The Pérez-Llorca/IE Commercial Law Chair analyzes the impact of COVID-19 on M&A operations

The latest session of the Pérez-Llorca/IE Commercial Law Chair, organized in conjunction with the North American firm Skadden, Arps, Slate, Meagher & Flom, examined the current situation of the M&A sector. In particular, it explored the biggest trends in the world of M&A that have come about in response to COVID-19. The session was opened and moderated by researcher and professor at IE University, Sara Sánchez, who holds a PhD in law. Guest speakers included Pedro Marques da Gama, partner of Pérez-Llorca, and Paola Lozano, partner of Skadden, Arps, Slate, Meagher & Flom, based in New York.

Sara Sánchez launched the event by discussing the consequences of the COVID-19 health crisis, asking the speakers about the impact it will have when it comes to structuring M&A operations and seeking capital injections.

Next, Pedro Marques da Gama and Paola Lozano began analyzing the current situation of M&A operations in Spain, the United States and Latin America, agreeing that the crisis has decreased both the number of M&A operations and their value. The speakers also indicated that the tourism and transportation sectors, among others, have taken a greater hit, showing that the economic impact of the virus has been disproportionate.

They went on to explain the importance of using contractual and legal mechanisms to tackle exceptional situations right now, such as a force majeure or a clausula rebus sic stantibus. In certain situations, these clauses can allow a party to refuse to close a contract, with the defense that it was impossible to fulfill it, for example because of the effects of COVID-19. Marques da Gama, the Pérez-Llorca partner highlighted the clausula rebus sic stantibus in particular, a clause that has been discussed in past editions of the Pérez-Llorca/IE Commercial Law Chair. Lozano also addressed the analysis of the material adverse effect clauses—referred to as “MAC/MAE” in the North American jurisdiction—and the difficulties they pose when regulating a situation as extraordinary as the COVID-19 crisis. She continued, explaining the different elements that the New York courts would evaluate to determine the rights of the parties and the allocation of risk between them.

Later, the two partners went into detail about the new opportunities that the health crisis has generated and could continue to generate in the near future. They noted that, in times of crisis, there’s always a large number of investors looking for companies with liquidity problems in order to access share capital at deflated costs. Some of the most popular investment formulas in these cases include debt that’s convertible into equity, and formulas of deferred value like earn-outs and closing price adjustments. In this way, communities gain an injection of liquid assets that allow them to survive the current crisis, and the investor community ensures their access to shareholders—with a relatively controlled risk.

On this point, Lozano emphasized that the current crisis is not financial. In other words, banks aren’t actually being gravely affected by the crisis. Nevertheless, she noted that if the current crisis continues the way it’s going indefinitely, it’s likely that financial institutions will start to feel its effects. Lastly, Lozano indicated that another structure that investors are currently using to lead in times of uncertainty is the establishment of joint ventures or similar vehicles, which allow them to safeguard liquid funds and not compromise the capital structure. At the same time, they are able to expand their platforms and market penetration by means of strategic alliances.

Following these interventions, a Q&A session took place, led by Sara Sánchez, in which the speakers addressed questions posed by attendees.