COVID-19: impact on M&A (Luxembourg)

Outstanding contracts and transactions are facing the unprecedented effects of the Covid-19 pandemic (COVID-19). The measures taken to contain and eradicate the pandemic have hampered the manufacturing process and supply chain of businesses. As a result, such businesses are facing difficulties in both achieving corporate acquisitions and disposals as well as fulfilling their contractual obligations and may now be turning to the contractual remedies available to them to mitigate the effects of the COVID-19 spread.


  • Due diligence;
  • Negotiation phase;
  • Binding offers and put option letters;
  • Period between signing and closing;
  • Closing process; and
  • Termination clauses.

Due diligence

Would-be purchasers of businesses or assets in sectors that are directly (eg travel) or indirectly (eg real estate or infrastructure) affected by COVID-19 are advised to conduct heightened due diligence and risk assessments in the current climate. Likewise, would-be sellers are advised to prepare pre-emptively for increased scrutiny. Such concerns include the following actions:

Solvency test and forecasts

The likely impact of COVID-19 on a target's business plan, budget and exposure to associated risks should now be carefully considered:

  • Contextual judgment should be paid to the target’s financial information, which may no longer accurately reflect its position or prospects;
  • The effectiveness and use of crisis management procedures, risk protocols and business continuity plans shall be analysed. Understandably, solvency and the ability to service debts, especially those that are high-yield, for a target and its contracting third-parties are of high importance.
  • The target’s existing contracts shall also be reviewed in the context of the current climate, particularly the ability of the target and its contracting parties to perform, suspend or terminate obligations, including exercising force majeure clauses or similar provisions (explored further below).

These considerations should include scenarios in which the non-performance of a third-party would result in the target breaching its own contractual obligations further down the line. Board members’ role is at the heart of the above process.

External reliance: aid and insurance

Companies that are (potentially) heavily reliant on state aid, emergency tax relief or similar measures, and claims on existing insurance policies, including business interruption and health cover, are likely to deter would-be purchasers from acquiring assets as market turbulence continues.

Regulatory implications: employees and data

As remote working became the present norm for many businesses; regulatory, licensing and data protection implications, particularly for the financial services sector, should be reviewed, notably the applicability of privacy laws, such as the European Union’s GDPR.

Moreover, employer rights and obligations, including adequate compliance with relevant health and safety guidelines, communicating and implementing health and safety procedures, and the potential impact of travel bans should be reviewed when contemplating an acquisition.

Negotiation phase

Under Luxembourg law, the parties to negotiations cannot in principle be forced to enter into an agreement. However, depending on the status of such negotiations and the intention of the parties, they may be subject to an implied duty of good faith to continue to negotiate, the premature breach of which can lead to the payment of damages. This duty is based on the idea that parties may incur high costs during drawn-out negotiations and could at some point have legitimate expectations about an agreement being reached.

In this instance, for example, when one of the parties terminates the negotiations without reasonable cause (culpa in contrahendo) and has led the other party to legitimately expect a commitment to the transaction, then damages may be claimed for tortuous liability, pursuant to Article 1382 of the Luxembourg Civil Code.

In the context of COVID-19, parties should be conscious of the level of their negotiations, the signals they are giving to their counter-parties and the potential consequences of having delayed the decision to walk away from the table at the earliest opportunity.

Claims are dealt with on a case-by-case basis, but a would-be seller must meet a high burden of proof to evidence the applicability of this principle of good faith.

Moreover, boards of managers/directors on both selling and purchasing sides must consider their own enhanced obligations throughout the pre-signing stage.

Binding offers and put option letters

The seller who has received a binding offer from the purchaser or has validly entered into a put option letter/agreement is entitled to exercise an option to sell within a certain timeframe. The buyer should therefore be obliged to execute the share purchase agreement (SPA) but, in the current situation, may not agree to do so.

The general principle, under Luxembourg law, is that the violation of a contractual obligation entitles the non-defaulting party to damages only. However, should the put option letter/binding offer letter expressly stipulates that the parties have agreed to specific performance and have excluded the right of the buyer to oppose to it, the seller would be entitled to specific performance.

However, since such specific performance requires the intervention of a judge, it may, considering the current circumstances, be difficult to obtain. Therefore, we would recommend that the seller include a provision whereby the SPA should be deemed signed following the exercise date of the put option even if not actually signed by the buyer.

Drafting of the SPA

For transactions currently being negotiated, both sellers and buyers may wish to include COVID-19 related provisions in their SPA specifically relating to the termination rights of the parties (i) purchase price adjustments or an element of earn out in case profits are adversely impacted during a specified time period post-completion; (ii) specific warranties regarding the operational and financial impact on the company; (iii) where there is a gap between signing and closing, a specific material adverse change (MAC/MAE) clause and/or comfort on availability of funds for the buyer as well as force majeure / hardship clauses (as considered below).

Between signing and closing – good faith

Between signing and closing, selling entities or target companies may, without obtaining the prior approval of the buyer, need to take decisions that fall out of the scope of their ordinary course of business to deal with the outbreak of the COVID-19 despite a contractual commitment not to do so in the SPA. This may raise concerns, in particular in circumstances in which the absence of breach of such management between signing and closing provision is a condition precedent to the closing of the transaction.

Under Luxembourg law, parties to an agreement have a duty of good faith (bonne foi) according to which they must fully cooperate during the performance of the contract and manage difficulties that could have an impact on the completion of the transaction. This principle is usually reaffirmed via a specific clause in the SPA whereby the consent of the buyer may not be unreasonably withheld or delayed, thus enabling the seller to execute urgent decisions if reasonably needed, irrespective of the buyer’s consent, to minimize any adverse effect of the situation.

Representations and warranties

Parties to an M&A transaction should comprehensively explore the representations and warranties (R&W) applicable to their specific deal. This is of even greater importance in the context of COVID-19, where R&W are likely to be required for contingency planning and protocols. Moving away from the data room style disclosure, purchasers may insist on specific disclosures against the R&W made.

Therefore, to adequately protect sellers later down the line, they are advised to carefully disclose all (and likely) effects of COVID-19 on the target business and resist forward-looking R&W. Ring fencing should also be considered to protect the seller’s R&W against COVID-19-related claims across the entire R&W spectrum.

Closing process

The travel restrictions implemented by the different governments to tackle the COVID-19 crisis have should be taken into consideration while drafting the provisions related to the actions to be taken by the parties at closing. A physical closing should indeed by avoided and, other alternatives (electronic signatures, remote voting for corporate approvals…) should be considered. Find out more about Electronic signatures: remote execution in Luxembourg and COVID-19 corporate governance measures in Luxembourg.

Termination clauses


For transactions that are between signing and closing, parties should look at whether COVID-19 constitutes a MAC under the SPA. MAC clauses provide that, to qualify as a material adverse change, an event must be non-foreseeable at the time of the contract and must have a long-term and material impact on the target.

MAC clause does not require evidence that the performance of an agreement has become impossible but only less profitable for one party (usually the buyer). As there is no legal definition of MAC clause under Luxembourg law and very little case law, it is necessary to scrutinize the definition of “material adverse change” or “material adverse effect” in the relevant documentation.


For transactions that are already closed, parties should consider force majeure and hardship mechanisms.

Force majeure

Unless an agreement specifically disapplies force majeure, it would usually apply to all contracts governed under Luxembourg law. Although force majeure is not clearly defined in the Luxembourg Civil Code, one may infer its existence if the following criteria are fulfilled:

  • an event external to (ie beyond the control) the parties to the contract;
  • an unforeseeable event (that could not reasonably have been foreseen when the contract was signed);
  • an unavoidable event (the effects of which could not be avoided through appropriate measures).

Once these conditions are met and the defaulting party has proven that it cannot, under any circumstances, execute its obligation, the contract will either be suspended or terminated depending on the terms of the contract and the duration of the force majeure event.

Whether the effects of COVID-19 constitute a force majeure shall be determined on a case-by-case basis. Previous French and Belgian cases in which epidemics were used to justify a force majeure event show that courts have been generally reluctant to characterise these events as force majeure (the events not being viewed as unforeseeable and/or unavoidable and/or external in the circumstances at stake – eg, Chikungunya epidemic, H1N1 flu pandemic, Dengue fever outbreak, SARS epidemic, plague epidemic).

However, given the magnitude of COVID-19, Belgium has officially proposed a Royal decree, currently being reviewed by the Conseil d’Etat, confirming that the COVID-19 pandemic, as well as any measures taken by the relevant authorities, would be considered as a force majeure event.

Moreover, in France a recent decision of the Colmar Court of Appeal ruled that the pandemic, combined with the strict measures taken by the governments of France, Luxembourg, among others, to avoid the spread of the COVID-19 virus, could, at a given moment, allow contracted parties to suspend their obligations under a force majeure.


If the defaulting party is unable to prove the impossibility to execute the obligation of a contract and hence a force majeure, it may be able to justify the default by proving “hardship”, owing to the current circumstances, which rendered the performance of the contract to be more onerous.

The concept of hardship is well documented under French law and French case law but is not defined under Luxembourg law. Recent case law has opened up the possibility for Luxembourg courts to entertain an application of hardship for certain limited situations. Considering the current exceptional circumstances, the Luxembourg courts might be more inclined to adjudicate in favour of hardship should the required conditions be met.

According to French law, the defaulting party must prove the following three conditions, cumulatively, in order to claim hardship:

  • a change of circumstances unforeseeable at the time of the conclusion of the contract;
  • a change of circumstances that renders performance excessively onerous for a party. It must be shown that performance of the contract has become excessively onerous, and not merely more difficult; and
  • none of the parties have expressly accepted to assume the risk of hardship.

Other alternatives – abuse of rights

If a defaulting party is unable to claim force majeure or hardship, another alternative, while facing repeated requests from the other contracting party to perform, would be to claim that such requests constitute an abuse of rights, which is contrary to the principle of good faith (bonne foi).

Our Luxembourg corporate team stands ready to assist when navigating this challenging climate.

See our coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.

Thierry Somma
Arnaud Fostier
Managing Associate
India Hammond
Supervising Associate
Clarisse Vidal
Vanesa Chamorro Magallón