Global law firm Herbert Smith Freehills (HSF) says many of last year’s uncertainties that impacted merger and acquisition (M&A) activity will remain this year.

HSF global M&A head Gavin Davies says the significant regional and global questions from 2020 have not gone away, although some have taken different forms as situations have played out, including the US elections and Brexit.

However, he avers that there are reasons for optimism. “There was a strategic recognition that 2020 has catalysed fundamental shifts in the way the world lives, works and plays, not least the importance of technology in all of our lives.

“With this comes a recognition that, for the best placed, M&A can be a tool of choice for effecting a rapid transformation of businesses to address that shift. In the more favoured sectors, we are seeing strong liquidity in the bank market to support strategic M&A by corporate clients and would expect this to continue into 2021.”

HSF corporate M&A partner Caroline Rae adds that, on deal execution, 2020 also showed that even the most complex deals could be done in lockdown conditions, if not more efficiently at times.

Davies says the lessons that 2020 ushered in for 2021 include catering for black swan events around termination rights and shifts around environmental, social and governance (ESG) aspects.

He explains further that the fall in M&A activity last year when the pandemic first hit most countries was partly owing to the logistical difficulties of doing deals, but market participants have since adapted and some meetings have become more efficient, albeit slightly offset by financing taking longer to obtain.

The disputes landscape in 2020 had been dominated by Covid-19-related issues and, given the lag between deal issues arising and determination of resultant disputes through litigation or arbitration, that will likely continue into the foreseeable future. 

Buyers’ attempts to reprice have tested price adjustment mechanisms, while buyers wishing to avoid deals altogether have sought to engage material adverse change clauses, or to suggest that completion conditions have not been satisfied.

“More creative arguments from remorseful buyers have included a suggestion that completion had been frustrated because the purchase agreement contemplated an in-person completion meeting which was impossible under lockdown.

“Courts have demonstrated their willingness to assist transaction parties urgently where appropriate, such as by determining targeted preliminary issues within the transactional timeline imposed by a longstop date for completion,” Davies explains.

He adds that litigation has also been a tool for some sellers to exert pressure on buyers and to compel closing, with governing law and jurisdiction clauses sending some parties’ claims out of the jurisdiction.

As the economic effects of Covid-19 continue, future disputes may arise out of the effect of the second and third waves on transactions, in particular whether those waves were foreseeable risks for which the parties catered in their agreements.

Meanwhile, buyers who completed transactions that now seem to have been overpriced will be examining the information provided to them in due diligence to determine whether warranties given by the seller, particularly as to the future business plan or finances of the target business, were true.

In terms of ESG, HSF states that social factors particularly rose to the fore of focus in 2020, given the pandemic’s impact on workers and vulnerable groups.

HSF says last year also saw employees becoming a more vocal constituency on ESG issues. Physical and virtual walk-outs and other protests were launched in response to concerns around working conditions, freedom of association, moderation of online content, diversity and equality, and climate, to name just a few.

Even while lockdowns and travel restrictions reduced emissions this year, concerns around climate change and its wider impact have continued to increase. This has led to greater investor demands for environmental and climate risk disclosure, scenario planning and portfolio analysis.

It has also led to more strident views regarding the need for companies to transition to a lower carbon future in a way that is just and inclusive, advancing S factors as well as E and G factors.

Meanwhile, in terms of foreign direct investment (FDI), HSF says FDI regulation has become an increasingly important consideration for cross-border M&A, against a backdrop of amplified protectionist rhetoric, even before the Covid-19 pandemic hit.

However, the outbreak has accelerated these trends, as governments have sought to move quickly to protect businesses affected by the economic fall-out, in light of concerns around opportunistic acquisitions by foreign buyers.

Some new regulations are directly tied to the impact of the pandemic, such as the express inclusion of healthcare as a sector covered by FDI regulation in many jurisdictions and the reduction of financial thresholds.

“After a year when the three most popular phrases were resilience, agility and ‘you’re on mute’, M&A seems to be emerging in 2021 on the right side of each of those trends,” Rae concludes.