Heiko Ziehms, Erik van Duijvenvoorde and Edmond Richards of financial advisory firm Accuracy introduce the findings of a report examining the major causes of post-M&A disputes.
Few corporate activities waste as much management time, and cost as much money, as post-M&A disputes. They can take years to resolve and often hinder a company’s operating activities.
Data suggest that up to one-third of M&A transactions end up in legal disputes. A post-deal dispute therefore represents a very real risk when buying or selling a company, and avoiding disputes should be among the key objectives for any deal. However, successfully avoiding them requires an understanding of their causes.
A major new report into the causes of post-M&A disputes reveals reasons why deals end in legal acrimony. Financial advisory firm Accuracy reviewed over 900 claims over a ten-year period and across a breadth of sectors to produce the most in-depth, data-driven research of its kind. The report, entitled ‘An Autopsy of Cross-Border M&A Disputes’, examines the leading causes of conflict and provides recommendations on how companies can avoid making similar mistakes in the future.
All of the disputes covered by the Accuracy report – with values ranging from €5m to €10bn – contained at least one of the following four factors:
· Volatility in the target company’s markets finding its way into the transaction;
· Ambiguity in the wording of the sale and purchase agreement (SPA);
· Pressure to acquire and the ‘thrill of the deal’; and
· Cases of fraud (around 10 per cent of the post deal M&A disputes involved allegations of fraud that were central to the claim).
Volatility, which often manifests itself in sharp movements in an acquisition target’s customer or supplier markets, can cause a surprise when the final purchase price is determined. If volatility has not been managed effectively, the purchaser may end up paying more, or less, than they anticipated, with a dispute likely to result.
Another common factor in M&A disputes is ambiguity or untechnical wording in SPAs where they make reference to accounting or financial matters, for example in representations and warranties or in the accounting policies to be used in determining purchase price adjustments at closing. Careful and precise drafting, and input from accountants and financial experts where appropriate, reduces this risk. In instances where this does not provide sufficient protection, the parties may agree the use of fixed values (as opposed to values that are measured at or after closing). The ‘locked boxed’ mechanism, where the final purchase price is fixed, is a case in point. The research shows that a staggering 80 per cent of disputes reviewed did not use this completion method.
External pressures or the ‘thrill of the deal’ effect also lead to post M&A disputes. This is where acquirers come under significant pressure to do deals, resulting in ‘red flags’ being ignored because it will interfere with the deal being done.
Additionally, around 10 per cent of the disputes reviewed by Accuracy were subject to fraudulent behaviour resulting from the manipulation, falsification or withholding of important data. Examples include overstated revenues and earnings, understated liabilities and deliberately incomplete disclosure.
Not all disputes are avoidable. However, many disputes are foreseeable, and to avoid them is sometimes down to not getting a few words in the SPA wrong or ensuring a single conversation between the M&A lawyers and the financial due diligence team can take place. This can save years of litigation and a great deal of money, time and unnecessary stress.
Heiko Ziehms and Erik van Duijvenvoorde are partners and Edmond Richards a manager at Accuracy.