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 indemnities.
Buyers and JV parties may consider the opportunity to exercise their MAC-related termination rights under the SPA and JVC. As there is no statutory concept of MAC, the extent to which a MAC clause can be invoked, the underlying trigger events, and the remedies available thereunder are primarily based on the wording used in the contract. A typical buyer-friendly MAC definition includes a broad spectrum of events (including change of law or other agreed event not within the control of the parties) that materially and adversely affects (or could reasonably be expected to materially and adversely affect), either individually (or in the aggregate with all other events), the business, valuation, operations, licensing, assets, liabilities, condition (whether financial, trading or otherwise) or operating results of the target, or the ability of the target and/or the parties to consummate the transaction. The added emphasis highlights typical pro-buyer wording that aims to expand the range of events that fall within the scope of the MAC, making it easier for the buyer to invoke a MAC. Under this more inclusive definition, the buyer may try to argue that the Coronavirus outbreak itself and the exceptional measures adopted by the Chinese government and foreign governments to cope with the crisis result in a MAC affecting the target company, and as such exercise the relevant termination rights. A seller-friendly MAC definition instead describes the trigger events in a more limited and objective way, as such making it more difficult for a buyer to invoke a MAC. For example, it commonly carves out a long list of events not within the target/seller's control, such as macro-economic downturn, catastrophe, as well as changes of law/rules by governmental authorities and epidemic.
The governing law of the SPA/JVC should also be taken into account as it may impact the extent to which a MAC clause is enforceable. For instance, under the laws of most U.S. states, the buyer's burden of proof is heavy and largely depends on the specific circumstances of the case. A short-term (e.g., a few weeks or even months) adverse impact, even if severe, may not be sufficient to convince the court that a MAC has occurred. Thus, if the loss suffered by a target company due to the Coronavirus outbreak is only expected to last for a short term, a termination based on MAC grounds may not be supported by a court in the U.S. Needless to say, not all companies are affected by the Coronavirus outbreak in the same way and therefore whether a MAC has or not been triggered in this specific instance must be assessed on a case by case basis, depending on the impact such event has on the company and the factual circumstances that can be adduced in support of the enforcement of the MAC clause. A careful evaluation of all these aspects and factual elements is essential to assess the possibility of relying on a MAC clause, and whether any related representations and warranties have been breached.
2. Coronavirus outbreak may constitute "force majeure"
Whether a particular event could qualify as a force majeure event depends on the specific definition of force majeure event used in the contract and its governing law. A force majeure event usually refers to an event that is beyond the control of the parties, is unforeseeable (at the time of conclusion of the contract), unavoidable or insurmountable, and prevents total or partial performance. Absent a force majeure clause in the contract, the governing law of the contract may also provide a statutory principle of force majeure that may automatically apply or supplement its terms. This is the case under Chinese law, as opposed to, say, Hong Kong or English law.
For example, a JVC is mandatorily governed by PRC law, and typically includes a force majeure clause providing that if a force majeure event prevents a party from performing its obligations under the JVC, such party is excused from performance, and if the event continues in excess of a given period (e.g., 6 months) either party can terminate the JVC and exercise an equity/assets buyout right (purchasing the equity interest of the other party, or some of the assets of the JV) or put the JV into liquidation.
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