M&A disputes in an uncertain, volatile world

As global M&A transactions continue to boom many forecast that 2021 will be a record setting year, bypassing the US$4.1 trillion in transaction amount set in 2007 and reaching the US$5 trillion or higher by the year end.

The contributing factors and threats to this phenomenon are numerous, complex, and intricately intertwined. What seems clear though is a simple idea that when there are more deals, the expectation is that there will be more disputes arising out of these transactions. More importantly, certain contemporaneous market developments may add challenges to the transactions and generate disagreements among the parties throughout the deal cycle.

First, continuing business disruption (e.g. supply chain interruption) can bring about a significant change to the target’s latest accounts or present a challenge in the projection of future performance. The target may not look like what the buyer thought it was buying at signing. The buyer may want to walk away (or renegotiate) if they believe the target suffered a detrimental impact from certain events, or that the seller failed to operate the target in the ordinary course after signing. Addressing these matters in dispute will involve examination of the drivers of the target’s performance, establishing the causal relationship between the key events and the target’s performance, and quantification of the impact of such events on the value of the target.

Second, shortened deal cycles and appetite for riskier investments may impose a constraint on complete and thorough due diligence, which may also have been exacerbated by the restriction on onsite inspections during the pandemic. Information asymmetry is inherent at this stage and the seller, seeking the best possible terms in a compressed timetable, may fail to disclose all material business information whether intended or not. As a result, non-disclosure of important price relevant information may become the focus of dispute, with the buyer arguing that they would not have entered into the deal had they known what they found out after closing. Resolving these issues will involve an evaluation of the economic significance to the target of such non-disclosed information, and an analysis of the amount by which the non-disclosed information impacted the valuation, and hence pricing.

Third, market volatility and dividing views on the macroeconomic trends mean lack of consensus in key assumptions used in valuation. Parties’ views on the world may diverge significantly, leading to disputes around the calculation of value and reasonableness of valuation assumptions. This will put a greater emphasis on the assessment as to whether valuation methodology is appropriate and assumptions are reasonable in light of the market uncertainty and volatility.

Fourth, the market continues to evolve coupled with governments’ ongoing response to the economic and health crisis. The uncertainty in this world not only relates to the target’s business but also to the financial positions of the buyer and seller. Accordingly, disputes may arise out of the pricing mechanism employed, in particular with respect to price adjustment. The issues may include interpretation of relevant price adjustment clause, definition of metrics and calculation methods, and assessing the temporary or permanent nature of certain events in the calculation of price adjustment.

Uncertainty and volatility abound. Despite the best intentions of the parties in executing a deal, disputes may not be prevented due to unforeseen evolution of business or changes in macroeconomic landscape over the course of a transaction. As can be gleaned from the above examples, disputes in M&A involve economic, accounting, finance, or forensic aspects. For successful dispute resolution, parties should work with their counsel and dispute specialists to carefully plan out strategy and approach to seeking remedy or defense.