If 2020 was the year that COVID-19 precipitated extraordinary government intervention and regulation of our lives, 2021 looks set to be the year that regulatory interventions in M&A precipitate changes to the way that dealmakers approach transactions.
After a disrupted first half of 2020 and a respectable rebound later in the year, M&A market sentiment for 2021 is generally positive. Absent unanticipated shocks, factors including the resolution of Brexit, a new US administration, and the widespread rollout of COVID-19 vaccines bring expectations of a busy year ahead for deals.
As regulators and governments push to introduce or enhance a wide range of rules impacting investments in multiple sectors, dealmakers should expect that the hand of government will still be felt, even for businesses not traditionally viewed as 'regulated'.
Successfully executing an acquisition in 2021 will require skilful navigation of a complex and evolving legal and regulatory landscape – and deal teams must remain agile to successfully clear hurdles.
CMA to take more prominent role in global deals
Amid the changes to UK laws and regulations brought about by Brexit, the end of the transition period means that acquirers face parallel EU and UK competition investigations – with the effect that the UK's Competition and Markets Authority (CMA) will play a more prominent role in reviewing global M&A deals.
Dealmakers must be alert to the increasingly interventionist approach of the CMA, including in transactions with a limited nexus to the UK. This is likely to increase the regulatory burden on acquirers, including for non-problematic cases, since the CMA has no equivalent to the EU's 'short form' procedure, which allows for a more truncated and less burdensome notification in simple cases.
The increase in workload is also the result of the CMA taking an expansive approach to jurisdiction. Cases such as Sabre/Farelogix and Roche/Spark demonstrate that the CMA is making dynamic, forward-looking assessments of parties' overlaps, even in cases in which the target had no revenues directly attributable to the UK.
Economic nationalism drives creation of new FDI screening regime
Growing economic nationalism is threatening to impact M&A across Europe.
Multiple jurisdictions are actively enforcing foreign direct investment (FDI) screening regimes and intervening in the acquisition of strategically important companies.
In November 2020, the UK government published its long-awaited National Security and Investment Bill (NS&I Bill), which is expected to come into effect later this year but will have retrospective review powers over certain investments. The NS&I Bill includes powers to void, prohibit or unwind transactions, mandatory notification and preclearance for investments relating to 17 broadly defined sectors (considered to be sensitive from a national security perspective) and voluntary notification for other sectors.
While the government has indicated that investment in the UK is still actively encouraged, the scale of the proposed changes means that a significant number of transactions are likely to be caught.
Increasingly assertive pensions regulator to gain new powers
With multiple employers deferring deficit recovery contributions in 2020 and growing holes in defined benefit pension plans, pension liabilities should be front of mind for dealmakers – especially as the Pensions Regulator will gain enhanced powers later this year.
Unlike the NS&I Bill, the Pension Schemes Act will not have retrospective effect, however, it expands the circumstances in which the Pensions Regulator can exercise existing moral hazard powers. The Pension Schemes Act also creates new moral hazard powers that can be exercised against any 'person' and includes penalties that encompass criminal sanctions. Given increasing political and public pressure on the Pensions Regulator, dealmakers should anticipate increased scrutiny of deals that involve a defined benefit pension plan.
The global regulatory direction of travel: More enforcement
This year is likely to bring a general step-up in enforcement, as regulators increasingly coordinate efforts, share learnings, and seek to take action on a growing range of issues and perceived concerns.
Amid the tumult of 2020, the risk of short-term corporate decisions having long-term financial and reputational consequences is heightened. Large and well-publicised fines, including for bribery, cyber and data breaches, and cartel behaviours, mean that dealmakers must remain alert to the risk of inheriting liabilities for historical regulatory non-compliance.
How should dealmakers respond?
Assess the opportunity
This year the market is likely to place a greater emphasis on deal planning and critical assessment of regulatory risks, including developing a strategic regulatory clearance plan focused on managing the impact of filings, clearances, and other hurdles. Nascent regimes and amended approaches mean that work is required to mitigate unexpected delays or remedies. If a transaction falls within scope of a particular regime, screening processes may well involve extensive disclosure requirements that can impact deal timetables, creating barriers to closing.
More clients have undertaken a merger control-style analysis of FDI approval issues, including analysing their own shareholder base and that of any other investors involved in the deal. Deal teams should consider opening a dialogue with regulators to allay concerns.
For problematic cases, dealmakers should consider what remedies or undertakings they might be willing to accept, and how this would impact deal value. Balancing the requirements of different regulators in different jurisdictions requires agility.
The Committee on Foreign Investment in the United States (CFIUS) may accept undertakings as a condition of clearance, including prohibiting or limiting the transfer of certain intellectual property, trade secrets, or know-how.
The UK government has also accepted undertakings (e.g. in Advent's 2019 takeover of aerospace company Cobham). However, differences in process between the CMA and other antitrust regulators are likely to create challenges in ensuring that remedy offers can successfully straddle the EU and UK systems effectively.
Allocate risk and uncertainty
Deal documents will need to respond to the regulatory framework to which the transaction and the target company are subject or will become subject once new legislation is fully implemented.
Latham's 2020 Private M&A Market Study – which examined more than 260 European deals – found that FDI approval conditions were beginning to increase between 2018 and 2020 but remained relatively uncommon, and were seen in just 11% of deals.
By comparison, the prevalence of FDI conditions is significantly less than that of merger control conditions, which were included in 54% of deals analysed. This appears likely to change, given the expansive scope of the NS&I Bill and similar regimes applicable in other jurisdictions. Dealmakers should consider terms and scope of such conditions and the efforts that parties are compelled to take to satisfy them, in addition to the implications on deal timetable and, in some cases, deal certainty.
Further, compressed deal timetables and a sellers' market in recent years have contributed to a downward trend for liability caps on warranty claims – 65% of sellers in Latham's 2020 Private M&A Market Study limited their commercial warranty liability to less than 20% of equity value, compared to 41% in the 2014 edition.
While buyers may have sought additional warranties, indemnities, and post-closing price adjustments to mitigate the uncertainties of 2020 (including fines and other regulatory risks), the M&A market for attractive assets has remained competitive, meaning that acquirers are frequently forced to accept less-than-perfect deal protections. This emphasises the importance of a detailed regulatory diligence exercise and the potential need, in some cases, for a risk-based post-closing audit and remedial processes.
Mind the gap
Gap covenants governing the conduct of the target business between signing and closing came under heightened scrutiny in 2020, as dealmakers debated what type of business conduct counted as 'ordinary course' in extraordinary times.
In an increasingly regulated M&A environment, deal teams should expect a greater focus on these covenants, particularly given lengthening timelines between signing and closing. Buyers need sufficient control of and confidence in the operation of the business by the seller, but without having full control through equity ownership, always being cognisant of gun-jumping rules.
New deals, new challenges
Special purpose acquisition companies (SPACs) emerged, somewhat unexpectedly, as the hottest market trend in the US in 2020, allowing SPAC sponsors to launch shell companies with the goal of taking private companies public via merger.
The launch of European-style SPACs, the growing number of triple-track deal processes (i.e. with an auction sale, an IPO, and a SPAC sale as possible outcomes), and increasing instances of stressed or distressed M&A present novel, complex deal structures and new challenges – all of which require agile legal advisers who are able to navigate regulatory interventions and give dealmakers the competitive edge.
Latham & Watkins
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Nick Cline is an M&A lawyer at Latham & Watkins, with more than 20 years of experience. He focuses on UK and international, cross-border M&A, corporate reorganisations, and joint ventures and is a member of the firm's executive committee.
Nick has extensive experience advising UK plc and international client boards and legal teams on their most complex M&A matters, as well as advising them on their day-to-day corporate advisory needs. He is ranked by legal publications and rated highly by clients.
Latham & Watkins
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Robbie McLaren is a partner at Latham & Watkins, and serves as global vice chair of the firm's healthcare and life sciences industry group and co-chair of the London corporate department.
Robbie's practice focuses primarily on cross-border M&A, joint ventures and emerging companies. He represents clients who primarily operate in the life sciences, healthcare, and technology industries. He is highly regarded by clients and ranked by legal publications.
Latham & Watkins
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Douglas Abernethy represents clients in a range of complex corporate finance and M&A matters, with a particular focus on public takeovers and take-private transactions.
Douglas delivers pragmatic and commercially driven advice on M&A matters to multinational PE firms, financial institutions, and UK-listed companies. He represents clients in connection with significant acquisitions and divestitures involving assets in a diverse range of industries. He also advises financial institutions serving as lenders and advisors to parties on M&A transactions.
Knowledge management counsel
Latham & Watkins
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Catherine Campbell is a knowledge management lawyer in Latham & Watkins' M&A Practice. Before joining the knowledge management team, she was an associate in the M&A Practice. Prior to joining Latham, she was an associate at an international law firm in London.
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