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Special Edition: Public M&A Trends: Looking Back and Moving Forward

February 1, 2021
Shareholders have their own crystal ball and may ultimately determine that COVID is not going to have a severe impact on the long-term prospects of a business.
Kathleen Keilty, Partner in the Mergers & Acquisitions group
As we leave 2020 behind (and bid it a happy adieu), we recap the impacts of the pandemic on public mergers and acquisitions. Blakes lawyers Alex Moore, Olga Kary and Kathleen Keilty share some of the highs and lows of the past year and provide a glimpse into what to expect in 2021.


Mathieu: Hi, I’m Mathieu Rompré.

Peggy: And I’m Peggy Moss. Welcome back to the Blakes Continuity podcast, and good riddance 2020.

Mathieu: Hmm. Wonder why you’d say that. Something wrong with last year?

Peggy: Uh, no. It was perfect.

Mathieu: Excellent. See, I became the perfect combination of Zen…and denial.

Peggy: Yeah. Speaking of combinations, let’s talk to some lawyers who followed the M&A trends in 2020, and they can tell us what to expect in the year ahead.

Mathieu: Peggy, I have a feeling you’re talking about Alex Moore, Olga Kary and Kathleen Keilty.


Mathieu: Alex, the pandemic has impacted M&A transactions in a number of ways, which was to be expected. Have you encountered any surprises, good or bad, in the deals you’ve worked on?

Alex: Well, yes. Last year, we had an experience that really epitomized the rollercoaster type of year that 2020 had been with a live transaction. We really couldn’t have seen more perfect timing to live through the ups and downs that the pandemic has brought to M&A transactions in 2020.
Early in the year, we announced a transaction for a public company target, and at that time, the markets were hitting fresh highs, the industry sector was on fire that we were doing a transaction for, and there was just robust enthusiasm for the market, notwithstanding that the pandemic was emerging. People knew COVID was out there, but it hadn’t affected the markets yet.

Nevertheless, within about three weeks of announcing our transaction, which was a premium to the all-time high of the company’s stock, we saw the markets take a deathly turn, dropping 40 per cent overall. And although our transaction was a cash transaction, the company’s stock price dropped about 25 per cent from our deal price, which really indicated that the market had significant doubts about whether our transaction was going to close, for various reasons, whether the market thought that the buyer was willing to walk away from the transaction because the uncertainty or concerns about whether banks were willing to finance the transaction.

So, with all the uncertainty that we were having to deal with with what’s happening within the marketplace, what’s happening in the industry, we had to consider what are the contractual obligations of the parties. Are we bound to close under all circumstances regardless of what comes from the pandemic? What kind of freedom does the target have in responding to the pandemic given that our agreement with the target had typical restrictions on its operation of the business and restrictions on deviating from the ordinary course.

Mathieu: Alex, I’m curious, what’s the outcome of that story you just told us?

Alex: Yeah, well, happily things did stabilize in the markets as well as for the business, and we were able to close the transaction about nine months after the announcement and at the deal price. Bold shareholders who had bought in at that 25 per cent discount were handsomely rewarded. It was probably a very lucrative opportunity for merger arbs. And so, we closed that transaction. But, obviously, during the course of the pending transaction, we were very much monitoring what the contractual obligations were of the parties, trying to be ready for whatever might arise. So, happily we were able to close.

And I should note that one of the really remarkable things, although has become sort of common place now with the transaction, is just how we were able to execute it all working from home. We announced this large transaction with assets across the country. We needed the involvement of many practice groups at Blakes. And on March 13th, I think, we all packed up and moved to our home offices and picked up where we left off, and despite the fact that we were operating all remotely, having to deal with filings and various tasks and court appearances across the country, we were able to pull off the transaction really without a hitch. And I think that’s really commendable for the whole team but also indicative of what has changed so quickly.

Mathieu: Very interesting. Has there been an increase in deals leading to litigation?

Alex: Yes, certainly there has been a fair uptick in litigation. We were not the only transaction to have nicely bridged the market reaction to the COVID pandemic. It was a robust M&A market leading into the lockdown in early 2020, and so there were several transactions that were caught like ours.

And in other industries, the impact of the pandemic was much more severe, and so we are seeing litigation. Some of it is still pending on transactions where buyers are either trying to find opportunistic excuses to get out of the transaction or there are serious existential questions about the nature of the business given the impact of the pandemic on the targets. And so, we are seeing those transactions wind through courts.
And we are starting to see some decisions come out of the courts both from Delaware and in Ontario. And what we’re seeing in interpretations of the material adverse change clauses and whether buyers are relieved of their obligations to close, the courts have been following established precedents on material adverse change clauses. And under normal formulations of a MAC clause, we are seeing that it’s going to be a high bar for purchasers to get out of transactions sighting the impact of the pandemic.

And I should say that every case is fact-specific, but on the other hand, with the ordinary course of business covenants, they’re seeing a lot more focus there and on how a target can comply with the ordinary course of business covenant while deep responding to the pandemic. Because as you can imagine, everybody has to react in some ways when there’s a provincial lockdown order barring customers from entering your premises. You know, how do you respond to those changes? This is not a normal occurrence, and so how are people going to respond? On most provisions, we have seen a divergence in the courts in terms of how they approach it, with Delaware taking a fairly strict approach and Ontario taking a more, I’d say, understanding approach with respect to holding a target to the ordinary course business covenant when responding to the pandemic.

Peggy: Kathleen, in our August podcast on distressed M&A, we learned that the uncertainty around COVID has heightened opportunistic behaviour. What has your experience been when helping clients assess potential transactions?

Kathleen: Thanks, Peggy. It has been an interesting year. There hasn’t been a major change in legal principles that are applied by a company in assessing an M&A transaction. Companies considering an acquisition business combination sale still ultimately need to determine if the transaction is in the best interests of their company. But the volatility and uncertainty caused by the pandemic has created unique challenges in assessing whether a transaction meets that legal test of being in the best interests of the company.

For example, companies hire financial advisors to help them determine if an offer is in the best interests of the company, and one of the metrics that those financial advisors use to assess whether the consideration being offered is fair to the shareholders is to look at the transaction premium.
And in the spring of 2020, when the share prices had declined rapidly and significantly in response to the declaration of a pandemic, some offers had a very significant premium to the current market prices. And then target companies had to determine whether the offers presented were good offers or just opportunistic, and those decisions had to be made at a time when it was unclear what the short and long-term impact of COVID would be on the business itself.

Other companies/clients determined that COVID was going to have such a negative impact on their business in the short or long term that what might have looked like an opportunistic offer was in fact the best option for the company and proceeded.
There’s always uncertainty in determining the long-term prospects of the business. That’s been true before COVID and will remain true after COVID. But COVID has been particularly challenging for some sectors with the rules and regulations changing without notice or not much notice, and those changes having a significant adverse impact on the business and having to decide on whether or not offers are in the best interests of the company through that backdrop have been very challenging decisions for our clients in some instances.

Peggy: Kathleen, what are some of the other challenges your clients are encountering?

Kathleen: So, the challenges are many and varied in COVID really depending on what sector the client is in. Some of our clients have been barely impacted by COVID or their businesses have frankly improved while others in certain sectors, which I’m sure we can all identify, have had extraordinarily adverse impacts on their business.

Going back to the discussion we had earlier about the challenges of assessing an M&A transaction in the context of COVID, I guess I’d add that some of the companies that concluded that an offer was ultimately in the best interests of the company when they factored in the long-term impact of COVID on their business, ultimately their shareholders actually had a different point of view. And I view this as a reflection of a continued environment of shareholder activism, but I also think it’s a reflection of the volatility and uncertainty of COVID itself that even though the board and management have the best knowledge of the business, its prospects and the impact of COVID-19 on the business, shareholders have their own crystal ball and may ultimately determine that COVID is not going to have a severe impact on the long-term prospects of the business.

Peggy: Olga, there’s been an increased focus on interim covenants over the past nine months and the role they play in M&A agreements. Could you please describe for us what an interim covenant is and what our clients should be aware of when they’re preparing for a deal.

Olga: Thank you, Peggy. We have seen a bit of a spotlight land on interim covenants since the pandemic outbreak. This change was brought about by buyers looking for ways to walk away from deals signed before the pandemic.

Most public M&A transactions involve a so-called interim period, which is a period of time between parties signing a definitive agreement to complete a transaction and the actual closing of a transaction. This period is to allow the parties to obtain the necessary approvals.

The main purpose of such covenants is generally to maintain the value of the seller’s business until the transaction is closed and commonly include an obligation for the seller to conduct its business in an ordinary course of business, which is typically defined with reference to the seller’s best practice.

Mathieu: Thank you, Olga. Mathieu here. I understand that energy companies have been significantly impacted by the pandemic. What types of challenges are these businesses facing now and that weren’t a factor in previous years?

Olga: That’s a really good question, Mathieu. Over the past year, the energy sector has experienced quite a significant impact of both the Saudi Arabia price dispute with Russia and the subsequent drastically decreased global demand for oil and gas. The impact of recent initiatives for carbon reductions have created a further layer of challenges.

Shortly following the onset of the pandemic, we did see a pause in the sector’s M&A activity, which was a result of issuers evaluating the impact of the pandemic on their business and challenges in valuations as a result of significantly decreased oil prices.

As we saw the year progress, the number of announced transactions increased and including some consolidation efforts by larger and mid-market issuers to create operational synergies. As well, we saw a number of distressed sales and opportunistic transactions involving smaller issuers in various states of financial distress.

As we expect to see an increase in similar types of M&A transactions as we move further into 2021, we advise our clients to be proactive in evaluating their strategy, including preparing for potential M&A activity, and making sure that directors become familiar with new considerations created by the pandemic for boards in discharging their duties.

Complex valuations and associated deal complexity are expected to continue to prevail in the industry, and an uptick in M&A activity is certainly something that we here are very much looking forward to.

Mathieu: Thank you, Kathleen, Alex and Olga. Listeners, make sure to tune into our next trends episode during which we will discuss competition, antitrust and foreign investment.

Peggy: Until then, stay well and stay safe.

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