Impact Of The Coronavirus Outbreak On M&A And JV Transactions

Author:Mr Roy G. Zou, Liang Xu, Aldo Boni de Nobili, Nigel Sharman, Jun Wei, Michael Zou and Jessica Li
Profession:Hogan Lovells

The outbreak of novel coronavirus 2019-nCoV ("Coronavirus") is an extraordinary challenge for many transactions involving Chinese companies. In this section, we analyse its impact on certain key aspects of mergers and acquisitions ("M&A") and joint venture ("JV") transactions, the remedies that may be available under the share purchase agreement ("SPA") and joint venture agreement ("JVC"), and what the parties could do to manage the relevant risks.

  1. Coronavirus outbreak may constitute "material adverse change"

    The Coronavirus outbreak and the exceptional measures adopted by the Chinese government to cope with the crisis (which include lockdown of areas, extended holidays, shutdown of factories, travel restrictions and mandatory quarantine) are causing significant risks to companies operating in China. They may be experiencing operational difficulties, financial losses and disruption to supply chains, and be exposed to a breach of their commercial contracts, including a breach by their suppliers. For instance, the government in certain locations ordered local companies to change their production lines to support medical supplies, resulting in increased costs, logistical complications, and potential breaches of pending orders.

    These circumstances could trigger a material adverse change ("MAC") clause under the SPA or JVC. A MAC clause typically provides that if an event having a material adverse effect on the assets or business of the target company or its group occurs, the buyer in an SPA can terminate the SPA and walk away from the deal (often referred to as a "MAC out" clause). Similarly, a JVC may provide a termination right upon the occurrence of such event, which could entitle a party to exercise an equity/asset buyout right or trigger the liquidation and dissolution of the JV.

    Similar termination rights could also be available due to a breach of representations and warranties stating that a MAC has not occurred: the supervening occurrence of a MAC after signing may cause a breach of those representations and warranties when repeated (for instance, at closing under the SPA, or at the business license issuance date under the JVC). Conversely, sellers and JV parties who wish to preserve the deal may consult with their counterparties to provide reassurances on the continuity of the company's business and its ability to survive the crisis, and obtain the relevant waivers aiming at avoiding the termination and claims for damages and...

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