The COVID-19 Case for ADR Provisions in M&A Agreements

The COVID-19 pandemic has wreaked havoc on economies and upended economic metrics. It’s led to some M&A deals dying, others being delayed and many sitting in limbo as parties struggle to close: Deals were agreed on pre-COVID terms based on financials that are, more often than not, simply no longer remotely applicable. With the court system backlogged and parties needing to address transaction matters in a timely fashion, alternative dispute mechanisms such as arbitration and mediation are increasingly becoming attractive options for deal makers. Going forward, deal parties and their lawyers should seek to untangle themselves from the courts and, as a matter of course, include both mediation and arbitration provisions in their transaction agreements.

This past year, a number of M&A deals have been in the headlines with one party seeking to enforce a sale on the basis of the pre-COVID agreed terms and the other party arguing that closing conditions haven’t been met due to the pandemic. Parties can look to a number of provisions to argue against enforcement: Some will turn to the material adverse effect clause, possibly arguing that the industry in which the target operates has been disproportionately impacted by the pandemic; others may look to a seller’s inability to satisfy the typical pre-closing ordinary course of business covenant. Some deal parties, such as LVMH and Tiffany, took it upon themselves to revisit purchase price and ultimately closed with an—albeit nominal—purchase price adjustment. L Brands and Sycamore took the opposite approach for the sale of Victoria Secret, agreeing to terminate their transaction agreement. No termination fee was paid. In most cases, deal parties initially turned to the courts to settle their dispute but COVID-19 didn’t spare courts. They find themselves faced with significant backlogs, with reduced capacity amidst a growing number of cases, as both small and big players look to revisit pre-COVID arrangements. Transaction parties are now faced with a difficult choice: wait for an indeterminate period of time for courts to catch up to the caseload, and thus take on all the risks and costs accompanying such delays, or turn to an alternative dispute resolution mechanism. Some may have the wherewithal to be patient but for many businesses survival and resolution of dispute go hand in hand. For those constituents, arbitration and mediation are invaluable lifelines.