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Corporate Contracts Get a Rewrite for the Post-Pandemic Era

Corporate Contracts Get a Rewrite for the Post-Pandemic Era

(Bloomberg Businessweek) -- When EasyJet Plc announced a long-term deal with Airbus SE in 2013 to buy 135 jets, the budget airline boasted that it had negotiated a “very substantial discount” from the list price of about $13 billion. Analysts estimated the price break at about 40%. But what EasyJet traded to get that discount wasn’t laid bare until last month. Under pressure from its largest shareholder to cancel the remaining undelivered planes from that order as the coronavirus flattens demand for air travel, the carrier said it couldn’t. Its contract with Airbus would require it to pay back the discounts it was given on the 45 planes it had already received and also to compensate the plane maker for any future losses it would incur from the deal’s termination. The company said it had no recourse to a so-called force majeure clause, which allows a party to exit a contract because of some unforeseen catastrophe—like a global pandemic.

Before Covid-19, price was the main consideration in corporate contract negotiations, but now risk minimization has become the order of the day. So companies involved in current negotiations are scrambling to include—or exclude—pandemics in force majeure provisions and in often-boilerplate “material adverse change” (MAC) clauses in mergers-and-acquisitions deals. And businesses will likely face demands to pay more or give up something else for the ability to walk away from a deal in the event of a second wave of the virus or some future outbreak. Think of it as the pandemic premium.

“In the post-Covid world, people will be able to say, ‘Unless you put this clause in, or if you want me to do this, then this clause has to go in or we cannot do it,’ ” says Sean Upson, a commercial litigator with Stewarts, a large U.K. law firm. “There’s so many uncertainties in the world now. So people will insist on clauses—and a competitor will probably be doing the same.”

With companies increasingly seeking to upend pending deals negotiated in the pre-virus era, contract disputes are piling up. Lawsuits have been filed over SoftBank Group Corp.’s withdrawal of a $3 billion investment in WeWork and over Sycamore Partners’ attempt to exit its agreement to acquire a 55% stake in L Brands Inc.’s Victoria’s Secret lingerie chain for about $525 million, among other soured deals. L Brands on May 4 agreed to terminate the contract.

Corporate Contracts Get a Rewrite for the Post-Pandemic Era

Many buyers still in negotiations are demanding significant discounts to carry on with M&A deals in a more uncertain world. Sellers, on the other hand, are trying to get in writing that the virus won’t prevent a transaction going forward, just like they’ve done following other catastrophic events, says Iman Anabtawi, a professor specializing in M&A law at the University of California at Los Angeles.

“After 9/11, they said they would include acts of terrorism,” she says. “After the financial crisis, we started talking about a global meltdown, and now they’re just saying ‘and also a pandemic’ as not [a] reason to walk away without some kind of termination fee.”

Such M&A termination penalties, which averaged 7% of the deal value for buyers in 2019, according to a study by SRS Acquiom, are typically included in agreements only when a transaction faces significant financing or regulatory hurdles. Brian Patterson, a Silicon Valley attorney with Gunderson Dettmer, says breakup fees may become more standard for all deals, not just the very biggest. But Mark Harms, chairman of merchant bank Global Leisure Partners, says there will be horse-trading involved when structuring the walkaway terms: “You want a MAC clause? Put a bigger termination fee in it so it’s at least painful for you to think about.”

Given the current economic climate, the party that has the money in a negotiation likely has the advantage, Patterson says. One of his midstage startup clients was recently brought back to the negotiating table by an investor who a few weeks earlier had signed a nonbinding term sheet providing for a 100% return in the event the company was acquired. “Lo and behold, that particular investor says ‘I actually think we need a 2X liquidation preference on our investment instead of the more customary 1X one,’ ” he says. “It’s typically viewed as a very heavy-handed, off-market request if an investor asks for more than one times their money back,” Patterson says. “But in times like this, investors are looking at: ‘Where’s my return going to come from?’ ”

In the hard-hit world of commercial real estate, the toughest negotiations ahead might be with insurers rather than between tenants and landlords, says David Bolour, president of AND Asset Management, a Los Angeles property investment group. He says future leases will probably require some kind of pandemic insurance to be maintained but predicts “insurance companies are going to be fighting tooth and nail over this” to limit their exposure. “This is nothing like anything any of us has ever seen,” he says.

Corporate Contracts Get a Rewrite for the Post-Pandemic Era

Amy Calvert, chief executive officer of the Events Industry Council, which represents a sector that’s been virtually stilled by the pandemic, says members are for now working out how to incorporate emerging health and safety protocols into future contracts with venues, caterers, and other service providers. More rigorous cancellation clauses will be a big part of the discussions, she says, though the emphasis will likely be on how dates can be reset. Says Calvert: “There’s a slogan in our industry, when we’ve seen crises like this before—9/11, the financial crisis—‘Don’t cancel. Rebook.’ ”

Upson says force majeure provisions will probably become far more specific and complex, noting that simply including the word “pandemic” may offer little protection if a company’s business is damaged more by the resulting economic downturn than by the disease itself. He says parties will likely try to work in more specific triggers to renegotiate when a contract becomes uneconomical.

Holly Stebbing, a London partner with Norton Rose Fulbright, cautions that including force majeure clauses may not offer pandemic protections indefinitely. “Now that Covid has happened and there are medical suggestions that highly contagious respiratory viruses may be the norm,” she says, “it’s no longer unforeseeable that this will happen again.”

While there may indeed be disputes about exactly what’s predictable, many lawyers still expect the use of force majeure clauses to increase. “Whether or not you say alien abduction or tsunami, the concept is meant to be that, in the event that something terrible happens,” the contract performance is excused, says Nicole Page, a lawyer at Reavis Page Jump in New York who represents models in endorsement deals. But she’s adding the specific term “pandemic” to her clients’ new agreements, just the same. “I’m certainly going to put it in every contract,” she says. “I’m not going to risk it. No lawyer’s going to take that risk.” —With Ellen M. Gilmer from Bloomberg Law

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