Mergers and acquisitions during the COVID-19 pandemic

By Brett M. Crowell, Esq., LL.M.



  • The COVID-19 pandemic has affected merger-and-acquisition transactions, and special efforts must be made by parties engaging in these transactions to address the specific issues and generally unpredictable environment caused by the pandemic and the responses to it by the government.
  • For M&A transactions already underway, purchase price adjustments may be necessary. Some deals may have become unfeasible or undesirable due to pandemic-related factors, and a party no longer wishing to undertake a transaction may need to investigate whether there is legal justification for terminating the transaction.
  • Targets in M&A transactions that are recipients of Paycheck Protection Program loans present special risks that buyers must consider.
  • The CARES Act creates several new tax issues that buyers and sellers involved in M&A transactions should address, including which party (1) will pay the 2020 payroll taxes that have been deferred under the act; (2) will be entitled to any refunds caused by provisions of the act, including the changes to the rules regarding net operating loss carrybacks, AMT minimum tax credit recovery, and the interest expense limitation rules; and (3) will be entitled to claim the employee retention credit or if a split of the credit between the parties is appropriate.

The COVID-19 pandemic's far-reaching impact on the global economy has affected merger-and-acquisition (M&A) activity, too. In this volatile, uncertain, complex, and ambiguous time, life and business continue in what is being called the "new normal," but, in truth, the current economic environment is far from normal. In M&A transactions, as discussed below, special efforts must be taken to address and safeguard against the unpredictability.

General considerations

Purchase price adjustments

One impact of the pandemic on M&A transactions is that many businesses' continuing viability is difficult to determine, which will likely create significant valuation discrepancies between buyers and sellers. Sellers may find that their underlying business model is scrutinized beyond the normal levels of due diligence, and they likely will be forced to demonstrate the ways in which the pandemic's longer-term social and economic environments will affect customers, supply chains, marketing, infrastructure, and so forth. In addition, deferred tax assets/liabilities and estimated tax payments will have to be evaluated in light of both new tax rules (discussed below) and updated financial projections that consider the impact of COVID-19 on a business.

A valuation discrepancy that is found to exist can be alleviated through more robust post-close purchase price adjustments. These adjustments could include earnout formulas based on future performance that can be paid on a sliding scale or upon reaching certain financial milestones. Further, payments can be arranged that are contingent on the occurrence of future events such as a future full or partial valuation.

In the current COVID-19 environment, a buyer's market sensitivity and risk aversion will likely depend on whether it is engaging in an M&A transaction for financial or strategic purposes. A financial buyer will likely be more concerned with uncertainty and therefore look to buy low with an eye toward short-term profits. A strategic buyer, on the other hand, may be less concerned with the market's short-term instability and focus more on growth potential and business synergies and thus may attribute a different enterprise value than a financial buyer.

Depending on the nature of the business, parties could conceivably remove the impact of the COVID-19 pandemic by adjusting EBITDA (earnings before interest, taxes, depreciation, and amortization). However, this process is extraordinarily arbitrary, particularly without visibility into what an EBITDA calculation may look like post-pandemic.

Working capital adjustments

The nature of many business operations has drastically changed and may force businesses to adapt to a new normal, at least in the short term, of lower working capital due to insufficient cash flow. Given the level of global uncertainty, however, a higher-than-normal level of working capital is desirable. Whether higher or lower, businesses' working capital is certainly being affected by the pandemic.

A source of tension in M&A transactions will arise from the debate over whether a historical measure for working capital is appropriate or whether a projection must be made that accounts for the current economic environment, with buyers likely preferring the latter. Any projections used for working capital calculations should account for varying needs as the economy normalizes. Parties should pay special attention to the working capital calculation and understand that it may become an increasingly contested item.

Paycheck Protection Program loans

Born from the Coronavirus Aid, Relief, and Economic Security (CARES) Act,1 Paycheck Protection Program (PPP) loans have recently been at the forefront of many business discussions. The PPP provisions require broad oversight that includes public disclosure requirements, which may benefit buyers' due diligence process.

Buyers in M&A transactions must review the risks associated with a target that has a PPP loan, including whether the loan was properly acquired and whether the target company has complied with the loan covenants. This is particularly important since Treasury has indicated the government will review all loan grants in excess of $2 million.2Whether a buyer or a seller will take responsibility for oversight will be significant, though the buyer will probably be liable in the eyes of the government. A buyer's liability is clear in a stock deal, but it is possible that liability will not change in an asset deal under successor liability theories.

PPP loan recipients are prohibited from substantially reducing employment levels and from using loan proceeds to fund stock buybacks. Financially motivated buyers in the business of creating efficiencies within a target with an eye toward resale may have to reevaluate their strategies so as not to run afoul of PPP requirements.

A buyer that does not need loan proceeds held by a potential target can return the funds or pay off the loan in order to avoid having to comply with the various PPP rules and loan covenants, and thereby avoid any inherent risk.

Extended deal timelines

The daily functions of most businesses have been greatly disrupted. Businesses that can do so have instituted remote-work policies that, for various reasons, can significantly reduce workers' productivity. As such, M&A deal timelines may need to be extended since information is not flowing as freely. Also, site visits might be impractical or impossible, which may prevent full-scale due diligence in some sectors.

The professional service providers that facilitate the deals are seeing the same impacts as the industry teams. Limited functionality could affect negotiation processes, access to information, ease of processing information, and so forth. Additionally, tasks such as gathering signatures, holding shareholder meetings for deals that require their approval, and documenting transaction progress may be impeded or require additional time.

Dealmakers must further consider the pandemic's impact on governmental agencies, with many agency offices operating at diminished capacity.

Transaction termination

In this uncertain time, some M&A deals have become unfeasible or undesirable. Each party involved must make its own determination and choose how to proceed. Some will want to merely delay the transaction and make a decision when more information becomes available. Indefinite or long delays, however, are often impractical, so parties must decide whether to terminate the transaction.

Terminations can be mutual or unilateral. If a deal has become burdensome for both parties, a noncompensatory termination is likely to be the best course of action. However, there may be situations in which one party still stands to gain from the transaction, while the other party will suffer repercussions. If this is the case, the negatively impacted party may "buy out" the other party to the transaction. Even with a contract termination expense, the burdened party may be better off financially.

If there is a difference of opinion on whether the deal should be terminated, the party wishing to cancel will have to consider whether it has a legal justification. Typical reasons are material adverse effect, failure to operate in the ordinary course (particularly related to crisis management), breach of covenant, force majeure, failure to provide access to information or facilities, and equitable impossibility. In cases where disputes end up in litigation over the validity of a unilateral termination, the outcome depends on the specific facts and circumstances. Parties should carefully examine representations and warranties in their agreement, particularly those related to solvency, material contracts, supply chains, and so forth.

In the current environment, some parties entering into M&A transactions may benefit from more robust representation and warranty insurance, though the cost is likely to be higher than normal and many policies may specifically exclude COVID-19—related breaches from coverage.

Tax considerations

The CARES Act, signed into law March 27, 2020, is a $2 trillion omnibus spending package that contains a wide range of pandemic-related economic relief, including direct payments to individuals, expansion of unemployment benefits, small business loans, relief funds, and a financial injection for the health care industry — as well as significant tax law changes. Many of these tax changes affect not only the 2020 tax year but also tax returns for earlier tax years, including 2019 returns that may still be in process.

The following discussion highlights tax provisions of the CARES Act that have a substantial impact on existing and future M&A transactions. As of this writing, Congress is considering possible modifications to some of these recently enacted tax changes. Note, too, that these provisions involve federal taxes and that states may or may not conform.

NOL modifications

Taxpayers that incurred net operating losses (NOLs) in 2018—2020 can now generally carry back those losses to the prior five years.3 Additionally, NOLs carried forward into 2019 and 2020 are not subject to the usual 80% taxable income limitation, and taxpayers may use those losses against the full amount of gross income. NOLs carried back to a Sec. 965 transition-tax inclusion year will need to be specially analyzed to ensure compliance with applicable international tax provisions.

M&A considerations: Parties that previously engaged in transactions should review agreements to determine who is entitled to any carryback refunds that may arise. Parties currently engaged in negotiations should ensure the entitlement is clear and is a fully discussed item, especially since carryback refunds could be substantial and the various elections involved are time-sensitive and irrevocable. Short-year returns that result in a loss for a seller may prove to be particularly useful. This temporary carryback allowance may make loss corporations more attractive targets. Parties should be cognizant of the fact that corporate NOLs carried back to 2017 and earlier may create refunds, but that the corporate alternative minimum tax (AMT) will still be in effect.

Deferred Social Security taxes

Employers may delay remitting the employer's share (6.2% of employee wages) of Social Security tax on wages paid between March 27, 2020, and Dec. 31, 2020, without incurring interest or penalties.4 Employers must remit 50% of the deferred taxes by Dec. 31, 2021, and the remaining 50% by Dec. 31, 2022.

The deferral was originally not available to employers receiving PPP loans after the employer had received a decision from the lender that the loan was forgiven. However, this prohibition was later repealed.5

M&A considerations: Agreements will have to consider this deferral in the definition of pre- and post-closing taxes. This becomes important in determining who has the fiscal responsibility to remit the taxes. If a seller has the responsibility, a buyer will want to ensure that the seller has sufficient liquidity to cover the liability since ultimate responsibility will fall back to the company. At the very least, this deferral should be considered when calculating working capital.

Qualified improvement property technical correction

Qualified improvement property (QIP) has been changed from 39-year property to 15-year modified accelerated cost recovery system (MACRS) property,6 correcting a drafting error in the law known as the Tax Cuts and Jobs Act (TCJA).7 The CARES Act fix means that QIP is now eligible for 100% bonus depreciation. The change is retroactive to the 2018 tax year.

M&A considerationsAs with many of these provisions, parties will have to review the transaction agreements to determine who is entitled to any refund that may result from retroactive application of the change. Further, this change could alter net tax asset value, which could have significant implications regarding recognition of gain/loss on sale and purchase price allocation.

Interest limitation rule changes

In the interest expense limitation of Sec. 163(j), the ceiling of 30% of adjusted taxable income (ATI) has been temporarily increased to 50% for tax years 2019 and 2020.8 Businesses may use their 2019 ATI, which, due to the pandemic, may be higher, to calculate their 2020 interest limitation. Partnerships do not get an increased limitation; however, the partners are able to deduct 50% of their share of 2019 excess business interest expense on their 2020 individual returns.

M&A considerationsThe temporary increase in the interest expense limitation could cause businesses that were subject to a restricted deduction to file superseding returns for 2019. Additionally, debt-financed transactions could become more appealing with the ability to currently deduct more of the interest.

Employee retention credit

Eligible employers can receive a refundable payroll tax credit equal to 50% of qualified wages paid from March 13, 2020, to Dec. 31, 2020.9 The amount of wages used to calculate the credit cannot exceed $10,000 per employee (with certain wages not eligible if the employer averaged more than 100 full-time employees in 2019). Eligible businesses are those: (1) whose operations were fully or partially suspended due to governmental orders related to COVID-19; or (2) whose 2020 gross receipts in a quarter declined by more than 50% when compared with the corresponding 2019 quarter (the business remains eligible until 2020 gross receipts for a quarter exceed 80% of the same quarter's receipts from 2019). Wages used to calculate this credit may not be used toward the paid sick leave or family medical leave payroll tax credits granted by the Families First Coronavirus Response Act (FFCRA).10 In addition, a business that receives a PPP loan is ineligible for this credit.

M&A considerations: Buyers should review the amount of the employee retention credit that remains available. For transactions that occur midquarter, buyers and sellers should consider whether the credit will be attributed to only one party or whether the credit will somehow be split between the parties.

Accelerated AMT credit recovery

Sec. 53(e) has been amended to allow a corporation to recover 100% of any of its remaining minimum tax credits in 2019, rather than over a period of years as previously required.11 Further, a corporation may elect to instead recover its remaining minimum tax credits in 2018.

M&A considerationsParties should determine who is entitled to any refund that may result from application of the AMT credit. Parties may have anticipated transfer of a longer-term tax asset, the nature of which has now changed.

Finding opportunities in an altered environment

The COVID-19 pandemic has disrupted the thriving M&A landscape but has likely increased the need for distressed M&As, such as sales by sellers in dire financial straits, reorganizations to facilitate cash flow, and insolvency restructuring. Further, deals will arise in certain markets and industries that will see increased growth and profitability during the pandemic.

Recently, M&A activity has been on hold as businesses grapple with the impact of the pandemic. However, transactions will soon resume, just looking a little different than they have in the recent past.  


1Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136.

2Treasury Dep't, "Paycheck Protection Program Loans: Frequently Asked Questions" (May 27, 2020), available at

3Sec. 172(a), as amended by CARES Act §2303.

4CARES Act §2302.

5IRS, "Deferral of Employment Tax Deposits and Payments Through December 31, 2020" (April 16, 2020), available at; Paycheck Protection Program Flexibility Act of 2020, P.L. 116-142, §4.

6Sec. 168(e), as amended by CARES Act §2307.

7P.L. 115-97.

8Sec. 163(j)(10), as amended by CARES Act §2306.

9CARES Act §2301.

10Families First Coronavirus Response Act, P.L. 116-127.

11CARES Act §2305.



Brett M. Crowell, Esq., LL.M., is an M&A tax senior associate at Green Hasson Janks in Los Angeles. For more information about this article, contact


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