COVID-19 lockdowns, travel bans, and economic conservatism built up a kind of transactional ‘cabin fever’, resulting in a relative buying spree throughout 2021, 2022 and into 2023.This produced one of the busiest periods of M&A activity in recent times. But those times have cooled – the economy is contracting, inflation and debt levels remain relatively high, and despite a recent uptick in business confidence, geopolitical uncertainty combines with domestic political change both here and overseas, to create an air of economic uncertainty abroad and at home.
As a result, some of the deals completed over the past two years aren’t looking as good as they might have, through that lens of optimism and excitement occasioned by the end of COVID-19 restrictions.
- Increased scruntiny of deals
An increasing number of our clients are scrutinising recently completed transactions with an intensity unseen in recent years, and our litigation experts are working closely with us in relation to higher-than-usual post-deal disputes, including disputes over post-completion adjustments and earn out provisions and alleged breaches of warranties.
- The importance of due diligence
Transactional lawyers will, rightly, tell you that the best line of defence for buyers and sellers is a thorough due diligence process conducted over the most important parts of the business (i.e. where the greatest risk exists). For vendors, ensuring your warranties, and any representations made, are sound, and that there are no “fish hooks” which could be used later on by a repentant buyer, is another critical step in assessing the terms of any proposed deal. Assessing post-deal dispute risks upfront is something we consider to be an important and prudent step given the increased litigious environment.
Where the parties have already signed, experience in navigating warranty and indemnity provisions, including familiarity with the types of claims and defences deployed in this space, is critical. Although not always possible, a well-advised vendor that acts decisively can achieve the swift resolution of spurious claims, freeing up capital and executive time (e.g. through summary judgment or strike-out proceedings).
For purchasers, it is always better avoiding the need for a dispute to claw back money that has not been well spent. Thorough due diligence, and ensuring language used for deal terms does not provide an out for a vendor in the face of a dispute are steps we strongly encourage.
- Use of warranties and adjustment mechanisms
In reality, dissatisfied parties are resorting to making use of warranties and adjustment mechanisms to re-value bad deals. Often for entirely justified reasons. Where purchasers have overpaid for assets in a buoyant market, they will be incentivised to shoe-horn claims into ill-suited provisions. In some cases, what they were told by excited and keen vendors may also result in claims for misleading and deceptive conduct. Even where purely speculative, such claims can lead to significant legal spend and put strain on management resource during already testing times. Worse, when they are warranted, they can lead to a significant reversal of expected economic value.
- Keep your eyes open
Whether you are a purchaser and a potential claimant, or a vendor (or intermediary) and a potential defendant, there are a number of stumbling blocks to look out for, from limitation periods and notice requirements to a possible duty to mitigate losses in respect of certain kinds of warranties. If you suspect that you have a claim under a warranty or indemnity provision included in a sale and purchase agreement, it is important to check the warranty claims requirements so that you do not miss a key date or technical detail for notification. If you are on the receiving end of breach allegations, be sure to thoroughly check out your potential liability and ability to defend before diving into negotiations.
- The importance of insurance
Finally, as we have said before, do not forget insurance. Insurers may be brought into the equation where the vendor or purchaser has obtained warranty and indemnity insurance to cover financial losses arising from inaccuracies during the transaction. Parties should make sure to check the scope of cover available to them and consider the position of the other side to the deal (are they insured or un-insured?) when considering the strategy in relation to a warranty claim.
- The rise of post-deal litigation
As the appetite for post-deal litigation rises, we expect to see:
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- A continued increase in warranty and indemnity claims – this could include claims for breach of contract, relating to financial and operational performance, compliance with laws and regulations (where organisational misconduct is identified post-deal) and (depending on the entity) significant employee claims (we continue to see significant risk around Holidays Act 2003 compliance).
- Disputes over adjustment mechanisms – purchasers are pouring over price adjustment mechanisms, wash-ups and earn outs that are intended to correct the price between signing and completion of the transaction. Given current and expected economic volatility, both purchasers and vendors may seek to rely on provisions designed to capture non-recurring or abnormal items for a range of items which were, in fact, expected or entirely ordinary in the context of the business. We have already seen several disputes of this nature arising due to COVID- 19’s effects on profit and whether this produced a non-recurring or abnormal effect.