Gómez-Pinzón is recognized for providing advice of high quality in transactions of Mergers & amp; Acquisitions / The largest, most sophisticated and innovative corporations on the market, including complex transnational and multi-jurisdictional transactions, representing not only strategic buyers, but also private equity funds, thus contributing to the success of our businesses. customers.
Gómez-Pinzón has outstanding experience representing both sellers and buyers in transactions of this type on public or private targets, either through negotiated or hostile acquisitions.
The Firm is capable of reacting swiftly to the most complex and lengthy transactions, while managing the day-to-day corporate needs of numerous key clients, without this compromising in any way the quality of the services provided.
The Material Adverse Effect Clause in M&A and Financing contracts: is it applicable in times of COVID-19?
The Material Adverse Effect Clause (hereinafter, the “Clause”) generally establishes that, in the event of a change in the facts that substantially affects the position of the company being acquired (hereinafter, “target”) or the borrower, The consequence will be (i) the termination of the contract, (ii) a mandatory prepayment, (iii) an event of default and / or (iv) the renegotiation of the same.
In some cases, this Clause could be considered ambiguous due to a lack of precision on what facts could be classified as “adverse” – unless specific situations have been contemplated in the contract. Therefore, depending on the specific circumstances, it could not be generalized and always affirmed that these will be classified or not as adversely negative.
Notwithstanding this, the North American and English courts [1] have already granted some guidelines regarding the application of this Clause in the contracts, which we will see below:
- It will be a materially adverse event in the case of a substantially negative change in the economy of the target company; that is, when there is a deterioration in the financial results of the company, as indicated in the cases of Pan Am vs Delta Air and Pharmacia Corp and Great Lakes chem.
- The aforementioned must be accompanied by a subjective element, such as knowledge. If the acquiring company or the lender were aware of the risks it faces, the application of the Clause cannot be alleged. This criterion was established in IBP, Inc. v. Tyson Foods, in 2010.
- In addition to this, the duration of the impact on financial conditions must be taken into account. For the interpretation of this Clause, the English court has indicated that “ the adverse change cannot be transitory or temporary “, as indicated in the 2013 ruling of Grupo Hotelero Urvasco SA v Carey Value Added SL .
In that sense, in order to know if the Clause may be applied in the times of Covid-19, it will be necessary to take into account, in each specific case, the terms of the contract and the aforementioned guidelines. However, from now on, it can be stated that not any change in the financial condition of the target or the borrower will mean that the contract can be terminated or the debt under it accelerated – unless the parties have so agreed.
And, by way of conclusion, prior to going to a judicial or arbitration process to allege the application of this Clause, the best that can be done is to specifically contemplate the assumptions that would fit within the materially adverse event. In this way, transactional costs and time required in the process would be saved.
By Grecia Zorrilla, student of the Gómez-Pinzón Abogados Seed Plan.
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[1] It is necessary to refer to these courts, because they have been in charge of developing more jurisprudence on the subject in question.
Current status of Mergers and Acquisitions in Colombia
Undoubtedly, new challenges will arise in the mergers and acquisitions transactions that were in progress at the time of the emergency declaration. Faced with the transactions that were being negotiated, it is very possible that the conditions to continue with the business will change and become more important in the negotiations, clauses and definitions such as “ Material Adverse Effect ” or those that seek limiting the activities of the target company to the ordinary course of business in the periods between signing and closing, as well as mechanisms that allow some of the parties to exit the business in the least risky manner possible, including “Covid-19 Clauses”. Likewise, in some cases the obligatory nature of the commitments agreed by the parties in the preliminary documents must be analyzed, in case any of them no longer wish to continue with the business.
With regard to transactions that are pending the fulfillment of conditions precedent to achieve their closure, it will be necessary to analyze whether the measures taken by the government due to the pandemic can be considered as a force majeure event that prevents compliance with said conditions or that generate a “ Adverse Material Effect “. On the other hand, it will be very important for sellers to review the statements and guarantees that were incorporated into the contract in order to certify that they remain true and correct at the time of closing, despite the impacts that the company has had due to the crisis generated by COVID-19.
In conclusion, great challenges lie ahead for law firms, private equity funds, and investment banks with regard to M&A transactions, and the effects that this crisis will generate on ongoing transactions will have to be reviewed on a case-by-case basis.
The 2019 M&A in figures
In Latin America, during 2019 there was a 12% increase in M&A transactions. In 2019, a total of 2,766 were reported, while in 2018, 2,460 were reported. As in Colombia, the financial and insurance sector was the most moved with 367 and an amount of USD 11,678 million followed by the technology sector with 328 transactions and a total amount of USD 4,133 million.
For 2020, the outlook for M&A transactions is not very encouraging due to the global COVID -19 crisis. In the first quarter of this year, there has been a significant drop in the number of transactions reported compared to the same period of 2019.
Information Duty in Mergers and Acquisitions processes. Conditioning factor in the indemnity claims processes.
Regardless of the law applicable to Mergers and Acquisitions contracts and processes, the issue of information available to buyers, whether in a competitive process or not, is and will be one of the most relevant issues when negotiating acquisition contracts. For buyers, the position will always tend to be protected against facts not known prior to signing and closing; for sellers, on the other hand, the position will tend not to respond to facts or events that occurred or known to the buyer prior to the signing and closing.
It is in this context where the sandbagging clauses take on an unusual importance when negotiating contracts. The so-called “pro-sandbagging” clauses (in favor of the buyers) establish that the compensation rights of the buyers will not be limited or impacted regardless of whether or not they had knowledge of the facts that gave rise to the claim on or before closing. On the other hand, the “anti-sandbagging” clauses (in favor of the sellers), prohibit buyers from seeking remedies for post-closing indemnity in relation to facts that the buyer himself had knowledge at or before the closing.
The side and side arguments are equally valid depending on the position being defended; Sellers, on the one hand, will argue that the due diligence process was free and carried out by the buyer without any restriction and, on the other, buyers would not want to see their rights to future claims limited by events or facts that did not have been properly disclosed by the seller in the disclosure annex, which in itself serves as an exception to the general indemnity regime. Ultimately, what the buyer seeks is to accept and limit the contingency as disclosed in the disclosure annexes and, thus, avoid its generality and uncertainty.
Despite these being the two opposite positions, they can be drafted with different nuances in order to reach a middle ground.
At the level of Colombian law, the issue opens a discussion around pre-contractual and contractual good faith. Judges or referees could interpret an anti-sandbagging clause as a violation of the principle of good faith (and, on the other hand, open the discussion around secondary duties of conduct). On the other hand, pro-sandbagging clauses, and when the buyer intends to claim judicially under the agreements signed, they could also be seen by the judges or arbitrators as conducts contrary to contractual good faith; In case of having knowledge and, even so, deciding to close with the intention of demanding own resources of the indemnity instruments, it could be interpreted as an action against the principle of good contractual faith.
On the other hand, and increasingly common in day-to-day transactions in Colombia, the parties tend to agree to New York law either for convenience or through the parties’ points of contact with the American jurisdiction. Regardless of the position assumed in the contracts, New York judges will tend to protect what was agreed by the parties, understanding that they were contracts entered into under equal conditions and under the principles of common law. Notwithstanding the foregoing, in the face of the parties’ silence in this regard, there are a variety of cases and opinions that illustrate the difficulty of the issue. In certain decisions it has been established that whenever the seller discloses certain information, the buyer should not have the possibility of making a post-closing claim, given the disclosure previously given by the seller. If the contract is silent regarding these clauses and the information was disclosed by the seller, the buyer would have no action; However, if the buyer was the one who learned the relevant facts by his own means, he would have action against the seller.
The negotiation of this type of clause goes hand in hand with many other factors that condition the possible claims of a buyer within the framework of a purchase contract. Considerations regarding the indemnity package, the applicable law, the percentage that is acquired and the transparency of the due diligence process, among others, are important motives when considering them. The information, ultimately, is translated into important amounts to be considered by the parties in the acquisition contracts, either in the indemnity packages or in the special indemnities. The foregoing, of course, makes it a sensitive topic and one that deserves the greatest attention when negotiating. Differences in positions make this one of the most recurrent and most frequent themes.
Project | Unión Bananeros de Urabá S.A.
Gomez-Pinzón Abogados SAS acts as legal advisor to Unión Bananeros de Urabá SA (“ Uniban ”) in the negotiation and signing of an investment agreement and other supporting documents of the transaction for the potential acquisition of the Puerto Antioquia pottery project. * Among the other investors in Puerto Antioquia are companies from the banana sector such as Banacol, Banafrut, CI Tropical y Agrícola Santamaría, in addition to the Institute for the Development of Antioquial – Idea, Grupo Pío S.A.S, as well as CMA CGM, which is currently the third largest shipping company in the world.
The project consists of developing a multipurpose terminal located in Bahía Colombia, in the municipality of Turbo, Urabá region, dedicated to handling containers, grains, and bulk cargo with an initial capacity of approximately 650,000 TEU.
Puerto Antioquia has a strategic location since it will allow connection with the fourth generation roads (4G) Autopista Mar 1 and Autopista Mar 2, which promise to leave Medellín and Urabá 4 and a half hours away, the project has the potential to become the most important logistics center in Colombia, which will bring dynamism and development to the entire region.
#MeToo Movement | Reputational risks in a transaction
Due to social media, movements like #MeToo have permeated the business world. Particularly, in mergers and acquisitions transactions, this movement has generated that potential buyers are giving greater importance to the possible reputational risks that may be involved in a transaction. In the United States, the term “ Weinstein Clause “, which refers to an express statement about the absence of complaints related to sexual harassment within the companies to be acquired, has become a common term. < / p>
These types of clauses, which were non-existent two years ago, have taken a significant boom in transactions in the last year. According to the Intelligize report called “ The Impact of Social, Political and Data Issues on M & amp; A Transactions “, while in 2017 only 1 of 1200 analyzed contracts incorporated a clause related to sexual harassment, in In 2018, 45 contracts were identified with declarations that included this scope. In Colombia we have not yet seen a relevant development of this issue, however we foresee that in order to avoid reputational risks this type of clause will become more relevant.
Report M&A Colombia
During the first four months of 2019 the transactional market in Latin America has registered a total of 636 transactions. Colombia ranks as the second best performing country in the region after Chile, while Brazil, Mexico, Argentina and Peru show declines in both the number of operations and capital mobilized.
Colombia rises in the ranking, surpassing Argentina in results, and registering an increase in operations of 22% with 71 operations and a rise in capital mobilized of 59% with movements of USD 2,172m.
For the months of January and February Gómez-Pinzón ranks as the second firm in the country with a greater number of transactional consultancies, advising clients on 3 transactions both within the country and multi-jurisdictional.