Why am I being sued? Disputes in M&A
Why am I being sued? Disputes in M&A
It turns out, that we are currently in a litigation ripe environment. More than that, litigation is being used more and more as a creative way to reopen negotiations.
“You’re looking at people using disputes as a way to claw back value after the deal, like a prize chip.” Francesca Parker, Senior Associate at Hogan Lovells, explains.
What are we seeing in the M&A Disputes market?
The backdrop is that going back to 2021/22, high valuations were paid which weren’t all underpinned by accurate forecasts for ongoing performance.
This has created a perfect storm for a litigation ripe environment. More than that, disappointed buyers are using litigation more and more as a creative way to reopen negotiations.
“You’re looking at people using disputes as a way to claw back value after the deal, like a prize chip.” Francesca Parker, senior associate at Hogan Lovells, explains.
This comes from being in a market that has been disappointing for M&A with high inflation and interest rates, and over-inflated valuations.
1. Claims don't need to have a 100% chance of success
At the moment, it’s a lot less about what the contract said, and more about the market that will make disputes more or less likely. The claim doesn’t need to have 100% chance of success to achieve the outcomes that might be anticipated.
2. Allegations are being made at an earlier stage
"We are inheriting more US-litigious practices, where allegations are made at an earlier stage in order to prompt the discussion and gain some leverage in negotiation," Ardil Salem, partner at Hogan Lovells, says.
3. Increase in due diligence
The trend that is seeing far more intensive due diligence being done since 2022 is continuing. “There is a lot of pressure on businesses to kick the tyres of what they are buying, and to make sure that the valuation is supported by the underlying business and the pipeline and the prospects."
4. Moving away from seller-friendly provisions
The environment is arguably creating less possibility of dispute over the deals that are signed today, because they're on the slightly more buyer friendly terms because of the increased due diligence. Be warned - there are exceptions!
1. Claims don't need to have a 100% chance of success
At the moment, it’s a lot less about what the contract said, and more about the market that will make disputes more or less likely. The claim doesn’t need to have 100% chance of success to achieve the outcomes that might be anticipated.
2. Allegations are being made at an earlier stage
"We are inheriting more US-litigious practices, where allegations are made at an earlier stage in order to prompt the discussion and gain some leverage in negotiation," Ardil Salem, partner at Hogan Lovells, says.
3. Increase in due diligence
The trend that is seeing far more intensive due diligence being done since 2022 is continuing. “There is a lot of pressure on businesses to kick the tyres of what they are buying, and to make sure that the valuation is supported by the underlying business and the pipeline and the prospects."
4. Moving away from seller-friendly provisions
The environment is arguably creating less possibility of dispute over the deals that are signed today, because they're on the slightly more buyer friendly terms because of the increased due diligence. Be warned - there are exceptions!
Exceptions to the rule
One of the exceptions to moving away from seller-friendly provisions decreasing litigation is where deferred consideration is involved.
What are the problems with deferred consideration?
Deferred consideration arrangements can be prone to disputes due to their complex nature and potential for misinterpretation.
Increase in indemnities: Greater use of deferred consideration often leads to an increase in indemnity claims, adding another layer of potential disputes.
Unpredictable market factors: Market fluctuations and uncertainties can affect the effectiveness and outcomes of deferred consideration agreements.
Case example: A recent case involving a Delaware grocery chain highlights the risks associated with deferred consideration, where strict contract interpretation led to unintended financial obligations for the seller, emphasising the importance of precise drafting and testing in deal contexts.
Warranties and indemnities
When it comes to giving warranties and indemnities for certain time frames, make sure they correspond with the timeline your disclosure has covered. Right at the end of the deal, it is important to think about whether anything shifted in the last hours to days before the deal is complete.
For example, If you’ve given a disclosure against two years worth of data, but have been asked to warrant for a longer period of time, you need to be confident that your two years of data actually tracks for longer. Otherwise that’s an area that can end up being ripe for disputes!
The panellists had seen a fair bit of wooly drafting when it came to indemnities, advising that broadly drafted indemnities doesn’t always work in your favour. In order to avoid this, have a think about where your indemnities might pop up again, such as where is that going to give rise to this? In what time period? What flex is there around that or is there none? What metrics are tied to certain milestones that need to be achieved? These kinds of questions can tighten this up, and prevent disputes arising after the deal has closed.
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“Make sure that you lean on other people's expertise: there is a huge amount of knowledge going around and people are incredibly kind with their time and their knowledge."
Other disputes claims arising in the current market:
- Unfair prejudice claims which are a minority shareholder remedy. There are difficult to succeed but an easy allegation to make and difficult to nip in the bud, meaning that they can
- Derivative action by shareholders over company directors' breaching their duties in some way
This all sounds a bit scary, but there are a few top tips you can take away to mitigate all this:
- Making sure you get due diligence and disclosure right, by not giving it all to AI, and being thorough about timeframes you warrant for can make a huge difference.
- If something has changed right before you sign, make sure your warranties and indemnities are up to date.
- Don’t warrant for longer timeframes than necessary unless you are really sure about your forecasts.