The current COVID-19 market environment presents unique circumstances to companies and investors who may, as a result of the tumultuous markets and the financial and personal effects of COVID-19, have opportunities to acquire distressed businesses at potentially depressed prices. Particularly in this market environment, though, one or more of the following scenarios may apply:
- The target needs to consummate a sale quickly because the target’s cash resources are dwindling. The buyer wonders whether the distressed sale and “melting ice cube” asset valuation increase its exposure to claims from the target’s creditors that the buyer underpaid for the asset.
- The target has a history of litigation claims or other types of latent claims (potential or actual), which it may not be able to satisfy. Even with diligence and proper structuring, the buyer may not be able to get comfortable that an asset sale or indemnification covenants will thoroughly protect it against successor liability claims.
- The target’s affiliates or other related parties have declared or are rumored to be considering bankruptcy, and it might be difficult to conduct diligence on the target’s receivables and payables histories, recent profits and loss statements, and related financial matters to confirm the solvency of the target. Moreover, the target itself could get swept into its affiliates’ or other related parties’ bankruptcy processes, especially if the target is a guarantor of any affiliate’s funded debt.
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