COVID-19 has claimed many M&A deals in March, the largest being Xerox Holdings Corporation’s termination of its proposed $32.85 billion hostile takeover of HP Inc. on March 31, 2020. Xerox wrote in its press release that “[t]he current global health crisis and resulting macroeconomic and market turmoil caused by COVID-19 have created an environment that is not conducive to Xerox continuing to pursue an acquisition of HP Inc.” Quite a few companies are finding themselves in a similar situation, with reports of deal terminations and delays continuing through April and into May.
As of April 8, 2020, 66 M&A deals were terminated since the World Health Organization’s declaration of the pandemic on March 11, 2020. These included the $32.85 billion Xerox-HP deal and the $3 billion WeWork-Softbank tender offer. Some analysts report that U.S. volume of M&A deals in March 2020 was only about half of what it was in January 2020, and Canadian deal activity was down almost 57 percent in the first quarter of 2020 as compared to a year ago, all due to COVID-19.
However, the impact of the pandemic on pending deals may be overstated, given that many pending U.S. deals are proceeding as planned. Out of 57 of deals valued at US$1 billion or more announced in Q1 of 2020, six already closed, 49 are still pending without any publicly announced changes, and only two have been terminated or disputed so far.
Other terminations will follow in the days to come, and many of the pending deals are delayed. No one will be surprised to see price adjustments negotiated into the terms of those that do end up closing.
If parties do not mutually agree to terminate, the unilateral terminations may be based on a material adverse effect (MAE) carveout, failure to operate in the ordinary course, or even the doctrine of impossibility. MAE carveouts will now come sharply into focus for all M&A parties. Most MAEs have not typically contained express carveout language relating to pandemics, epidemics, or COVID-19, but deals signed in April and March of 2020 have indeed been including these carveouts into their MAE clauses.
A few recent examples of these clauses include:
1. Asset Purchase Agreement between Orgenesis Inc. and Tamir Biotechnology, Inc. (April 12, 2020):
“Material Adverse Effect” means any change, event, circumstance, condition, fact or effect (each, an “Effect”) that is, or would reasonably be expected to become, individually or taken together with all other Effects, materially adverse to (i) the business, results of operations, financial condition or assets of Seller or the Business, or (ii) the ability of Seller to consummate the Transactions, in each case, except to the extent that any such Effect results from . . . (e) any act of war, act of terrorism, natural or man-made disaster, act of god or pandemic (including the COVID-19 virus). . . .; provided, that any Effect referred to in the foregoing clauses (a), (b), (c), (e) and (h) above shall be taken into account in determining whether a Material Adverse Effect has occurred or would reasonably be expected to occur to the extent that such Effect has a disproportionate effect on the Business as compared to other participants in the industries in which the Business operates.
2. Agreement and Plan of Merger between Turning Point Brands, Inc. and Standard Diversified Inc. (April 7, 2020):
“TPB Material Adverse Effect” means any effect that would prevent or materially delay the ability of TPB to consummate the Contemplated Transactions; provided that any effects resulting from the COVID-19 crisis shall not constitute a TPB Material Adverse Effect for purposes of this Agreement.
3. Membership Interest Purchase and Sale Agreement between Carbon Energy Corporation, Nytis Exploration (USA) Inc. and Diversified Gas & Oil Corporation:
“Material Adverse Effect” means any event, occurrence, fact, condition or change that is or would reasonably be expected to be, individually or in the aggregate, materially adverse to (a) the business, results of operations, financial condition, operations or assets of the Company Entities considered as a whole, or (b) the ability of Sellers to consummate the Contemplated Transactions; provided, however, that none of the following shall be deemed to constitute, and none of the following shall be taken into account in determining whether there has been or would reasonably be expected to be a Material Adverse Effect: (a) any adverse change, event, development, or effect arising from or relating to: . . . (ii) national or international political or social conditions, including the engagement by the United States in hostilities, whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any military or terrorist attack upon the United States, or any of its territories, possessions, or diplomatic or consular offices or upon any military installation, equipment, or personnel of the United States; natural disasters, weather conditions, outbreaks of disease, epidemics and pandemics (including the CoVid-19 pandemic) and effects thereof, and similar force majeure events . . . and (b) any adverse change in or effect on the Acquired Assets or Operations of the Company Entities that is cured or, if such adverse change is with respect to a Material Contract, waived in writing before the earlier of the Closing Date and the termination of this Agreement.
4. Membership Interest Purchase Agreement between CAPSS LLC and MSG NATIONAL PROPERTIES, LLC (March 24, 2020):
“Material Adverse Effect” means any event, change, circumstance, occurrence, effect or state of facts first occurring after the Effective Date that has a material adverse effect on (a) the Company or the assets, liabilities, results of operations and financial condition thereof, taken as a whole, or (b) Seller’s ability to consummate the Transactions; provided, that any such event, change, circumstance, occurrence, effect or state of facts resulting from any of the following, individually or in the aggregate, will not be considered when determining whether a Material Adverse Effect has occurred for purposes of clause (a) above: . . . (iv) conditions in jurisdictions in which the Company operates, including epidemics, pandemics or disease outbreaks (including the COVID-19 virus), hostilities, acts of war, sabotage, terrorism or military actions, or any escalation or worsening of any of the foregoing . . . provided that any adverse effects resulting from matters described in any of the foregoing clauses (i), (ii), (iii), (iv) or (vii) may be taken into account in determining whether there is or has been a Material Adverse Effect to the extent, and only to the extent, that they have a disproportionate effect on the Business relative to other participants in the industries or geographies in which the Business operates.
5. Asset Purchase Agreement between Silicon Laboratories Inc. and Redpine Signals, Inc. (March 11, 2020):
“Material Adverse Effect” shall mean any event, change, violation or effect that is, or would reasonably be expected to be, materially adverse to the Target Business, financial condition, properties, assets, Liabilities, operations or results of operations of the Group Companies, taken as a whole, but will not include any adverse event, change, violation or effect to the extent arising from: . . . (h) any spread of Novel Coronavirus (i.e. COVID-19); except in the case of each of clauses (a), (b), (c), or (f), to the extent such event, change, violation or effect disproportionately affects the Group Companies relative to other participants in the industries in which the Group Companies operate.
Considering that the likelihood of the second wave of infections and subsequent shutdowns is not insignificant, careful drafting of the MAE clause in currently negotiated or soon-to-be-negotiated agreements is crucial. Buyers and sellers should pay careful attention to the wording of the clause to properly allocate the risk.
It is also important to note that each company’s situation is different and will be evaluated on the facts and circumstances surrounding its particular business. A MAE clause must be tailored to the transaction at hand and the vulnerabilities of the parties involved. It is important to remember that issues stemming from COVID-19 or a similar pandemic may prove disproportionately disastrous for target X, thereby triggering the MAE clause in target X’s case, but not nearly as disproportionally dire for target Y, leaving target Y’s buyer without a MAE out.
 See ANALYSIS: M&A Terminations Are Here, Mostly of All-Cash Deals, Bloomberg Law (last visited May 6, 2020).
 See Most pending US M&A deals are proceeding as agreed, despite COVID-19, White & Case M&A Explorer (last visited May 6, 2020).