Deals in the Time of Pandemic

The COVID-19 pandemic has brought new attention to the period between signing and closing in M&A transactions. Transactional planners heavily negotiate the provisions that govern the behavior of the parties during this window, not only to allocate risk between the buyer and seller, but also to manage moral hazard, opportunistic behavior, and other distortions in incentives. Prior literature, both academic and practitioner, has focused virtually exclusively on the material adverse effect (MAE) clause. COVID-19, however, has exposed an important connection between the MAE clause and the obligation for the seller to act “in the ordinary course of business” between signing and closing. This Article is the first to examine the interaction between the MAE clause and the ordinary course covenant in M&A deals. We construct a new database of 1,300 M&A transactions along with their MAE and ordinary course covenants—by far the most comprehensive, accurate, and detailed database of such deal terms that currently exists. We document how these deal terms currently appear in M&A transactions, including the sharp rise in “pandemic” carveouts from the MAE clause since the COVID-19 pandemic began. We then provide implications for corporate boards, the Delaware courts, and transactional planners. Our empirical findings and recommendations are relevant not just for the next pandemic or “Act of God” event, but also the next (inevitable) downturn in the economy more generally.