Mandate and commitment statements are agreements signed by lenders that aim to guarantee the prospective borrower the financial support necessary to complete a transaction (usually a business acquisition) until negotiations with the counterparty or in the phase between signing and closing the transaction take place. On December 21, 2017, written agreements between the Consolidated Revenue Fund and each corporation amended the terms of the respective senior preferred share certificates issued under the SPAS to allow each corporation to hold a capital reserve of $3 billion on a quarterly basis. Under the 2017 written agreements, each corporation paid a dividend to the Consolidated Revenue Fund equal to the amount whose net worth exceeded $3 billion at the end of each quarter. These conditions applied to the payment of the dividend dated December 31, 2017 and to dividend payments for each quarter thereafter until the signing of the written agreements dated September 30, 2019. FHFA Administrator Mel Watt issued a statement regarding the 2017 letters of agreement when they were announced. Whether COVID-19 affects your M&A agreement or your business agreement depends on the specific language of the clause. For M&A agreements, a buyer who wishes to terminate due to an EAW must demonstrate that COVID-19 has caused a long-term and materially negative negative change in the seller`s business that does not reflect general or industry-specific economic conditions (provided there is no pandemic exception and with a disproportionate impact clause). Similarly, a non-performing party wishing to invoke a force majeure clause in a commercial contract must also establish a link or causal link between the underlying COVID-19 event and the inability to perform its contractual obligation. By early April 2020, it is likely too early to predict the duration of the COVID-19 pandemic or, perhaps more difficult, the duration of a business downturn, closures or restrictions that results. In addition, a disproportionate impact clause in M&A agreements is unlikely to help buyers, as many sellers face industry-wide financial problems. MAC regulations generally have broad and general formulations (e.B.
“the effects of an event the consequences of which may have, directly or indirectly, significant negative effects on the legal, economic, financial or financial situation of the borrower or his professional activities”. For this reason, it is crucial to understand what are the minimum requirements for lenders to rely on the mac provisions contained in loan agreements, especially in a situation of instability such as the current one due to COVID-19. For businesses in sectors already directly affected by COVID-19, also as a result of the orderly or voluntary closure of most or all of their business activities (such as cinemas, restaurants and retailers), these considerations also imply a real and practical overlay, namely the need to counteract the negative impact on cash flow that they are already experiencing. These companies, already affected by COVID-19, which have not yet used available credit capacity, are facing growing concerns about whether their lenders will choose not to finance the loan by applying significant adverse effect clauses (MAEs) in applicable credit agreements. In the context of a business acquisition, the MAE clause generally allows a buyer to terminate the purchase contract and/or abandon the transaction in the event of a significant deterioration in the seller`s activity. At the time of conclusion, the seller usually confirms that no EAW has occurred in the meantime between the signing of the take-back contract and the conclusion. However, sellers often negotiate exceptions to the definition of an EMA that allow for certain significant adverse events without giving the buyer a right of exit, such as: (a) changes in general economic or political conditions; b) changes to the terms and conditions that have a general impact on the Seller`s industry; (c) in the case of public transactions, changes in the price or volume of transactions in the seller`s securities; (d) Changes in geopolitical conditions such as terrorism, acts of war, sabotage or disasters; and (e) natural disasters. According to one seller, the above exceptions are systemic risks that are beyond a seller`s control and buyers should accept as an acquisition risk. While some user-friendly or vendor-negotiated definitions of EAWs may exclude changes resulting from pandemics, epidemics, or similar language, such language is not a standard exception to AEDs. However, New York law is the most common law in many commercial agreements (including credit agreements).
Interestingly, there are no significant precedents for the interpretation of EAW clauses in the context of credit agreements. We offer the following important considerations based on existing jurisprudence in Delaware and New York that you can support during this time. In common law countries, such as the United States, courts generally recognize the parties` agreement regarding force majeure or AEM provisions. What triggers an EAW clause is highly negotiated between the parties and depends on the specific language of the agreement. Parties to an M&A agreement (whether a buyer or a seller) involving a target that has been negatively impacted by COVID-19 should take the following steps: Over the past few weeks, we have seen various domestic and cross-border mergers and acquisitions (M&A) and private equity transactions, but in some cases we have seen stalled offer processes and negotiations due to the coronavirus outbreak. (COVID-19). The parties should carefully draft the provisions on new agreements in light of the COVID-19 outbreak, but what about the impact on acquisition agreements already signed? Similarly, force majeure clauses are often found in other commercial contracts such as leases, supply contracts and service contracts. This type of clause may excuse the non-performance of contractual obligations caused by unforeseen events beyond the control of both parties. Force majeure in commercial contracts typically include: acts or instructions from government agencies (e.g.B. business closures, shelter orders on site, quarantines); lockouts, malfunctions or bottlenecks at work; and other “force majeure”.
If a valid case of force majeure resulting from COVID-19 applies to your contract, a party could be exempted from performance, possibly for the duration of the COVID-19 event, and may even be entitled to terminate the contract without any liability. Credit agreements generally include the assurance that there is no EMA, provide that an EMM is a default, or both. Most often, an EAW is defined in credit agreements to cover a material adverse effect on (1) the borrower`s business, assets, operations or financial situation, or (2) the borrower`s ability to meet its payment obligations under the loan agreement. Loan agreements generally require lenders to finance financing obligations provided that, at the time of the borrower`s request for financing, (1) no default has occurred or would occur as a result of the financing and (2) the assurances and guarantees given by the borrower in the loan agreements remain true in all material aspects. However, unlike mergers and acquisitions (M&A) agreements, MAE clauses in credit agreements are not modified by well-designed and mutually agreed exceptions to the terms, as lenders focus on borrowers` ability to repay the loan. As COVID-19 weighs on the company`s current and future cash flows, companies in many industries are investigating whether a global pandemic and the resulting government-ordered shutdowns and shelter-in-place policies offer the right to terminate or apologize for non-compliance with contractual payments and other obligations. While negotiation and M&A agreements often allow for suspension or even termination due to a material adverse effect or change in business (“MAE”) or excuse a failure due to force majeure, we encourage companies to review the specific wording of the agreement to assess whether COVID-19 provides a legitimate “out” in terms of payment or other performance obligations. In the recent case travelport Ltd v Wex Inc [2020] EWHC 2670 (Comm), the High Courts of England considered the interpretation of a material adverse effects clause in which a party attempted to invoke the provision due to the impact of the COVID-19 pandemic. Given the prevalence and importance of EAW clauses in many commercial contracts such as installation agreements and acquisition agreements, we examine in this article the issues that UK courts have taken into account in determining the construction of this EAW clause in the context of a global pandemic.
In the context of mergers and acquisitions/private equity transactions, typical MFA provisions (also known as material adverse changes or MACs) may allow a party to move away from the transaction if there is (or is reasonably likely to occur) an event or circumstance that would significantly affect the business, results of operations or financial condition of the target company and its subsidiaries after the date of signature. Under the terms of the agreement, a party may be permitted to terminate the agreement if the current circumstances make impossible a condition of completion, including conditions that there has been no EMA, that a reduction in representations and warranties is true and accurate (as qualified by materiality or MFA), or that no obligation has been breached.. . . .