for the sale of immovable property.
Closing of commercial transactions
In the context of closing a commercial transaction, closing obligations may include a requirement to execute and exchange certain specified documents and the requirement to deliver certain original documents to a counterparty – all of which may be difficult or impossible to comply with in the current circumstances. While physical closings are (generally) not currently possible, depending on the type of transaction and the closing deliverables involved, this challenge need not delay closing. In many cases which would ordinarily necessitate a physical closing, the transaction agreement in question would ideally contemplate an electronic closing procedure to be followed by the parties. If a particular transaction agreement does not cater for an electronic closing, or if the closing procedure contemplated is inadequate in light of the circumstances the parties now find themselves in (under lockdown), the parties can (and should) agree either to delay completion, or agree to a new electronic closing process – the validity of the latter would be assured by the provisions of ECTA. In the latter instance, this can be done by way of executing a written closing confirmation between them, amending the provisions of the transaction agreement.
A closing confirmation could detail the virtual closing process and specifically provide that the parties to that transaction can virtually exchange the requisite closing deliverables between them, and set out details of any arrangements in respect of obligations which have been deferred until after the lockdown. For example, where original documents are required to be exchanged, a provision that with effect from closing, the original document is held in trust for the party to whom it is to be delivered, with the party holding the document giving an undertaking to deliver the original document immediately after the lockdown has lifted.
To ensure that closing goes as smoothly as possible, parties should exchange closing documents and agree the form and content of the closing confirmation ahead of time. On the closing date, the parties can then arrange a virtual meeting via an agreed digital conferencing platform (such as Skype for Business™, MS Teams™ or a similar secure platform) where they confirm that all deliverables will be virtually delivered, confirmed as being satisfactorily completed and the (electronically) signed closing confirmation can then be exchanged between the parties at, or immediately after, that virtual meeting, thus confirming that closing has occurred. The closing confirmation should also contain a confirmation by the parties that, by their execution of that closing confirmation, the transaction is agreed as being closed.
Bhyat is a Director and Binge a Senior Associate in the Corporate Commercial department, ENSafrica.