Publication | ThinkSet
The View from EMEA: M&A Disputes on the Rise in 2023
Daniel Ryan, David Rogers, and Andrew Webb
Economic and geopolitical uncertainty will continue to drive disputes in Europe, the Middle East, and Africa.
The outlook for 2023 deal activity is mixed after last year’s decline in mergers and acquisitions, with reason for optimism in some industries offset by banking-sector turmoil that could chill dealmakers’ appetites for M&A. But the economic and geopolitical uncertainties that drove last year’s spike in M&A disputes show no signs of slowing down, setting the stage for more conflicts to come—particularly in the Europe, Middle East, and Africa (EMEA) region, which BRG’s 2022 M&A Disputes Report identified as the expected leader in such activity this year.
In what follows, we’ll examine how factors such as the protracted war in Ukraine and mounting regulatory pressures could influence M&A disputes in EMEA. Issues around cryptocurrency and environmental, social, and governance (ESG) factors also are casting shadows over the disputes landscape in the region and beyond—a topic that BRG plans to explore in greater depth in our upcoming 2023 M&A Disputes Midyear Report.
2023 Outlook: EMEA M&A Landscape
This year, EMEA is seeing some M&A activity, driven—as a February Bloomberg report put it—“by corporates looking to take advantage of cheap valuations and strong balance sheets to drive their growth agendas.” Major transactions in the works include:
- Biotechnology giant Amgen’s planned $28 billion acquisition of Dublin-based Horizon Therapeutics
- A $4 billion bid by the main shareholder of Rothschild & Co. to take the storied French banking firm private
- Swiss building-materials company Holcim’s $1.3 billion-announced deal for US roofing systems company Duro-Last
- UK chemical maker Ineos Group’s $1.4 billion purchase of South Texas oil assets from Chesapeake Energy
Recent banking-sector upheaval, however, potentially could curb M&A volumes, despite earlier forecasts identifying sectors including technology, media, and telecommunications as expected drivers of EMEA deal activity this year. The Middle East also may offer opportunity for deals, with a senior bankerr at Saudi Arabia’s SNB Capital noting, “We see 2023 as an M&A year” due to accelerated investments by the kingdom’s sovereign wealth fund and heightened transactional activity among the private sector.
Unpredictable Market Conditions Increase the Likelihood of M&A Disputes
However, ongoing uncertainty and market volatility in EMEA also are expected to increase the propensity for deal-related disputes, as shifting conditions affect how deals are structured and as the economics that underpin transactions evolve between the time of signing and completion.
Rapid market shifts can make it hard for buyers and sellers to gauge the value of the businesses being bought and sold, which can result in a “valuation gap” where both parties want to do a deal but struggle to agree on price. One way that dealmakers can address this is by using contingent consideration such as earn-outs, which allow the buyer and seller to share some risk. These mechanisms are on the rise: they were the second-ranked dispute driver in EMEA last year, BRG’s research found.
For their part, buyers may try to renege in instances where value has declined sharply, as Elon Musk appeared to attempt (unsuccessfully) with Twitter. Acquirers also may consummate a deal only to find that what they have received is not what they had bargained for, because of undisclosed factors such as supply chain disruptions or regulatory interventions.
Sector-specific upheaval is feeding the disputes pipeline too, most prominently in the area of cryptocurrency. Last year saw a record number of crypto-related M&A deals, including the London Stock Exchange Group’s purchase of TORA, a provider of technology for trading digital and other assets. But the announced value of crypto M&A transactions fell by more than half in 2022 compared to 2021 amid the crypto winter, providing impetus for post-deal disagreements.
The War in Ukraine and Other Geopolitical M&A Dispute Drivers in EMEA
Nearly one-third of EMEA respondents to our 2022 survey cited political strife as a factor they expected to drive disputes in 2023—the highest of all regions we surveyed. Those issues could well come into play in EMEA in the coming months.
A prime example: additional economic sanctions on Russian banks and other entities as the country’s invasion of Ukraine drags on. Shut out of many American and European banks, Russian money has been flowing to more friendly destinations such as the United Arab Emirates. The UAE’s Central Bank, for instance, revoked a license it had granted Russia’s MTS Bank to operate in the country after the US included the lender in a list of sanctions, giving the bank six months to wind down its operations in Abu Dhabi. The move comes as the US appears increasingly keen to encourage the UAE and other Middle Eastern countries to do more to slow down Russian economic activity fueling the war in Ukraine.
Stepped-up sanctions and/or more aggressive enforcement of such measures could lead to M&A-related disputes, similar to the impact of anti-corruption laws. Say a Western company has invested in a business in the Middle East that has been close to the line where Russian sanctions are concerned—and then either the business crossed it, or the line shifted due to stepped-up enforcement. Complex multinational supply chains also could snare companies in sanctions-related M&A disputes if, for example, a company’s downstream supplier is in breach of sanctions but that vulnerability wasn’t disclosed at the time of the deal. In times of economic turmoil, potential nondisclosures are more likely to lead to disputes, with disappointed buyers looking to assuage some of their dissatisfaction through warranty or misrepresentation claims.
On the other hand, energy-market turmoil tied to the Ukraine conflict hasn’t damaged the European economy as much as some had anticipated. A milder than usual winter and strong government support has blunted some expected impacts for most Western European countries, though Eastern European countries that rely more on energy-intensive manufacturing are expected to be harder hit. That steadier-than-expected economic footing could potentially avert some dispute activity tied to M&A deals for EMEA companies.
Heightened Focus on Antitrust and Environmental, Social, and Governance
The regulatory environment was a prime driver of M&A disputes in EMEA last year: nearly one-third (31 percent) of survey respondents in the region selected it as a key factor leading to disputes. We expect that trend to continue in the coming year, as European Union and UK authorities enact stricter rules on issues including antitrust, data privacy, and ESG. Regulatory interventions that slow the progress of deals often can result in transactions that don’t create the value initially anticipated, creating an environment primed for disputes. UK regulators in particular are becoming more assertive.
For example, in February the UK Competition & Markets Authority told Microsoft that the software giant’s $69 billion acquisition of Activision Blizzard could harm competition in the UK gaming market. While the CMA has since narrowed the scope of its investigation, the probe adds to existing pressure on the deal from US regulators. These sorts of regulatory interventions can affect deal terms around representations, warranties, or other contractual commitments—and so trigger M&A disputes.
The EU’s Foreign Subsidies Regulation, set to apply later this year, also could slow some M&A deals and open up others to disputes. The FSR grants the European Commission powers to investigate subsidies from non-EU states that distort competition in the EU’s internal market. The rule also allows the EC to impose far-reaching conditions, such as divestment or dissolution of deals, for transactions where a foreign subsidy may affect competition in the EU.
ESG in the Legal Spotlight
A heightened focus on ESG among authorities—not to mention investors and advocates—continues to cast a shadow over the regional M&A disputes landscape.
BRG’s research found that evolving ESG rules in the EU, UK, and elsewhere are expected to reveal previously undisclosed issues that could feed deal-related disputes. Nearly 80 percent of survey respondents agreed that the aggressive regulatory environment and lack of established metrics and rules around ESG make M&A disputes in this area more likely in 2023.
These issues have been increasingly showing up in EMEA legal venues. In February, the advocacy group ClientEarth, which is also a Shell shareholder, sued the oil giant’s board of directors in a UK court for failing to manage the material and foreseeable risks that climate change poses to the company. The lawsuit alleged that the directors had breached their duties under the UK Companies Act of 2006, as well as their duty of reasonable care, skill, and diligence, and had the support of key financial investors.
That vulnerability also could extend to companies that buy assets that are in compliance with ESG standards that are current at the time those deals are completed, sparking disputes around duty of care laws and companies’ obligations to disclose, manage, and prevent ESG-related risks in the future. The 2021 order by the Hague District Court for Shell to reduce its worldwide CO2 emissions by 45 percent by 2023 was based on an unwritten duty of care in Dutch tort law that the court found required the oil giant to prevent dangerous climate change.
That decision is now under appeal, but such litigation and court decisions show that companies can be found liable for historical acts that, on the face of it, may have appeared at the time to be consistent with then-applicable legislation or ESG standards. Due diligence during M&A processes is evolving to encompass these considerations and must assess whether liability might arise from acts or omissions, whether or not these comprised breaches.
Under this lens, a warranty that the operation of an asset was compliant with prevailing in-country regulations may not be adequate to protect a new owner’s reputation and ESG record. Instead, the due diligence must drill down into the scale and nature of the impact of that operation on the environment and local communities; then an informed decision must be made as to the extent to which this might come back to bite the new owner—if the risk is deemed too great, it could prevent the acquisition. Similarly, sellers are taking greater care about whom they sell to if one of the reasons for the sale of an asset is that it no longer fits within their ESG tolerance.
What’s Next for M&A Disputes?
As 2023 unfolds, BRG will be watching carefully to see how the rapidly evolving conditions may affect our clients and readers. BRG will explore ESG’s impact on deal-related disputes in greater detail in our upcoming M&A Disputes Midyear Report. That research also will examine how cryptocurrency and other digital assets are influencing M&A disputes in EMEA and beyond.
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