M&A in Ireland: looking beyond COVID-19

Whilst much uncertainty remains, dealmakers are starting to consider the likely complexion of the Irish M&A market after the immediate impact of COVID-19 has subsided. We explore the strategic considerations, alternative structures and shifting norms around key M&A provisions that are likely to feature in Irish M&A activity in 2020 and beyond.

1. A greater variety of deal structures

The popularity of minority investments will likely increase to help achieve a balance between seller retention of value and buyer valuation risk. This is already being seen in the UK and some jurisdictions in continental Europe. Within this context, various capital instruments (including preference or convertible shares) could be considered to manage valuation challenges and identified risk, concurrent with giving buyers a route to 100% ownership. Separately, a combination of distressed sales and buyers looking to carve out unwanted liabilities or unprofitable segments of a target business will result in a greater number of asset purchases and pre-closing restructurings.

2. More contingent and deferred price structures

In light of the valuation and diligence challenges posed by the impact of COVID-19, dealmakers are likely to use various mechanisms to enable buyers to de-risk their investments. Carefully crafted earn-out provisions are likely to prominent and the use of both seller loan notes and escrow mechanisms also offer solutions in what is expected to be a more buyer-friendly environment. Where escrows are used, the use of cash release insurance, already featuring in the UK and continental Europe, will likely emerge on Irish M&A deals.

3. Price adjustments

Whilst recent years have seen an increase in the use of locked box mechanisms in Ireland, save for on seller-led processes, completion accounts adjustment mechanisms are likely to retain their primacy on Irish M&A deals given their ability to enable buyers to correct short term impacts.

4. Evolving due diligence

Buyers can be expected to double down on the resilience of key supplier and customer contracts as well as environmental and social governance matters, particularly in the context of employee benefits, health and safety measures, supply-chain management and other environmental, social and governance priorities. Where time is of the essence for diligence (such as on distressed deals) the use of legal technology will help dealmakers achieve compressed timeframes.

5. Increasing conditionality

Where there is a gap between signing and closing in a volatile market, buyers can be expected to seek walk-away rights. This may include buyers looking to make completion of satisfactory due diligence a condition to closing. Dealmakers should also anticipate renewed discussion around material adverse change (MAC) clauses, the detail of which will be key if they are to capture or exclude macroeconomic events and/or breaches of certain warranties between signing and closing.

6. Regulatory logistics

Whilst unlike certain other countries, such as Spain, Ireland has not introduced additional regulatory clearances that add further conditionality to M&A deals, logistical challenges may arise from a regulatory perspective. Unlike during the 2008 crisis, where regulators often worked more quickly than normal, this may not happen post the immediate impact of COVID-19, due to backlogs. Dealmakers will need to factor this into their deal timetables, longstop dates and financing considerations.

7. Emergence of new warranties

In tandem with a recalibrated diligence focus, buyers will likely seek warranties on targets’ COVID-19 related plans and sellers will need to carefully consider disclosures against the warranties in the context of COVID-19. Where there is a gap between signing and closing, buyers can be expected to insist on the repetition of all or, at a minimum, certain key, warranties at closing.

8. Increasing use of W&I to facilitate distressed deals

The use of W&I insurance on Irish M&A deals can be expected to increase due to concerns around the financial health of sellers, a reduction in the risk appetite of buyers and the desire of many sellers to want cash “off the table” rather locked up in an escrow. Whereas previously, very few distressed deals were insured, many insurers are now offering insurance in the distressed arena which is enabling a larger pool of buyers to explore such deals and incentivising management engagement with an accompanying enhancement of buyer protections.

9. The (new) ordinary course of business

Dealmakers will need to carefully consider how the target business is to be conducted during any gap between signing and closing. In particular, the concepts of the “ordinary course of business” and “consistent with past practice” in relation to the business will require recalibration in light of COVID-19. Sellers may also seek for certain of their obligations around conduct of the target business between signing and closing to be given on an endeavours or efforts basis.

10. Cash is king

As cash is likely to be king, financing certainty will be a key feature in the Irish M&A market. New acquisition finance is only likely to be available for transactions in sectors where there has been less impact on cashflow such as TMT, healthcare and life sciences. Regardless, the terms of new financings are likely to be much less flexible given market uncertainty with baskets being reduced and future acquisition lines heavily conditioned. Dealmakers may need to consider alternative sources of funding such as non-bank lenders which may impact completion dates and overall financing costs.

See our coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.