Progressing transactions in the current environment
TRANSACTIONS ARE PROGRESSING WITH TECHNOLOGY AS AN ENABLER
Most components of a typical transaction process can now be undertaken via electronic means.
In the post COVID lockdown environment, deal activity will resume but the manner in which deals are executed, both from a seller and buyer perspective, may adapt to the new normal of travel restrictions and social distancing.
Technology will play a key part in deal-making and physical interaction and inspections could be deferred to the latter stages of a transaction when the prospective parties have been narrowed down to a much smaller number- It is possible to exchange signatures on purchase agreements, wire funds to the seller and pass ownership of assets through electronic means:
Increased use of virtual methods suggest that it is likely that some individuals critical to the post-closing success of the transaction will never have met in person (F2F).
Site visits of laboratory/clinical assets absolutely essential to the investment rationale will still need to happen but virtual walks of the site may be used to progress the transaction further before the physical meetings can be held.
For certain types of transactions which do not involve physical assets, it is theoretically conceivable to execute the transaction with not one single F2F interaction or in-person inspection during the M&A process; nevertheless, most buyers are not just purchasing the physical assets but the people as well and a F2F meeting is expected to be necessary (especially for private equity).
IN VIRTUAL DEAL PROCESSES, DATA USE WILL HAVE TO BE SCRUTINISED...
Data Sharing
In the current market conditions, enhanced protocols for sharing data between seller and buyer is expected:
Data Sharing Agreement
- Increased delineation and detail around custodial responsibility and data stewardship. We will see increased focus and detail around permissible uses and a push towards full indemnification for misuse of information and data;
Data Processing Agreement
- With an increased legislative environment around data use we will see further protections sought in any process; and
Non-Disclosure Agreements
- The rigour around NDA content and their negotiation is likely to harden as part of the wider process but commerciality must always be front of mind in a tighter process. It is to be investigated how recorded videos of certain interactions would work in practice from a disclosure perspective. We will also see more detail and guidance included in issued process letters.
The above example areas given are aimed at agreeing the three main types of data processes (encryption, deletion, return) and data transfer rules (in the case of cross-border data transfer during due diligence, by including EU GDPR type clauses as necessary alongside US data privacy legislation, e.g. HIPAA).
...WHILE R&W INSURANCE CAN BE USED TO MANAGE SOME RISK
Representation and Warranties Insurance
Increased use of R&W Insurance may be a tool to manage the risk of virtual deals:
R&W Insurance is for the buyer’s benefit, is normally paid by the sellers, and insures against damages for breach of representations and warranties in the purchase agreement.
It also avoids the situation where recourse is sought against an active management team.
Pre-COVID, R&W insurance limits were set normally at 10% of enterprise value:
In some of our current deals, the buyers are looking for upwards of 20% of upfront payment at close to be kept in escrow showing the level of risk management being sought in the market.
It should be kept in mind that premiums average at 3% of coverage limits.
A buyer or investor can add (and pay for) additional coverage for higher amounts than the cap the sellers are willing to accept, and with longer survival periods.
Around 80% of venture capital firms in the US West Coast and the North East stated that they routinely require RWI in the sale of their portfolio companies (based on a survey conducted by SRS Acquiom in May 2019).
THERE ARE SOME INHERENT ISSUES WITH VIRTUAL DEAL-MAKING TECHNOLOGIES BUT THESE CAN BE MITIGATED
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