As the Covid-19 crisis deepens, and the number of positive cases and casualties continue to mount rapidly, governments across the world are enforcing stringent lockdown and social distancing measures. With the engines of economic growth grinding to a halt, the pandemic has mutated into an economic crisis, plunging the global economy into an unparalleled recession. India is no exception, and mergers and acquisitions (M&A) in India is sure to sniffle, snuffle and sneeze, at least in the short-term. From a legal standpoint, we believe that there will be consequent changes and fundamental shifts in the M&A landscape.
Covid-19’s impact has already started to affect M&A activity in India. Corporates are facing a tough strategic choice between jamming the brakes or stepping on the gas, with respect to ongoing deals. The key drivers of decision making range from change in business outlook, concerns regarding valuation, liquidity crunch due to reduced lending by banks and consequent reallocation of surplus funds. Cross-border transactions have been severely impacted due to the lockdown and closure of international borders.
In sectors such as aviation, hospitality and tourism, where there has been a direct business impact, parties may look to walk away from the transactions, amidst long-term uncertainties. In other sectors such as consumer goods, manufacturing, etc., where the impact is less severe, buyers may reconsider valuations or seek downward price adjustments. This becomes particularly relevant, given that January 2020 saw the Indian stock markets at an all-time high and buyers may wish to re-consider valuations.
In this context, we are likely to see the invocation of the ‘Material Adverse Effect / Change’ (MAE) clauses in the investment / acquisition agreements, which could allow purchasers the right to walk away from transactions. Whether or not the Covid-19 crisis has actually resulted in an MAE will have to be assessed on a case by case basis, based upon the scope of the MAE clause in the respective contracts, the industry / sector and geography in which the target company / business operates, as also specific exclusions to the MAE clause. Even where an epidemic, pandemic or health emergency are not specifically excluded, other exclusions (e.g. events having industry-wide impact, general economic conditions, change in law or force majeure) could potentially exclude the application of the MAE clause to the present crisis.
Where parties intend for the transaction to proceed to completion, the parties’ ability (particularly the seller’s) to fulfil the pre-closing covenants and conditions precedent will be significantly impeded on account of the lockdown. Significant delays can be expected in obtaining governmental, regulatory and third-party approvals (including from lenders and contractual counterparties), as offices, banks and government departments are either closed or are operating with limited staff. Courts (including the NCLT) are either shut or are only hearing urgent cases, M&A and group re-structuring through court-based schemes are also likely to be delayed, particularly given the existing backlog of cases. From a practical standpoint, physical verification of inventory for consideration adjustments for working capital may not be feasible and stamping and registration of documents would be an issue in the near-term, given the current restrictions. In view of these, parties would need to consider extending the ‘long stop date’ for closing under the agreements.
Additionally, parties may need to re-look at certain covenants, to be able to respond to the present challenges. Sellers may want to reconsider the standstill obligations and the various actions that require the purchaser’s consent, to enable a dynamic response to the crisis. Purchasers would need to bolster their right to seek information relating to the target business from the seller (including specifying detailed formats and negotiating specific warranties and indemnities), given that site access / audit may not be feasible. Purchasers are also likely to carefully re-consider the terms and conditions of employment, appraisal cycles, employee commitments, new hires etc.
In the event that the Covid-19 crisis and the lockdown conditions were to continue for a significant duration so as to make closing impossible, parties could consider flexible alternative interim structures to give effect to their commercial understanding, and proceed to close the transactions once the crisis abates.
The lockdown period and the period immediately thereafter are most likely to see a downward trend in M&A activity in India. In our crystal ball gazing, we see the following indicative outcomes:
Several clauses in the transaction documents (viz. warranties, conditions precedent, MAE and consideration adjustment) are likely to be heavily negotiated and the focus is likely to be on the following provisions:
While the short-term effect of the Covid-19 crisis on the M&A landscape will be drastic, it is expected that this crisis would also precipitate a change in the outlook of consumers and a realignment of priorities at the level of the government towards sectors such as healthcare and pharmaceuticals, as well as allied fields such as medical research, medical devices, etc. Not only would this spawn opportunities for increased localisation, but it is also likely to result in further consolidation.
Several measures being undertaken by the government as a response to the Covid-19 crisis, such as permitting the practice of telemedicine through video, phone, internet based platforms, and facilitating retail sale of drugs to the doorstep of the consumers, together with the innovations in technology and artificial intelligence, would result in newer business opportunities within the ‘health-tech’ space.
In addition, considering that a large proportion of India’s population is without any insurance of any kind, a crisis of this scale and nature is likely to underline the gravity of the need for obtaining insurance, including health insurance, thus potentially resulting in significant uptick in the insurance sector and consequently, increased M&A activity. Further, essential sectors such as healthcare, pharma, FMCG, IT, etc., are also likely to see a boom, and M&A activity is sure to follow.
The present crisis is a humanitarian one, but it has significant business and economic impact. One hopes that the crisis abates quickly with the discovery and delivery of a vaccine so that normalcy can return none too soon. In the meanwhile, stay safe and work from home.
 Among others, Moody’s, S&P and CRISIL have dramatically reduced India’s GDP projections for FY 2020-21.
 In order to increase the attractiveness of the Indian equity market, Finance Act, 2020 has amended the Income-tax Act, 1961 to allow dividend or income from units to be taxable in the hands of shareholders or unit holders and inter alia domestic company or mutual funds are not required to pay any DDT. To remove the cascading effect, the amendment has allowed deduction for the dividend received by holding company from its subsidiary.
 Section 7 of the Finance Act, 2020 amending Section 10(23FE) of the Income-tax Act, 1961.
 Rule 2 of the Companies (Meetings of the Board and its Powers) Amendment Rules, 2020 available at http://www.mca.gov.in/Ministry/pdf/Rules_19032020.pdf.
 CCI Notice dated March 30, 2020 available at http://www.cci.gov.in/sites/default/files/whats_newdocument/30thcircular.pdf.
 CCI Press Release No. 48/2019-20 dated March 19, 2020 available at http://www.cci.gov.in/sites/default/files/press_release/PR482019-20.pdf.
 Ministry of Health and Family Welfare notification dated March 26, 2020 available at http://www.mohfw.gov.in/pdf/Doorstepdelivery26B.pdf.
 Press Release by Press Information Bureau dated May 8, 2015 available at http://pib.gov.in/newsite/PrintRelease.aspx?relid=121445.
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