M&A Disputes Report: Five Years in Review: Lessons Learned and Future Outlook

Key dispute trends since 2020 and how dealmakers can navigate the year ahead 

Introduction The global economy has undergone a seismic transformation since our research into mergers and acquisitions (M&A) disputes first launched in 2020—shifts leading to more deal-related disagreements and new areas of contention. From pandemic disruptions to surging interest rates and geopolitical turmoil, dealmakers have navigated an exponentially more complex environment— one that only increases the likelihood that deals may turn sour. At the same time, new themes have emerged with implications for M&A and deal-related disputes, be it the energy transition, environmental, social and governance factors, cryptocurrency or the recent artificial intelligence boom. To understand how the M&A disputes environment has evolved since 2020 and help executives prepare for what’s to come, in June and July 2024 BRG professionals surveyed a select group of disputes and corporate lawyers whose insights have informed our broader research initiative over the years. Based across Asia–Pacific; Europe, the Middle East and Africa; and North America, participants in private practice at some of the world’s most prestigious law firms provide a firsthand view of the current deal market and related disputes. The findings reveal that some dispute drivers—like termination clauses—which gained prominence during the pandemic may be less salient as the overall economic outlook begins to stabilise after a period of extended disruption. After all, a stretch of megadeals in the first half of 2024 suggests the global M&A market could be on the path to recovery. However, amidst persistent upheaval, dealmakers appear to be focusing on deal levers that can offer an advantage in volatile times, such as purchase price adjustments. In addition, we asked dealmakers what they anticipate in the coming year. 83% of respondents expect M&A volumes will increase—the largest share in the history of our research—and seven in ten expect dispute volumes to rise. We also examined how respondents see private equity involvement influencing the likelihood of disputes in the current deal environment. In what follows, we unpack these findings and offer crucial guidance to help clients, readers and the broader M&A community understand the underlying causes of disputes and implement strategies to mitigate risk. — Mustafa Hadi, Founder, BRG M&A Disputes Report iii4 Previous Reports M&A Disputes Report 2020 READ HERE M&A Disputes Report 2021 READ HERE M&A Disputes Report 2022 READ HERE Mid-Year M&A Disputes Report 2023 READ HERE M&A Disputes Report 2024 READ HERE M&A DISPUTES REPORT: FIVE YEARS IN REVIEW M&A DISPUTES REPORT: FIVE YEARS IN REVIEW KEY FINDINGS M&A DISPUTES REPORT: FIVE YEARS IN REVIEW 6 Key Findings 1. M&A transaction elements most likely to generate a dispute since 2020: Purchase price adjustments (PPAs) and termination provisions tie for first place, selected by 46% apiece. 2. Deal element most likely to generate a dispute in the coming year: PPAs dominate present concerns (58%), while worry over termination provisions recedes. 3. Private equity involvement adds deal complexity: More than four-fifths (83%) of dealmakers agree PE involvement increases the likelihood of a post-closing dispute, but they appear more confident in navigating these challenges than in years past (93% agreed in 2021). 4. Heightened expectations for deals and disputes: Over 80% of respondents expect deal volumes to rise in the coming year—the largest share in survey history—and 70% expect disputes to increase. 5. Approaches to M&A risk mitigation: Legal teams advise attention to detail, experienced dispute counsel, clear communication and in-depth analysis of economic and geopolitical risk. v M&A DISPUTES REPORT: FIVE YEARS IN REVIEW 7 The first half of 2024 suggests a partial return to form for a mergers and acquisitions (M&A) market that has whipsawed between famine and feast since 2020. An early surge of big-ticket transactions drove global M&A values to an estimated $1.2 trillion at the half-year—up 12% from the same period in 2023. However, deal volumes remained lackluster, declining 13% year over year. While dealmakers are willing to pursue large transactions, the M&A market has yet to fully recover from the slowdown that began in 2022, according to S&P Global Market Intelligence. The second quarter also saw the largest increase in take-private deals in the past two years, with $67 billion transacted across thirty-two deals. Notable transactions include Capital One Financial’s planned $35 billion acquisition of Discover Financial Services, Conoco Phillips’ $17.1 billion deal for Marathon Oil and, in August, Mars Inc.’s $36 billion takeover of food-maker Kellanova. Private equity (PE)–backed M&A is also rebounding, with major transactions like BlackRock’s $12.5 billion purchase of Global Infrastructure Partners and Apollo Global Management’s $6.3 billion acquisition of gaming companies IGT and Everi. However, 2024 also saw regulatory and deal-related developments that could drag out transactions or cause M&A-related disputes. They include a slowdown in PE healthcare rollups in the US due to antitrust scrutiny and lawmaker pushback, as well as increased Federal Trade Commission review of serial acquisitions that could harm competition. Increased scrutiny of foreign investment is also shadowing the M&A landscape, with US pushback over Nippon Steel’s proposed takeover of US Steel a prominent recent example. Deals and Disputes Outlook Snapshot Expectations for Increase: Deal and Dispute Volume Deal volume Dispute volume 2024 (February) 47% 65% 2024 (October) 83% 70% 2023 63% 63% 2022 72% 70% 2021 75% 72% 1 M&A DISPUTES REPORT: FIVE YEARS IN REVIEW 8 Against that backdrop, it makes sense that 83% of respondents expect deal volumes to increase in the coming year and 70% expect dispute volumes to rise—a higher level of anticipation on both than in our annual 2024 and mid-year 2023 reports, particularly when it comes to M&A volumes. “Given the economics of the dispute process—where a relatively small investment may result in a material payout—it is difficult not to bring a dispute when there is a positive expective value from doing so,” said BRG Managing Director Frank Dery. Our findings also inched closer to the trend we’ve observed over much of our research: expectations for M&A deals and disputes move largely in tandem, though the latter tends to lag. Our February 2024 survey, published on the heels of a notoriously down year for M&A, was a prominent exception to that rule, with a gap of 18 percentage points between expectations for deal and dispute volumes (47 and 65%, respectively). Regional and industry factors are also expected to impact deal and dispute volumes. A greater share of Asia–Pacific (APAC)–based respondents, for instance, expect that deal volumes will increase in the coming year (91%), compared to 83% in Europe, the Middle East and Africa (EMEA) and 67% in North America. However, APAC had the lowest share of those expecting an increase in disputes (63%), compared to 83% in EMEA and 66% in North America). The results of the US presential election could significantly impact deal activity— driving either an increase or decrease once dealmakers have greater clarity on policy direction for the next four years, Dery said. “Lower interest rates are also on the horizon, with changes there likely to release some of the pent-up demand for M&A.” In EMEA, “Lower economic growth may constrain companies’ ability to grow organically and so push up deal numbers in order to deliver growth by acquisition— leading in turn to more disputes,” BRG Managing Director Peter Bird said. More broadly, the potential increase in artificial intelligence–related deals by newcomers to that sector which are more likely to make valuation errors could also drive an uptick in disputes, he said. “Lower economic growth may constrain companies’ ability to grow organically and so push up deal numbers in order to deliver growth by acquisition—leading in turn to more disputes.” PETER BIRD Managing Director, BRG 2 FIVE YEARS IN REVIEW M&A DISPUTES REPORT: FIVE YEARS IN REVIEW M&A DISPUTES REPORT: M&A DISPUTES REPORT: FIVE YEARS IN REVIEW 9 COVID-19 upended the global economy in 2020, putting M&A temporarily on ice as dealmakers scrambled to adjust to the fallout. The uncertainty heightened tensions between parties and widened the gap between deal terms and business realities in many transactions. Even as the pandemic receded and M&A activity bounced back, our research revealed increasingly complex deal structures amidst increased geopolitical and market volatility. With that in mind, we asked respondents which transaction elements have been most likely to generate a dispute in the years since the pandemic. PPAs and termination provisions— such as force majeure, material adverse change (MAC) or material adverse effect (MAE) clauses—led the way, selected by 46% apiece. However, while PPAs still top the list of likely dispute generators in the year ahead (increasing to 58%), termination provisions dropped significantly, to 25%. That shift reflects that parties are having fewer disputes where one side walks away from a deal—instead, they’re completing transactions but having more disputes in relation to deal elements such as PPAs. “The environment isn’t as choppy as it was four years ago,” said BRG Managing Director David Rogers. That more stable M&A landscape comes as the global economy moves on from economic shocks like pandemic shutdowns and the rapid run-up of interest rates in 2022. “Instead of trying to get out of deals altogether via termination, parties now may be focusing on extracting value from deals they have entered into based on the mechanisms in a sales and purchase agreement,” BRG Director Calvin Qiu said. Those include put and call option clauses— the second-ranked dispute driver for the coming year—which provide a mechanism for an investor to sell or increase their stake. Changing Role of Deal Elements in Disputes M&A Transaction Elements Most Likely to Generate a Dispute Termination provisions (including force majeure, MAC or MAE clauses) 46% 25% Put/call option clauses 42% 46% Other representations and warranties 38% 33% Earn-out clauses 33% 29% Regulatory approvals 25% 29% Indemnity provisions 17% 17% Due diligence 17% 13% Covenant agreements 8% 4% Representations and warranties concerning regulatory approvals 8% 13% Purchase price adjustment 46% 58% Since 2020 Next 12 months 3 M&A DISPUTES REPORT: FIVE YEARS IN REVIEW 10 “Most of the termination provision-related disputes that I have seen arose from COVID issues and the seller fundamentally changing the way it operated the business before the deal closed,” Dery said. Such disputes are less frequent in the post-pandemic period. “PPAs continue to be the most common type of dispute I see.” Additionally, as M&A deals become more complex, so do the accompanying PPAs—giving rise to ambiguity that deepens dispute risk, Dery said. “During negotiations, the parties may have one understanding of what the terms mean, but it is not uncommon for that understanding to change post-closing.” For example, in a recent dispute the parties had agreed that there would be an adjustment to lower the contractually defined amount of cash by the amount of repatriation taxes calculated on cash held in overseas jurisdictions. Once the transaction closed, the buyer calculated the adjustment based on all cash balances in overseas jurisdictions, whereas the seller calculated the adjustment based only on cash that could be hypothetically repatriated to the US. Ultimately, the matter was resolved in favour of the seller on the basis that all adjustments had to be determined based on the company being a going concern— and on that basis, it was not reasonable to calculate the adjustment on all cash being held overseas because not all cash could be repatriated back to the US. Another factor may be driving the emphases on PPAs, put and call options and earnout clauses: the accelerating importance of private equity, “whose focus may be on short-term value more than longer-term strategic benefits,” Bird said, “and which may be less ready to take an immediate value hit.” “During negotiations, the parties may have one understanding of what the terms mean, but it is not uncommon for that understanding to change post-closing.” FRANK DERY Managing Director, BRG 4 FIVE YEARS IN REVIEW M&A DISPUTES REPORT: FIVE YEARS IN REVIEW M&A DISPUTES REPORT: M&A DISPUTES REPORT: FIVE YEARS IN REVIEW 11 As suggested above, the dramatic growth of private equity has profoundly impacted the global M&A market. PE firms with vast reserves of dry powder are driving consolidation across industries, engaging in new types of transactions and pushing traditional corporate buyers to compete more aggressively for assets. “PE firms are in the business of doing M&A. They have money to deploy—and the pressure on them to do deals increases over time,” BRG Managing Director Mustafa Hadi said. The differing approaches, resources and motivations of PE versus corporate buyers also influence M&A disputes. Most lawyers we’ve surveyed over the years consistently agree that PE involvement increases the likelihood of post-closing disagreements. In our most recent survey, 83% of respondents agree with that statement, citing PE’s different approach to risk management, the industry’s focus on profit and exit strategies and a greater degree of sophistication and experience with litigation compared to some corporate buyers. Here’s what they told us: Private Equity Impact 5 FIVE YEARS IN REVIEW M&A DISPUTES REPORT: FIVE YEARS IN REVIEW M&A DISPUTES REPORT: – PE buyers are sophisticated, work on many transactions and have a higher comfort level with disputes than your typical strategic acquirer. The disparity in M&A experience can lead to outcomes where agreements favour the PE buyer— but the commercial outcome was unexpected by a strategic seller, increasing the likelihood of a dispute. – PE’s enhanced familiarity with litigation generally means a dispute is likely to be commenced—but there may also be opportunity to resolve through negotiation or mediation. – It is only about dollars and cents in PE, whereas the strategic aspects of non-PE deals mitigate against post-closing disputes. The overall performance of a particular fund may drive aggressive positions postclosing that you would not see in strategic M&A. – There is a greater focus on financial numbers and pressure to exit with a strong return on investment. – PEs have obligations to their limited partners/shareholders and pressure to deliver on their internal rate of return targets. Further, exit disputes occur more frequently with PE investors given the limited fund life. – PE investors take a different approach to risk against a portfolio of investments. Throwing $2 to $10 million at a dispute, even with a lower than 50% likelihood of success, is more palatable to a PE investor with a relative short-term perspective than for traditional corporate ownership models. They are more focused on upside. – PE players are more likely to take riskier investments and are prepared to enforce their legal rights. Risk Management Focus on Profits and Exits Litigation Sophistication and Experience M&A DISPUTES REPORT: FIVE YEARS IN REVIEW 12 Interestingly, the view that PE involvement leads to more disputes appears to have moderated somewhat as PE buyers become increasingly entrenched in the deals landscape. In 2021, 93% of respondents said PE involvement increased the likelihood of a post-closing dispute—a result that, in part, may have reflected the heightened volatility of the early pandemic period. That share fell to 85% in 2022 and has remained fairly steady, with 83% of respondents to our most recent survey saying the same. The portion of respondents who disagree, however, offered some instructive counterpoints: – PE generally tries to avoid disputes, given their adverse impact on a PE sponsor’s reputation in the market. – PE buyers tend not to be as litigious, as they operate on short investment spans which are not usually consistent with lengthy disputes. On the sell side, they don’t tend to give warranties, which limits the scope for disputes. As such, their involvement is at best neutral; at worst it reduces the risk of post-closing disputes. – PE firms usually won’t invest unless a significant amount of due diligence has been conducted and they usually retain some degree of control over the target. With sophisticated PE firms, the documentation is usually watertight. “PE firms are in the business of doing M&A. They have money to deploy— and the pressure on them to do deals increases over time.” MUSTAFA HADI Managing Director, BRG 6 FIVE YEARS IN REVIEW M&A DISPUTES REPORT: FIVE YEARS IN REVIEW M&A DISPUTES REPORT: M&A DISPUTES REPORT: FIVE YEARS IN REVIEW 13 The transformations reshaping the global deal landscape since 2020 underscore the importance of fine-tuning best practices to avoid and/or manage M&A disputes. The devil is in the details, which require an even closer eye to keep pace: “We need more and better due diligence and more detailed spelling out of price terms and price adjustment terms in deal documentation,” Bird said. Precision is crucial, whether in defining financial terms, including deal parameters like working capital adjustments or crafting provisions around sales and purchase agreements or shareholder agreements. Project and process management in the period around closing are also important. “Everybody knows what the contract terms mean until the transaction closes and the lawsuits start getting filed,” Dery said. “Being prepared for a dispute before it arises is the best mitigation step you can take.” Dealmakers in highly regulated sectors— healthcare, financial services or extractive industries, for example—also should pay attention to regulators’ increased willingness to pursue perceived wrongdoing. Case in point: BRG Managing Director Andrew Webb, who focuses on mining and natural resources, is seeing continued disputes between natural resource investors and host governments around construction and operations regulations like environmental consents, as well as fiscal stabilisation arrangements. “In my experience, in natural resource transactions the risk of regulatory challenge can be reduced by a combination of deep due diligence and an understanding of the position of local communities, coupled with a recognition that anchoring consent on outdated regulations or a onesided arrangement may well increase risk of challenge.” We asked respondents what advice the

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