During the last years, the Romanian M&A market was characterized by an upward trend of profile transactions, the year 2019 registering the highest level in the last ten years. Although the negative impact of the 2008 global economic crisis has had long-term repercussions, the M&A market has gradually experienced a significant comeback with essential and significant transactions both in terms of value as well as in terms of the business sector in which they have been conducted.
Although it is easy to predict that the new economic context dictated by the Covid-19 pandemic will generate major imbalances, it should not be neglected, however, that, according to economic rules, any recession also creates business opportunities, and lack of action does not necessarily mean safety in uncertain times. Thus, potential buyers who have capital and financial power will consider the acquisition strategy of other companies useful for the purpose of developing and implementing their own business plans, while the sellers could take advantage of this opportunity to limit any losses or even to capitalize on their efforts to successfully support and carry on the business over time.
Also, an important role could be played by the interest of the entrepreneurs who, lately, have begun to integrate in the development strategy not only organic growth but also the M&A option.
In this context, a brief analysis is required with respect to the main issues that are usually the basis of an M&A transaction and which, in a radically changed economic environment, involve new approaches and perspectives.
1. Preliminary analysis
In times of economic recession, a legal and tax assessment of the target company is more necessary than ever. It is well known that such assessments play a decisive role in carefully and thoroughly investigating, examining and analyzing those issues that need to be known in advance by the buyer and which basically outline the transactional framework.
In this respect, it is advisable for the legal and tax due diligence reports to expand their perspective and to have a greater focus on the effectiveness and use by the target company of business continuity plans and of procedures for the management of economic crises.
Further, the exposure of the business within its field of activity will also be assessed, including by reference to the key partners, suppliers and clients of the target company, as well as the jurisdictions in which they operate, in order to determine how strongly they are affected by the coronavirus pandemic and the impact on the contractual relationship.
Thus, a number of issues are to be considered in the preliminary legal and tax due diligence recommended to be carried out especially in the case of transactions conducted during the period of emergency and during the pandemic, as these are generally listed below.
1.1. Force majeure in commercial contracts
The analysis of force majeure contractual clauses, which until now was subject to general observations, will take on a significant importance. It should be noted that once the fulfillment of the contractual undertakings has been affected, the parties turned their attention to the applicable contractual clauses which could clarify the new terms and conditions of the commercial relationship.
However, it has been proven that the contractually regulated force majeure, which involves either suspending the fulfillment of contractual obligations or the termination of the contract, is not necessarily and always assimilated in the context of the pandemic with an exemption from fulfilling the obligations undertaken. Although epidemics have sometimes been considered as cases of force majeure, the qualification of Covid-19 pandemic as a case of force majeure in each contractual situation concerned is still debatable.
Moreover, of particular interest in this context is also the recently adopted legislative framework which, in addition to providing a specific definition of force majeure, also creates a distinction in the applicability of force majeure to small and medium-sized enterprises whose activity was affected by the decisions issued by the competent public authorities. Thus, it distinguishes between utility contracts (electricity, natural gas, water, telephony, internet) and rental contracts for main or secondary offices on the one hand, and other types of ongoing contracts, on the other hand, establishing specific conditions and procedures for each such situation. In short, if for invoking force majeure in order to obtain deferred payment of utilities or rent it is required, among others, the emergency situation certificate issued by the Ministry of Economy, Energy and Business Environment, in the case of ongoing contracts (of course, other than the ones mentioned above), the law regulates an additional condition, namely the initiation of a preliminary procedure of amicable renegotiation of the contract with the contractual partner, in order to adapt its clauses to the situation thus generated.
Finally, it seems that in case of disagreements arising in the process of invoking the force majeure, it remains to the courts’ assessment whether the occurrence of the event is qualified as force majeure depending on the specific circumstances, the special legal provisions and the situation that the contracting parties knew or were required to know. It should also be mentioned that not even obtaining a force majure certificate issued by the Chamber of Commerce and Industry of Romania represents an absolute certification of the force majeure case, the practice of the High Court of Cassation and Justice proving their censorship on different occasions.
1.2. Emergency certificate
At the same time, special attention should also be paid if the target company has obtained an emergency certificate issued by the Ministry of Economy, Energy and Business Environment. Thus, according to the provisions of the Government Emergency Ordinance no. 29/2020 regarding some economic and fiscal-budgetary measures, economic operators whose activity was totally or partially interrupted based on the decisions issued by the competent public authorities as well as those that prove that, due to the effects of the pandemic, they registered in March 2020 a decrease in revenues with at least 25% compared to the average of the revenues from January-February 2020, can apply for an emergency certificate. It is not to be overlooked that the revenues also include an analysis from a tax perspective for a correct assessment of their calculation and reporting.
In this context, it should be emphasized that the authorized bodies have the power of control and inspection of the documents that served as basis for requesting and obtaining the emergency certificate, and in the event of any reasonable suspicions, the competent bodies are notified in order to establish the necessary measures, according to their competences. Precisely in this regard, a rigorous legal and fiscal analysis of all the aspects that served as basis for obtaining and also using an emergency certificate is extremely important.
1.3. Labor relations
The evolution of labor relations at the level of the target company also involves an increased analysis especially if the employees were affected by the measure of technical unemployment regulated in particular by reference to the emergency situation. Thus, it is worth mentioning that the granting of the technical unemployment allowance during the state of emergency has undergone a series of legislative changes with respect to the beneficiaries, the conditions necessary to be fulfilled for its implementation as well as the related procedures. Special provisions have also been adopted regarding the situation of the parent employee who remains at home for the care of the child in case of suspension of courses or temporary closure of the educational units, flexibility of work schedule, work from home, teleworking, integration incentive, granting of meal vouchers or quarantine leave and allowance. Thus any failure to observe the legal provisions regarding the implementation of the legal measures adopted in the context of the pandemic and the state of emergency as regards labor relations, is subject to significant financial penalties, an aspect which requires a legal and tax evaluation of the implementation of these special measures by the target company.
1.4. Tax and lending matters
In the tax regime, a series of economic and fiscal-budgetary measures were adopted and made available to economic operators to support them during the state of emergency. Generally, these are related to the extension of the payment deadlines for certain taxes, the temporary suspension of the interest and late payment penalties for the payment of the fiscal obligations, temporary suspension or postponement of garnishment procedures for the recovery of budgetary debts with certain exceptions, restructuring, under certain conditions, of the fiscal obligations of the debtors in the context of the provisions of Government Ordinance no. 6/2019 regarding the establishment of fiscal facilities but also measures regarding the loan repayment terms. Also, a series of measures were adopted in order to support the economy, including supporting the lending of small and medium-sized enterprises through state guarantees and subsidizing the interest due on these loans. Being a technical and legislative context and of particular interest, it is vital that in the case of a transaction, the buyer should be aware that any accessing and implementation of these measures by the target company was carried out in compliance with all the conditions and procedures specially regulated in this regard, precisely to prevent sanctions that could be applied afterwards.
1.5. Processing of personal data
Regarding the processing of data with respect to the health status that represents special data, it is to be noted that the National Supervisory Authority for the Processing of Personal Data has made essential recommendations in the context of the coronavirus pandemic and state of emergency, to be followed by operators in the process of processing such data. In this case, a special legal analysis should be dedicated to such a situation if for example the target company processed data regarding the health status of the employees. Otherwise, the sanctions for non-compliance with the processing of personal data are significant.
1.6. Competition matters
Aspects regarding competition matters are a sensitive topic in general, but especially in the particular situation of the state of emergency and of the measures put in place that affect all markets and fields of activity. Thus, the Competition Council has issued a series of recommendations that are part of the common policy, adopted by the European Commission and national competition authorities, regarding the application of competition rules during the pandemic caused by coronavirus. In this respect, it is worth mentioning the rights of traders to limit the quantities of essential products purchased by one person on a single receipt and to modify their working schedule, the right of the producers to establish maximum prices for their products which could limit the unjustified increase of prices at distribution level, , limiting the volume of deliveries under certain conditions. Also worth mentioning are the measures of capping the prices for electricity, heat, fuels and sanitation services established by the Military Ordinance of the Ministry of Internal Affairs no. 4/2020 on measures to prevent the spread of Covid-19.
In this regard, the competition authority points out that this crisis should not be used to raise prices without having an objective justification, to exchange sensitive information (prices, trade policy, etc.), to exclude competitors from the market or to abuse of the dominant position. Thus, the Competition Council has the attribute of verifying all these aspects and of applying sanctions in case of violation of the competition law, being noted that the fines that may be imposed by the authority are significant. In this regard, the need for the legal audit of the compliance by the target company with the obligations regarding competition becomes even more important.
The practice of insurers shows that insurance policies do not cover the risks posed by pandemics. However, it is recommended that any type of insurance policy concluded by the target company should be analyzed in detail in order to identify situations in which the scope of the insured risks could be extended.
2. Considerations on transaction elements
Of particular importance in a transaction between a buyer and a seller would be negotiation and regulating in the transaction documents clauses regarding material adverse change events, to include risks arising from the pandemic as reasons for termination of the agreed transaction should the situation worsen significantly. Although these clauses are not very well assimilated by the sellers, given that the effects of the pandemic have been and continue to be widely publicized and therefore most of the commercial risks could be identified by the buyer, the practice shows that in the case of procurement contracts carried out in similar situations, such clauses were nevertheless regulated by reaching a consensus.
In what concerns the price mechanism and the specific evaluation, such will be influenced by the uncertainty of the short and long term impact of the pandemic on enterprises and on broad fields of activity. In this regard, the parties should consider whether setting a fixed transaction price would not pose too many risks, a solution being maybe to implement a mechanism to adjust the purchase price at the end of the transaction precisely to ensure that the paid price properly reflects the status of the target company at that moment in time. Thus, the evolution of the target company between the signing date of the transaction documents and the completion date would be covered.
Considering that the economic effects of the pandemic remain unpredictable and can thus affect the financial capacity and income of the buyer, it is likely that the seller will consider the use for his own benefit of some price guarantee solutions offered by the buyer, such as parent company guarantees, escrow accounts or even termination clauses along with the payment of compensations.
Most transactions are structured by reference to a "long stop date", which marks practically the last day when certain conditions of the transaction must be fulfilled, otherwise the transaction being considered terminated. In this regard, it is important for the parties to consider the possibility of setting longer terms than usual given an environment in which the relationship with the authorities or with the banking institutions may be delayed or poorly conducted due to the measures taken at the governmental level in the context of the pandemic.
Also, between the signing date and the completion date, it is known practice of the parties that the activity of the target company to continue to be carried out by the seller, subject to ensuring the profitability of the company but also to obtaining the agreement of the buyer regarding the implementation of certain actions relating to several aspects of the business. However, the uncertainty generated by coronavirus could cause the seller to retain the right to act immediately during the aforementioned period, without any prior approval of the buyer, in order to minimize or eliminate any risk that could thus be encountered and at the same time impossible to predict at the time of signing. Therefore, it is advisable for the involved parties to establish an action plan in such cases, and to respect it accordingly.
As regards specific representations and warranties, it is advisable for the buyer to obtain additional representations and warranties from the seller regarding the plans for the management of emergency situations at the level of the target company, the continuation of the activity of the target company and other such critical aspects in the context of the pandemic. Of course, in such a situation, the seller will insist on a limitation of these warranties by reference to legal provisions and to what he considers it would confer him the right and the capacity to act in the direction of fulfilling the representations and warranties undertaken. At the same time, the disclosure by the seller as detailed as possible of the impact that the target company has already felt but also of the impact reasonably planned as a result of the outbreak of the pandemic is encouraged, so that the buyer makes an acquisition knowingly and that the seller’s liability cannot be engaged in this regard.