Between March and August 2020, the UK M&A team completed 35 deals, with a combined aggregate volume of £960 million. More than two thirds were cross-border deals. In this article, Suzy Penney, a Senior Associate in the Private Equity team, examines what it is really like to do an M&A deal during lockdown.
COVID has changed all our lives. For many businesses the impact has been catastrophic; for a few it has created new opportunities. For buyers and sellers the economic freefall has presented a valuation challenge. The usual financial metrics used to analyse the numbers are inadequate. Understanding a business's normal cashflow, its likely revenues and costs is a tough job for the best financial analysts, made more complex by the uncertainty of how long the COVID cloud will hang over us.
Companies are reworking their forecasts to reflect the damage done. We have seen deals collapse because investors or purchasers have not been able to value a business confidently enough to determine their offer price. As the economy starts to pick itself back up, and as people adapt, buyers and investors are finding their feet again in terms of valuations, but it will be some time before all parties have the same confidence they are able to assess growth prospects accurately and understand what the future holds for their companies and the economy at large.
From a practical perspective, doing an M&A deal in lockdown is not that different. M&A lawyers have gradually moved away from having large numbers of face-to-face meetings during a transaction. The parties are usually scattered across multiple locations, often in a variety of countries, so the burgeoning array of conference call facilities are generally more than satisfactory to discuss any matter. COVID – and its resulting lockdowns – has created a dramatic shift to video calls, probably because we all felt the need to enhance human interaction every day.
Bandwidth issues and the general strain on domestic broadband facilities inevitably led to periodic connectivity issues (robotic voices, frozen screens, and the endless cries of "You're on mute"), but generally work has proceeded apace. The shift to video conferencing also created a "battle of the apps". In the first weeks of lockdown, there was the tedious process of joining calls early to log on, download the communication platform, register, then decide another participant's platform was better and have to go through the whole registration rigmarole all over again.
There were other differences. These became prominent in the run-up to deal closings. Getting documents signed is the most obvious. Each signatory did not have access to the raft of printers and scanners usually deployed in an office, not to mention having sufficient reams of white paper littering their homes. So technology platforms allowed for electronic signings – instead of all that paper you just need an internet connection and an email address. While you still need to confirm all parties (including banks, or rather their lawyers) are happy to rely on electronic signatures, we have seen a notable shift towards accepting this as part of the execution process. COVID accelerated a shift that was already underway.
There were some technicalities to be addressed. Under English law, there are stricter requirements for having a deed validly executed compared to those for a simple contract. One of these requirements is for the signatory to sign the deed in the presence of a witness, with that person attesting that they have witnessed the signatory's execution. That physical presence is required under English law. Witnessing a signature virtually (for example, over video conferencing platforms) does not constitute a valid execution. Further, it may sound trite but simply signing a document in the physical presence of another person requires a degree of proximity which can present a challenge in a socially-distanced world. Also, the best legal practice is for the witness to be independent – that is not the spouse or civil partner, or other family member of the signatory. Unsurprisingly, during lockdown very few signatories were living with someone they were not related to in some way! To get deals done lawyers have had to take a practical view and revise some of the old rules to accept family members as witnesses (provided they are over 18 and mentally competent).
Using electronic signature platforms to get a deed signed is not as straightforward as with simple contracts. There is a bigger chance that the signatory and witness are not physically present together, and because execution is performed by emailing a link, the risk of manipulation is greater. This has meant that an extra layer of authentication and verification is needed to minimise that risk (which is a time-consuming procedure). This is more of an issue for signatories that are individuals. At least if the signatory is an English company, a deed can be executed by two directors or a director and a company secretary, rather than a director in the presence of a witness. For completeness, it should be noted that corporate entities in other jurisdictions may not need to have a witness as they will be governed by the legal requirements in their relevant jurisdiction for valid execution.
The other notable difference doing a deal in lockdown is more personal. The days (or weeks) in the run-up to a deal signing and completing are often intense, requiring long hours and late nights. While it's nice to be in your own living room rather than in an office late into the night, working from home for an extended period dilutes the teamwork and camaraderie derived from being "in the trenches together". Similarly, pre-COVID, the process of confirming exchange of signatures and completion would often take place with both sides eagerly awaiting signature in the same room. After all the hard work there was a palpable sense of achievement in those moments (ideally with a chilled bottle of bubbly nearby to be enjoyed). Confirming completion in a remote or virtual forum just feels so much more anti-climactic.
So, while all the technological advances are wonderful and inject so many efficiencies into our work, I personally cannot wait to get back to the office with my colleagues in the middle of the night negotiating deals with the take-away boxes cluttering the corners again. And as the autumn unfolds and funds and companies have money to spend there is a noticeable uptick in opportunities, with work slowly coming back on stream. Hopefully those take-away businesses can start to breathe again.