COVID-19 as a Material Adverse Effect (MAE) Under M&A Agreements

Ramesh K. Vaidyanathan, Advaya Legal

In May 2020, the private equity firm Sycamore Partners called off the $525 million deal to acquire 55% in L Brands-owned Victoria’s Secret citing the economic downturn brought about by the Covid-19 outbreak. Similarly, Marathon Petroleum’s sale of its Speedway convenience stores fell through after the oil price collapsed, Xerox Holdings called off its pursuit of HP and SoftBank Group Corp. is backing away from its planned bailout of WeWork. For the first time since September 2004, no merger or acquisition deal worth more than $1 billion has been announced worldwide according to data provider Refinitiv, as the new coronavirus (Covid -19) pandemic stifled global M&A. The dearth of mega deals has come as countries across the world have shut down their economies in their war against the pandemic. Companies are walking away from announced transactions amid changed deal conditions and high levels of uncertainty.

The Covid-19 outbreak has disrupted business at an unprecedented level right from restricted movement of people, goods and services across countries and regions, lockdown restrictions and policy measures to contain the pandemic. The prevailing uncertainty and volatility has mutated the engines of economic growth globally, impacting pretty much every business activity in some way or the other. Across various sectors, businesses looking at organic growth through strategic acquisitions have hit the pause button. Added to the current volatility is the increasingly protectionist measures taken by governments across the world to restrict the free flow of foreign investment. The pandemic and its aftermath are likely to bring about fundamental shifts in the M&A landscape.

Here is an overview of the Indian perspective.

The Due Diligence Process

Due diligence is a process of investigation of a potential investment opportunity performed by investors, which is an indispensable element of any M&A deal. While the traditional manner of conducting due diligence involved visiting the company’s premises and examining documents, there has been a gradual shift over the last few years to migrate to a virtual data room hosting the required documents online and allowing legal counsel to access the data room in a secure manner. This will pretty much become the standard norm moving forward, given the challenges associated with travel/physical meetings and social distancing.

The pandemic has also demonstrated the importance of boilerplate clauses such as force majeure and the impossibility of performance of contractual obligations. There will be greater scrutiny on the target company’s treatment of force majeure in all contracts, warranties and indemnities, its ability to perform its contractual obligations and manage its working capital and pay off its debts and compliance with governmental regulations.

Covid-19 as a “Material Adverse Effect”?

Companies are facing a tough call between jamming the brakes or stepping on the gas with respect to ongoing deals. The focus is now shifting to a clause that provides the prospective purchaser an opportunity to walk away from the transaction or withdraw from the on-going negotiations. The Material Adverse Effect/Change (‘MAE’) as this is referred to or the termination clause typically allows a stakeholder to refuse to close a transaction in the event of any material adverse change in the target company that has severely threatened and impaired the overall earnings-potential of the target.

Whether a MAE has been triggered or not requires to be assessed on a case by case basis, depending on the impact of the event on the target company and how this clause has been drafted in the contract. Indian courts have generally been reluctant to excuse buyers from their obligation
to consummate a transaction on the basis that a MAE has occurred and have restricted the scope of a MAE clause to ‘any event or activity making it impossible or restricting any party to perform its obligations’. It will be interesting to watch how the jurisprudence evolves given the current pandemic outbreak’s impact on the global economy. Buyers are likely to insist on enlisting events such as pandemics, lockdowns, closure of international and domestic boundaries as MAE events, whereas the seller will push for a narrower MAE. As a result, we expect to see heightened negotiation of this clause in the wake of the COVID-19 pandemic as well as an uptick in associated litigation.

Change in Law

New measures are being announced by the government almost on a weekly basis. As such, the allocation of risks on account of a ‘change in law’ is likely to be keenly contested.

Representations, Warranties and Indemnities

While representations and warranties clauses are carefully drafted in M&A transactions, we will likely witness parties negotiating on specific representations relating to financing options, cybersecurity and data privacy measures and contractual obligations in the event of a force majeure and post- termination consequences.


A major clause that needs to be negotiated is the indemnity insurance and the policy coverage. Though insurance companies seek to indemnify the losses/covering a peril,  many exclusions have been brought in.  Such exclusion clauses cover every loss arising out of  COVID-19 and these clauses can only be limited by leveraging the operational profile of the target company for better negotiation.


Parties will increasingly rely on e-execution and e-signing of the agreements and complying with the e-stamping and registration formalities, where required.


Internal corporate approvals such as from the board, audit committee or shareholders may have to be obtained through videoconferencing or audio-visual means. Regulators such as the Reserve Bank of India, Securities Exchange Board of India and the Competition Commission of India are increasingly permitting filing of applications electronically and/or through the video conference route. While this process may get easier over time, approvals from state / local / municipal authorities may continue to pose a challenge in the absence of robust online e-filing structures.

Events between Execution Date and the Closing Date

Transaction documents typically contain covenants and undertakings for the targets regarding their conduct (which are mostly operational in nature) during the period between execution and closing. A common covenant mandates the target to continue to undertake its business “in the ordinary course of business” which is essential to ensure that the target’s business can go about its normal operations without eroding the value of its business. Typically, these include maintaining the status quo on employee compensation or hiring/termination, producing loans or freeze capital expenditure till the consummation of the transaction or with the permission of the buyer. Given the outbreak and the crippling effect of the lockdown in India, suitable exceptions to these clauses may have to be carved out to enable the target to continue its business in a seamless manner.

Moving Forward         

As countries across the world battle it out to mitigate the effects of Covid 19, uncertainty about prospects and unquantifiable risks in volatile business environments have to be factored in by the dealmakers. It is expected that this crisis may also precipitate a change in the outlook of the consumers and result in a realignment of priorities at governmental level towards sectors such as healthcare and pharmaceuticals and allied fields such as medical research or medical devices. Parties should take a pragmatic approach while contemplating acquisitions or drafting transaction documents and put together a balanced framework for business to function in the middle of an evolving set of events.

Ramesh K. Vaidyanathan is the Managing Partner of Advaya Legal, a broad based full service commercial law firm in India with two offices in Mumbai and one in Delhi NCR. He can be reached here.

Photo Credits: Kiyoshi Ota/Bloomberg

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