Corporate Transactions: Pandemic Has Changed How Deals Get Done
NEW ORLEANS — Like every other facet of our day-to-day lives, the onset of the COVID-19 pandemic in March 2020 brought markets to a standstill. Deals were halted as companies, lawyers and bankers figured out how to make the new normal work from their basements, guest bedrooms and kitchen tables. However, once Zoom logins were memorized and new home “office” backdrops were properly arranged, the markets came roaring back in the second half of 2020, and the entirety of 2021 has seen deal flow surpass pre-COVID levels. If you are in the market to grow your business through an acquisition, bring in a new investor or obtain new financing, here are the ways the COVID-19 pandemic has changed how your next deal will get to close.
New Areas of Diligence
The COVID-19 pandemic has become its own topic of due diligence and is just as important to understand as a company’s financial statements or organizational chart. The Paycheck Protection Program (PPP) was widely used to support businesses of all shapes and sizes and understanding whether a company received a PPP loan and whether that loan was forgiven should be on every due diligence checklist. If your company received PPP loans or other loans or grants through the various pandemic relief legislation, be prepared to disclose the relevant documentation. The SBA, the arm of the government which disbursed PPP loans, has restrictions on how companies can undertake a change of control with a PPP loan outstanding, so engaging sophisticated M&A counsel is critical.
Another important area of diligence brought on by the pandemic is understanding how a company reacted to the pandemic. This inquiry goes beyond just understanding the financial impact of the pandemic on the target business, but also looks to how a company changed its day-to-day operations and which of those changes are permanent. For instance, companies that were able to go fully remote may no longer have the office space needs they did pre-pandemic and understanding the relevant leases can be an important due diligence topic. On the other hand, companies that couldn’t go fully remote will have their own changes to analyze, such as what steps the company took to protect their frontline workers and how they utilized technology to decrease direct face-to-face interactions with customers.
With the widespread release of effective vaccines in the United States, we have entered a new stage of the pandemic that has led to additional, but equally important, due diligence topics. Companies should expect to be asked how they are maintaining access to their vital supplies amid the ongoing constraints on the global supply chain. Further, with the “Great Resignation” ongoing, companies should be ready to discuss what steps they are taking to recruit and retain top talent. Finally, the release of the vaccines and recent federal vaccine mandates have opened another line of inquiry into the vaccination status and rules, or mandates issued by a company.
Getting the Deal to Close
In addition to the expanded scope of diligence, parties should be ready for a different transaction experience in the post-COVID world. Buyers, investors and lenders should be prepared to rely even more on virtual data rooms than they did pre-pandemic. Further, you should expect zoom management presentations, which may take longer and require additional detail depending on the complexity of the relevant company. Finally, parties should also be prepared to negotiate over Zoom and WebEx. While not uncommon pre-pandemic, virtual negotiations are now ubiquitous, regardless of the size of deal.
Though moving to a virtual due diligence and negotiation process has led to efficiencies, virtual diligence and negotiations can more easily lead to misunderstandings, as body language is difficult to convey through a 2×2 inch box on a screen. This unfortunately makes it difficult for parties to build trust, which can lead to protracted diligence and negotiations. To combat this risk, it is now even more important to be thoughtful about how you are communicating both within your deal team and with the other side.
During the diligence process, extra time spent ensuring the data room is fully populated and laid out in a user-friendly format can both help expedite the diligence process but also show a lender, investor or buyer that a company has nothing to hide. When the deal progresses to negotiations, an effective deal team should coordinate before a negotiation call just as they would a sit-down negotiation meeting. Deal teams should also be clear about who can have side bars with the other side just as they would if the negotiation were in person. A text or email without buy in from the entire deal team can distract and derail negotiations and fuel a lack of trust between parties.
Once the deal is negotiated, you can forget about receiving a packet of signature pages and signing page after page until your hand aches. The pandemic has accelerated the adoption of DocuSign and other e-signature platforms that make it quick and efficient to execute deal documents with a few clicks of the mouse. These platforms have also made virtual closings even more commonplace. Though more efficient, these virtual closings mean less opportunity for a congratulatory dinner and drinks after the close of a transaction.
With COVID case counts thankfully declining and more widespread adoption of the vaccines, we hope the worst of the COVID-19 pandemic is behind us. However, we expect the changes spurred by the pandemic to become the new normal. By taking the time at the beginning of your next transaction to proactively prepare and adopt these changes, you will be in position to have a smooth transaction and successfully close.
By Noah B. Kressler & Jean-Luc Delpy, both attorneys in Baker Donelson’s New Orleans office. They can be reached at firstname.lastname@example.org and email@example.com.