Covid-19: Specific Considerations in Conducting Merger and Acquisition

The Covid-19 pandemic outbreak has caused great uncertainty and disrupted business activities in Indonesia and even the rest of the world. The Government of Indonesia itself has taken a number of extraordinary measures to overcome the crisis, including by implementing a Large-Scale Social Restrictions (PSBB) policy, restrictions on foreigners traffic, travel restrictions specifically for returning to one’s hometown, temporary closure of workplaces and education, all of these policies resulted in considerable operational difficulties and disruptions for business operators.

Under current conditions, mergers and acquisitions (M&A) become a corporate action that must be carefully considered. Investors must be careful in making decisions during this time of uncertainty. With which transaction risks will of course also increase. This article intends to convey certain steps that need to be considered by the parties in an M&A transaction.

Due Diligence

The current Covid-19 pandemic situation is very dynamic and continues to grow, which causes the need for a wider due diligence investigation to assess a company’s business vulnerability. It is crucial to obtain in-depth and comprehensive understanding of the target company’s business and how Covid-19 pandemic may influence it. Important considerations in the due diligence examinations are as follows:

1. Supply chain and the target company’s consumer network. This is to understand the geographical scope of operations, dependencies, and business risks of the target company and the extent to which it can be affected by supply chain disruptions and whether the target company has an appropriate mitigation plan;
2. Legal rights and obligations governing the relationship between the target company and its suppliers and consumers. This is to determine the ability of the target company or its partners to fulfill their respective obligations based on the contract they have;
3. The presence rights which can exclude non-compliance or allow the contract to be terminated. In addition, it must be noted that identification of termination of employment with notification, force majeure and adverse material changes clause. In this case, it should be noted that the provisions to terminate and not fulfill a contract on the grounds of force majeure are still debatable, even though the President has decided the Covid 19 pandemic as a national disaster, does not necessarily cause the status as force majeure and the reason for canceling or delaying the fulfillment of an agreement. Because force majeure assessment is also casuistic in nature, it does not apply automatically;
4. Ongoing renegotiation between the target company and other parties that are contractually bound with it or whether there has been a termination of the rights that have been carried out by the target company or the other party;
5. Compliance with new laws and regulations related to the Covid-19 pandemic, for example Minister of Health Regulation No. 9 of 2020 concerning the CBDR Guidelines in the Context of Covid-19 Mitigation, PSBB rules and guidelines that apply in the target company domicile area, as well as other regulations that must be obeyed by companies in order to prevent the spread of Covid-19;
6. Is there any insurance protection for all aspects of the target company’s business operations that might be affected by Covid-19.

Through extensive and in-depth due diligence, the buying company must be able to learn more about the exposure and protection of the target company under Covid-19 conditions. This will be very important when preparing, reviewing and negotiating the scope of representation and guarantees, compensation and limitations in the M&A agreement.

Also Read: The Process & How to Acquire a Limited Company

Timing

The Covid 19 situation can cause M&A transaction delays. Delays may occur as a result of travel restrictions imposed by many cities and countries. Due diligence is carried out more broadly and a lot of time is needed, delay in getting government approval or regulations that have been established as M&A conditions. For example, Regulation of the Business Competition Supervisory Commission Number 3 of 2019 concerning Appraisal of Merger or Consolidation of Business Entities, or Acquisition of Company Shares that Can Lead to Monopolistic Practices and/or Unfair Business Competition.

The said regulation states that the Merger of Business Entities, Consolidation of Business Entities, or Takeover of shares of other companies which results in the value of Assets and / or sales value exceeding a certain amount must be notified in writing by filling out a form to the Commission.

However, in the current conditions, KPPU Chairman Decree No. 11/KPPU/Kep.1/III/2020 concerning Amendments to KPPU Decree No. 10/KPPU/Kep.1/III/2020 concerning Temporary Suspension of Law Enforcement Activities in the KPPU Secretariat states that the assessment and classification of mergers and acquisitions will be suspended. It should be noted, the suspension period does not relieve the business operators from the mandatory transaction notification to KPPU as soon as possible. This is to avoid a period of “30 working days” and the application of administrative sanctions of IDR 1 billion per day for delays, as well as a maximum fine of IDR 25 billion as stated in Article 7 of the Regulation. Therefore, it is necessary to choose the right time to conduct M&A in the current situation.

Termination Right

The seriousness of the Covid-19 situation resulted in the need for special rights granted in the sale and purchase agreement or joint venture agreement as the basis for M&A. One of the termination right that is often used is the force majeure clause.

Force majeure is a clause that explicitly identifies certain events can be excluded from the implementation of contractual obligations and is a reflection of the estimated risk agreed between the contracting parties. In practice, the provisions of force majeure are rarely seen in M&A transaction documents, given the binding nature of a contract. However, the current condition is an uncertain and different time so that the inclusion of force majeure provisions in the M&A agreement is an appropriate way as a protection mechanism to reduce the risk, guarantee and breach of contract termination.

Conclusion

Although there is no certainty how long the Covid-19 situation will last, the most important thing is that all parties to the M&A transaction, both the selling company, the buying company or a member of the joint venture company, must review the agreement and continue to monitor the situation as it develops. If possible, the parties must take preventative measures to mitigate risk in order to anticipate further decline in the global economic climate.

Author: Andi Akhirah Khairunnisa

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