New judgement on consequences COVID-19 on M&A transactions
On 14 May 2020, a summary judge in the District Court of Amsterdam ruled on whether a prospective purchaser (Defendant) had to sign a share purchase agreement (SPA) regardless of the materializing COVID-19 outbreak.
A controlled auction was organized for the sale of all shares in the capital of the target company (Target). The Defendant submitted a binding offer for the purchase of the Target and was selected as winning bidder.
On 26 and 27 February 2020, negotiations on the SPA took place between Defendant and the current shareholders of Target. During these negotiations, COVID-19 was discussed but it was agreed that the SPA would not contain a MAC or Corona clause. The next day, a Signing Protocol was signed. An agreed form SPA was attached to this Signing Protocol and parties agreed that signing of this SPA was subject only to the condition precedent of Defendant taking out a W&I insurance. Satisfaction of this condition precedent was the sole responsibility of the Defendant and Defendant would use its best efforts to take out a W&I insurance that would cover the far majority of claims under the Seller’s Warranties and the Tax Indemnity, in any event within 10 business days after signing of the Signing Protocol.
Defendant informed the sellers on multiple occasions that the W&I-insurance was almost in agreed form with the insurer, but that certain tax warranties were still under discussion. However, Defendant ultimately informed sellers that no W&I insurance was obtained. Later, Defendant informed sellers that reality had been so profoundly altered by the COVD-19 related measures that Defendant felt compelled to suspend its efforts to obtain W&I insurance and wanted to focus on assessing the implications of these measures on the Target and the transaction. In view of these circumstances, Defendant argues that the standards of reasonableness and fairness do not warrant the W&I insurance condition precedent to be deemed fulfilled and that sellers cannot reasonably expect Defendant to sign the SPA under these circumstances.
Obligation to sign the SPA
The summary judge first assesses whether the Defendant is obliged to sign the SPA. Pursuant to Dutch law, if reasonableness and fairness so require, a condition is deemed to be fulfilled in the event that the party who had an interest in its non-fulfilment has prevented its fulfilment. The summary judge rules that Defendant indeed prevented the fulfilment of the condition precedent of taking out W&I insurance, as Defendant decided not to enter into the W&I insurance policy offered by the insurer. Therefore the condition precedent will be deemed fulfilled. Consequently, the summary judge orders Defendant to sign the SPA within two days after the date of judgment.
COVID-19 as unforeseen circumstances?
The Defendant claimed that both the Signing Protocol and SPA should be modified due to the COVID-19 crisis being an unforeseen circumstance. The summary judge decides, in line with claimants’ arguments, that the Signing Protocol (merely) relates to signing of the SPA and not closing of the transaction. Therefore, there is no need to modify the Signing Protocol.
The summary judge continues with saying that Defendant has not made it plausible that the SPA could not be signed without alterations. The summary judge refers to the fact that parties contemplated the impact of the COVID-19 outbreak and concluded that no MAC-clause was required, even though many infections were already registered in Europe. The summary judge furthermore takes into account that European countries have started to ease restrictions. Therefore Defendant has not (yet) convincingly argued that the COVID-19 crisis should be considered as an unforeseen circumstance that should lead to modification of the SPA.
Our firm has extensive experience with M&A-related litigation and closely monitors legal developments regarding the COVID-19 crisis. For more information, please contact Mijke Sinninghe Damsté or Harmen Holtrop.
Two weeks ago, the Netherlands Commercial Court also issued a judgement in summary proceedings in which the COVID-19 crisis played a significant role. More information on this judgment can be found here.