The strict but necessary lockdown measures introduced across the world to tackle COVID-19 are definitely taking its toll on the economy. Virtually the whole business fabric stayed put which inevitably gave cause for a sharp fall in consumption and a steep rise in unemployment. There is no denying that the squeeze in money supply brings to the fore a heavy blow for everyone and a major hurdle to overcome by any economy attempting to rise like a phoenix from ashes.
Amidst fears of a relapse and as restrictions are gradually loosened, businesses are re-opening in the hope of catching sight of a gleam of light that could get them back on track. This is no easy task when companies, especially small and medium-sized enterprises, have seen their revenues hit rock bottom and subsequently have been compelled either to cut wages or to dismiss or furlough their staff.
Struggling companies now face the challenge of negotiating with their creditors the re-structuring of their debts. Many of which are about to be pushed into insolvency proceedings. After all, either by filing for bankruptcy or involuntarily going into it, companies may proceed to reduce their outstanding liabilities in an orderly fashion by preventing creditors from taking undesired action against the remaining assets.
There are not too many alternatives to this. Many companies with unhealthy balance sheets will resort to equity capital markets. And those who have difficulties in collecting the necessary funding might see themselves bound to work off their debts by passing an internal resolution to increase their authorized share capital. This unavoidably comes at the expense of minority shareholders whose stake in the company may be diluted.
In regards to Mergers and Acquisitions (M&A), this might not be the best of contexts to purchase another market player. Nonetheless, this decision cannot be ruled out offhand if a good chance comes along. It is true, however, that M&A have plummeted around the globe since the outset of the pandemic. In many jurisdictions there exists a ban on completing transactions exceeding the notification thresholds without the approval of the competition authority, many of which encouraged parties to a merger to put their filing on hold until the situation becomes clearer. Now and in the midst of the lifting of lockdown restrictions, some companies have decided to reconsider their expansion strategies and engage in the study of their available options in the market.
Regardless of the size of the undertakings merging, it is deemed necessary to conduct the relevant research into the financials of the target company. There are too many risks stemming from the purchase of a struggling company which must be foreseen by the acquiring party before carrying the operation into effect. That is why the best way to gather the relevant information on the target is to look into its former performance, current state and future prospects by means of a Due Diligence.
The implementation of a Due Diligence comes particularly in handy for the assessment of those operations taking place between private market players in comparison to those publicly listed. The raison d’être of this is no other but the greater ease that there is for private undertakings to conceal some facts and figures on their market performance. Solid legal advice must subsequently be present throughout the process to ascertain blurred information that could potentially hinder the odds of success of the envisaged transaction.
By and large, the legal firm entrusted with the Due Diligence will require the target company to come forward with the following information: Memorandum of Association, certification of all entries in the Commercial Register, Membership Book, Minute book of the company, compliance with their tax obligations, list of company assets: movable and immovable property, list of employees, their contracts and payroll, banking pool with which the target usually operates, the identity of any other financial institutions or companies with which the target has worked on an occasional basis, loan list, insurance policies, list of independent professionals with whom the target works, etc.
This information should provide the acquiring company with a first picture of the prospective target. Nonetheless, this is just a first step of a more complex and broader investigation that should finish with a comprehensive overview of the deal before its closing.
Miguel Verdeguer Segarra, Ph.D.
Lawyer & Economist at Legal Notes