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Disputes Related to M&A Activity Could Surge in 2021

Mustafa Hadi

March 3, 2021

2021 is likely to see an end to the patience and empathy parties extended in 2020, according to new BRG research.

Despite a pandemic that challenged M&A activity and the operations and finances of buyers and sellers alike, the parties didn’t let those challenges fuel a surge in deal-related disputes.

2021 promises to be a different story.

Recent research from BRG finds that attorneys and dealmakers in the Asia–Pacific region expect a surge in disputes this year, as 2020’s challenges become increasingly intolerable, and as the patience the parties extended during a crisis is widely replaced by a renewed focus on protecting their interests.

“We are likely to see proceedings increasingly being used to resolve genuine disagreements, which have been festering over the past year,” said John Choong, a partner at Freshfields in Hong Kong, in December.

BRG’s M&A Disputes Report – Asia–Pacific 2020 describes how issues boiling over from the pandemic year and a range of factors could help fuel disputes in 2021. In this evolving dealmaking environment, international trade tensions, market volatility and continued fallout from COVID disruptions all are likely to push parties toward arbitration and litigation.

2020: Delays and Difficulty, But M&A Activity Continues

Most attorneys and dealmakers said disputes didn’t increase significantly in 2020, but some saw an incremental rise in disputes consistent with previous years. More common than disputes were delays in transaction proceedings, as the parties struggled to complete due diligence—a particular challenge in cross-border deals, given widespread travel restrictions—and other tasks traditionally undertaken on location.

As a result, many deals that had signed but hadn’t closed before the pandemic were put on hold. Some buyers struggled to secure financing or representations and warranties insurance; others found themselves unable to enter the countries where their acquisition targets were located. Most commonly, buyers found it increasingly difficult to make fully informed valuation decisions.

In interviews conducted in the fourth quarter, some attorneys said they’d begun to see buyers using dispute proceedings—or the threat of such proceedings—to renegotiate prices on deals they’d signed before the pandemic upended global commerce. Nearly all of the attorneys and dealmakers we spoke to said they expected the cracks in deals that began to form in late 2020 to break open into disputes in the coming year.

“People are more sensitive about the financial situation,” said Matthew Skinner, a partner at Jones Day in Singapore. “In the past, they may have been inclined to let these things ride; they would not want to upset the apple cart. But now, it is different.”

MACs Under the Microscope

As tensions between parties grow, so does the attention paid to contract provisions that in more prosperous, less volatile times had gone largely unremarked upon. Thus did material adverse change (MAC) clauses and force majeure provisions rise quickly to the forefront of many dealmakers’ thinking in the waning months of 2020.

In interviews, lawyers said that in years past, disputes that involved MACs and conditions precedent (CP) most often saw them included cursorily in long lists of claims simply to preserve all possible avenues for claimants. But in 2020, that began to change. In 2021, disputes that center on MACs could proliferate as buyers and sellers grasp how the pandemic’s effects have rippled through the parties’ businesses.

When MAC- and CP-centered disputes arise, the outcomes likely will hinge on questions of how the pandemic directly impacted the business and the subsequent quantification. Whatever the issue, the imperative for dealmakers and lawyers will be to look carefully at the wording of MAC provisions and CPs. In contracts where the provisions are precisely defined, the question may turn to whether COVID-19’s impact qualifies as a MAC or makes a CP impossible to meet.

On the other hand, as one prominent Asia-based arbitration lawyer said, with a MAC that contemplates only general business disruption, “if a pandemic is not a MAC, then what else could be?”

Hot Spots: Where Disputes Are Brewing

To understand which industries likely will see the most disputes over M&A transactions in 2021, follow the COVID-19 fallout.

In the industries hit hardest, plummeting valuations and precarious futures are expected to lead to active deal markets and almost certainly to frequent disputes. The commercial real estate, infrastructure, aviation and hospitality sectors, for example, could see heavy activity in 2021.

On the other end of the spectrum, industries that have been booming should continue to attract investors seeking acquisitions. In an industry such as pharmaceuticals, robust transaction volume combined with complex intellectual property issues and cross-border financing and ownership will create a steady stream of complications that can foster disputes.

Our research indicates that, geographically, China and South Korea were the most active jurisdictions for M&A-related disputes in 2020 and likely will be again in 2021.

The weighting of dispute activity towards China arises from the heavy volume of foreign-direct investment and cross-border deals, combined with a slowing economy and tightening credit market. Diplomatic tensions between the US and China also will impact cross-border M&A activity and disputes.

Under the Trump administration, those tensions spilled into high-profile disputes involving the US government, such as the administration’s attempts to influence transactions involving Chinese-owned TikTok. Deal activity has remained relatively robust, despite the increasing tensions of past years. With a new president in the Oval Office, investors in the US and elsewhere could be poised to become even more active in China.

Future Impact: How COVID-19 Could Alter M&A 

As 2021 begins, the inauguration of a new US president and the global rollout of multiple COVID-19 vaccines signal a potential return to business as usual. But it’s unlikely that any business or industry will carry on exactly as it had before the pandemic, and that goes for M&A transactions as well.

Whatever COVID-19’s ultimate, permanent alterations, in the short term it appears the pandemic’s end will bring about a surge in disputes related to M&A and private equity transactions. Dealmakers and attorneys, buyers and sellers alike should brace for an active, contentious year.

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Mustafa Hadi

Managing Director

Hong Kong, Singapore

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