Blenheim Talks | Ondermijning
The effects of the Corona virus, particularly in the hospitality and retail sectors, are causing more and more companies to fall into financial distress. While government relief measures have been keeping firms afloat, businesses have also been forced to look for other opportunities where restructurings are not possible. As a result, the number of distressed M&A transactions has seen a notable increase in the past year with both financial investors and trade buyers taking advantage of situations where sellers are looking for an exit.
In this blog, Blenheim’s corporate team has identified the key considerations to look out for, for any seller or purchaser embarking on a distressed M&A process. These considerations require focused attention at the outset of the process to identify the material risks and avoid any mishaps during or even after the transaction has been concluded.
Blenheim’s corporate team are well versed in all stages of a distressed M&A process. Beyond the core requirements of a transaction/restructuring process, Blenheim’s lawyers are also experts in the field of employment, real estate, and regulatory compliance law which may well have a dramatic effect on the structure and implementation of a distressed transaction.
The structure of a distressed transaction is critical considering the timing and deliverability constraints. There are generally two options for structuring a transaction of this nature, (i) on a share sale basis if the target in question is solvent, or (ii) on an asset basis which is often characterised by insolvency proceedings. Knowing which structure to choose when dealing with limited timeframes is not a clear question, however, having a lawyer which can advise on the implications of each option will ensure you are making the right choice. For example, an experienced lawyer can weigh up the risks between the negative consequences on a target’s business relationships caused by insolvency proceedings versus the protection of a target’s reputation in solvent proceedings.
Time is often of the essence in distressed M&A transactions due to the target business facing pressing financial difficulties. As a result, transactions of this nature are frequently characterised by fewer possibilities for thorough due diligence investigations in relation to access to management, the amount of information at one’s disposal and the scope of reliance on such information. As purchasers are also benefitting from a reduced purchase price for the target company, sellers are also inclined to insist on a limited due diligence to push the deal through.
As a result of the tight deadlines and limited due diligence, it stands to reason that there will also be less contractual protection for the purchaser. This means that there will be more transactions conducted on an ‘as-is where-is basis’ with limited, or even no, representations or warranties regarding how the seller’s business has and will be operated after the conclusion of a transaction. More frequently, however, even where representations and warranties are contractually agreed in distressed M&A matters, sellers are often not able to meet them due to financial distress.
Whether you are a buyer or seller, it is essential to have advisors that are able to identify the key risks (and opportunities) in distressed transactions. This is especially true considering there be a limited amount of information to work with within a tight deadline. Blenheim is here to service all your M&A needs and advise on any of these considerations should you find yourself looking for or considering a distressed transaction.
Blenheim Talks | Ondermijning
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