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The Closely Held and Growing Business Enterprises Committee's first virtual retreat
Report on the Committee’s first Virtual Retreat
Summary of discussions during the breakout sessions in the virtual retreat
Burges Salmon, Bristol
The second wave has impacted what was an improving position, and decision makers are now postponing investment and strategic decisions. Notaries and public offices are not functioning normally. Increasing numbers of clients’ offices are closed and that is impacting activity.
The focus is moving to local transactions given the disruption to international transactions. Again decisions are being deferred, a real sense of ‘wait and see’ on the part of clients and the government. Even technology and fintech investment is slowing down.
Caterina noted the psychological impact on people, reflecting some of the above but also some strategic decision making continuing (also reflected by Nigel and Richard below), though M&A is definitely slower. Nigel sees opportunities in mergers by necessity and noted the concept of ‘Covid discount’ on deals, as did Alessandro, and noted the further impact of Brexit. Richard noted that there has been good activity in some sectors, including financial services, energy (renewables) and technology, and a return of private equity investors.
Many decisions have been put on hold. We have seen softer M&A, positives in litigation, employment and re-financings (consistent themes for all of the group). More advisory roles on corporate to balance quieter M&A, again deals in energy, telecoms, infrastructure and financial services.
Pierre-Alexandre touched on prospects for juniors and challenges in training people, and Nigel mentioned possible reductions medium term in headcount.
Mixed views on recoveries, some issues in Europe but not so much in UK.
All were positive about M&A in 2021. There is a sense that people want to push on and money to invest though variations across sectors. This was countered by some concern (particularly from Italy) that next year could be more challenging (this year having been better than expected).
And a final tribute to Nigel, who on this morning’s performance would win the British radio programme ‘Just a Minute’. The aim is to speak continuously for a minute and be speaking at the end to win the point. He very generously handed me the baton with a mere seven seconds to go of which I took four to unmute!
Conference Quality Officer, IBA Closely Held and Growing Business Enterprises Committee
Market trends: M&A activity and other areas of work
We started the conversation talking about how the M&A activity and deals in our jurisdictions have been affected. We all concluded that, even though in the United States there is still a lot of M&A activity, in general terms, the M&A activity in all the jurisdictions has declined compared to last year. However, all of us have seen an increase in other areas of work, such as advisory, refinancing and restructuring work.
Venture Capital has been, and is still, very active. There is a lot of liquidity in the market and Venture Capital funds have to invest the money. Sectors like technology and healthcare have been the focus of many investments in almost every single jurisdiction during the pandemic.
Issues: material adverse change, representations and warranties, and valuations
Interesting discussions took place when we talked about the transactions that were able to be signed during the pandemic. The participants had experienced certain additional difficulties for closing the transactions already signed. Some of them experienced difficulties due to the authorities not being able to give the greenlight (antitrust and other governmental authorisations needed for closing), others due to breach of certain rights and warranties between signing and closing, and others because one party was trying to apply a material adverse change (MAC) clause for not closing the transaction.
The issue about how to valuate a company is a hot one and all M&A clients are dealing with it. The gap in valuations between buyers and sellers is now bigger and lawyers have to start thinking about different alternatives for deal structuring and different mechanisms that allow the gap on valuation to become less risky for the parties (ie, earn-out mechanisms and others).
What is coming and what is next – year 2021
We are all very optimistic for 2021. There was a general impression around the group that more distressed M&A and bankruptcy work is coming. We all agreed that if a vaccine is finally announced, more deals will come because there will be a lot of money and appetite in the market. We finally concluded that there will be more M&A activity next year.
Marco A Rizzi
Chair, IBA Closely Held and Growing Business Enterprises Committee
- There is a lot of domestic M&A going on. International M&A is quite slow/reduced and big deals are at a standstill
- ‘Hot’ sectors are pharma/life-sciences, e-commerce, e-healthcare, tech, infrastructure and logistics. ‘Flop’ sectors are manufacturing, retail, entertainment, sports and automotive
- Prices and deal-sizes are generally smaller
- The pandemic had, and continues to have, a certain effect on due diligence questions and representations and warranties, as well as on MAC-clauses. However, there was not an actual shift in terms. Covid-19 is now being factored into deals and the situation is being addressed early. It is less and less seen as a general case for MAC, but, rather addressed in a much more specific way
- In terms of pricing mechanisms, there is an increased tendency towards completion accounts. In turn, no actual shift towards earn-outs can be seen. Where earn-outs were traditionally used this continues to be the case, but it is not the ‘normal’
Young Lawyers’ Committee Liaison Officer, IBA Closely Held and Growing Business Enterprises Committee
Oluwabukola Iji, Diversity and Inclusion Officer, IBA Closely Held and Growing Business Enterprises Committee
Most of the transactions were slowed down due to the difficulties linked to state approval, which became increasingly difficult to obtain. As a consequence, completion dates had to be postponed with an impact on price mechanisms. Furthermore, sellers were requested to issue new MAC clauses.
However, through flexibility and remote working, it was still possible to take deals home.
Gábor Damjanovic, Forgó, Damjanovic & Partners
In some cases, transactions where just aborted. For the other deals that managed to go on, an intense renegotiation on several clauses was necessary, including on pricing. Force majeure clauses were redrafted as well, but in most cases they did not include references to the pandemic. Another important aspect was the ministerial veto in strategic sectors. As the definition of ‘strategic’ is very broad, virtually any transaction could be affected. This is something that may become permanent even after Covid-19.
On the other hand, several business opportunities are arising, such as in the dispute resolution field.
Frédéric Cohen, Foley Hoag
There has been a trend of targets being on the market due to Covid-19. Some sectors, like tourism, were hit heavily. Physical due diligence could not be made during the lockdown. Other sectors, for which physical meetings were unnecessary, like technology and biotech, carried on unaffected.
In general, transactions are still happening and, with the right degree of flexibility, it is possible to continue working.
Christian Gregersen, Horten
There have been three major phases: in March/April deals dropped and were abandoned; then during the summer the M&A market slowly started to recover; it eventually got momentum and it is now close to normal again. It looks like there will be several consolidations, especially in the financial sector. Litigations on price are to be expected. Earn out clauses are not very popular in Denmark, all the more so during a pandemic. Founders prefer to wait and see how the next coming months will look like.
Michael Schmidt, Schmidt Taxlaw
The German economy and one of its most prominent sectors, the automotive sector, was under a lot of pressure even before Covid-19. Now the situation is even more difficult to read and all satellite activities are struggling, with a consequential decrease of the selling prices. Even though finance is widely available, uncertainty as to the business models of the targets makes it hard to use it.