Covid-19 – Merger & Acquisition Disputes

Following a year of uncertainty last year, it’s a natural time for reflection of many business owners in relation to mergers or acquisitions completed over the last couple of years. Those transactions which had previously felt like a positive step towards growing a business or diversifying income, may now appear to be nothing more than an additional burden on the business finances.

Inevitably, merger and acquisition disputes will become more prevalent as 2021 progresses as a result of Covid-19. The financial impact of the pandemic will undoubtedly take hold, as bank and Government funding options reduce or become repayable, coupled with the continuing obligation in many instances to make deferred payments towards those acquisitions. So what options are there?

Merger and acquisition disputes as a result of Covid-19

The transactions themselves are often a detailed and time consuming process involving significant due diligence from a buyer, careful consideration of the seller’s performance and anticipated income over future years, and detailed negotiations between the parties to structure and agree deferred payment of the consideration.

In light of the recent pandemic however, we are seeing a rise in cases where the expected and anticipated income has not met with the performance requirements anticipated at the outset, and an increase in buyers reneging on payment obligations.

Buyers are often now taking the view that they have overpaid for what they acquired, whilst sellers remain adamant that an agreement reached requires fulfilment and are seeking to enforce full payment of any deferred sums.

Reviewing sale agreements

As disputes of this nature arise, careful review and interrogation of the original sale agreements are the first port of call. Whilst on the face of it, an agreement was reached to pay a specified sum of money for the acquisition, there are often performance obligations and/or warranties provided by a seller which may have been breached.

In particular, we advise buyers to consider if the seller agreed to certain performance obligations following completion. Where they have, and those obligations have not been met, it is plausible to dispute the future payment obligations owed. Similarly, where full consideration may have been paid as completion, if the agreed performance obligations have not been met, the seller may be in breach of contract and liable for part repayment to the buyer.

Breach of warranty claims

As an extension to the above, there is also a prevalence of disputes arising in respect of breach of warranty claims.

During the merger and acquisition process, the seller will often provide documentation in the form of management accounts or anticipated revenue calculations based upon stock levels, orders placed by customers and/or profitability calculations from previous years. If the seller specifically discloses such information upon request from the buyer, and the buyer relies upon the due diligence supplied, and that information or documentation later transpires to be wrong or incorrect, breach of warranty claims arise.

This may be as a result of a seller warranting that the information supplied is accurate when it is not, a warranty that they have disclosed full financial information when they have not, or that they have provided full and frank disclosure of anything relevant to the sellers underlying business and/or performance, when they have not. Once again, in those scenarios the buyer is entitled to pursue a claim against the seller for breach of those warranties.

Payment issues

A seller will also have options available to them. If the entirety of their obligations have been fulfilled but full payment has not been made, we specialise in assisting the collection of overdue sums, or negotiating further payment plans which take account of the uncertain economic situation, whilst giving the seller certainty of future payment. This may be on the basis of a personal guarantee being provided, security against personal or business assets or increased interest recovery for further deferment of the sums owed to them.

Sellers can also consider whether the original agreement compels or allows a buyback of shares, and whether they wish to enforce such.

Resolution of a merger or acquisition dispute

There are many situations where a perfectly profitable business will not succeed under new management regardless of economic factors, but that a hive off or de-merger to the original parties may result in a financially suitable resolution being reached to the satisfaction of both sides.

The recent economic uncertainty has certainty heightened awareness around disputes of this nature and a more careful consideration as to whether the obligations of the parties have been met.

It is important to take a step back and consider all aspects of the transaction and documentation which will be specific and tailored in each case, and to take legal advice as early as possible.