Disputes in M&A: 5 key trends for 2022 and beyond

This article is part of our Disputes in M&A: 5 key trends for 2022 and beyond series: a collaboration between our market leading Corporate and Dispute Resolution teams.

The Australian mergers and acquisition (M&A) market continues to thrive. Sentiment in the technology, media and telecommunications, as well as pharmaceutical, medical, biotech and financial service sectors remains at an all-time high for 2022.1 This sentiment was driven by a strong year for Australian mid-market M&A in 2021, with total deal value increasing by 39%.2

There is immense pressure on the market to maintain momentum. This pressure is perhaps greater given lingering economic uncertainty as Australia recovers from COVID-19 and feels the effects of global geopolitical tensions. However, unprecedented growth nearly always leads to increased corporate risk taking which necessarily attracts the attention of regulators.

In an address to the Australian Institution of Company Directors (AICD) corporate governance summit, Australian Securities and Investments Commission (ASIC) Chair Joe Longo highlighted ASIC’s corporate governance priorities for 2022.

Emphasising ASIC’s approach to corporate governance, Mr Longo stated:

‘A critical aspect of what directors do is manage risk’

‘ASIC is not here to discourage risk-taking and innovation’

‘ASIC recognises that running a company is about managing risks, and involves decision makers allocating resources and making decisions very often in conditions of uncertainty’

It is clear ASIC’s stance remains aligned with judicial authority which provides that the very nature of commercial activity necessarily involves uncertainty and risk taking.3 However, ASIC’s measured view on corporate risk-taking should not be taken as an assurance that company directors should sleep easily at night.

As reflected by outgoing Australian Competition and Consumer Commission (ACCC) Chair Rod Sims in his 2022 – 2023 policy address to the Committee for Economic Development of Australia (CEDA), with Australia’s surge in M&A activity comes an increase in ACCC engagement. In fact, 2021 saw a 41% increase in mergers notified to the ACCC, 61% higher than the average over the last five years. Naturally, with the M&A boom continuing (albeit at a reduced level) in 2022, ACCC oversight (and inevitable scrutiny) can only be expected to increase.

Hamilton Locke’s market leading corporate and dispute resolution teams have identified specific areas of heightened risk in M&A activity that have, and are expected to continue, to give rise to disputes. In the coming months, Hamilton Locke will publish a 5-part series on Disputes in M&A: 5 key trends for 2022 and beyond. The series will discuss issues in M&A that lead to disputes as they arise across pre-transaction, pre-closing and post-closing stages of M&A transactions:

  • Article I: Regulatory covenant litigation – During 2021 the Australian Competition and Consumer Commission (ACCC) outlined its vision for a dramatic overhaul of Australia’s merger review regime. For M&A dealmakers, this has brought into focus the allocation of risk of obtaining ACCC clearance, and the implications if clearance is not obtained. In this article, we explore the rising popularity of antitrust and competition risk shifting provisions in the United States and the United Kingdom and their efficacy in addressing competition-risk disputes in the Australian market, in light of impending merger form.
  • Article II: Understanding pre-emptive rights – Is your company deal ready? In this article, we discuss the importance of understanding how pre-emptive right clauses in your constituent documents work, how they affect transactions and provide cautionary tales of how things can go wrong.
  • Article III: Material adverse change clauses – Where unforeseen adverse business conditions affect valuation of a target company or asset, material adverse change (MAC) clauses provide acquirers the flexibility to terminate or seek to renegotiate the agreement. However, in the wake of COVID-19 and underlying economic uncertainty, parties are rarely in agreeance as to what should constitute a “material adverse change” and disputes arise where buyers attempt to rely on the MAC clause to jettison the transaction.
  • Article IV: Breach of representation and warranties – Perhaps the most common area of dispute between buyers and sellers in an M&A transaction is in relation to breach of representations and warranties given by the seller in relation to the state of the seller’s business or assets on signing or completion of the transaction. Lawyers spend a large proportion of their time negotiating these provisions and the associated exclusions and limitations that seek to reduce the potential liability of the seller. It is therefore critical to understand how courts interpret contractual limitation regimes where a buyer seeks to rely on statutory rights in relation to misleading and deceptive conduct claims.
  • Article V: Price adjustment disputes (post-close) – Price adjustment considerations (such as earn-out formulas) provide a practical way to solve disagreements around business valuations. However, caution must be exercised: these provisions are bespoke, are extremely susceptible to manipulation and therefore dispute.

*Hamilton Locke is consistently recognised by clients and leading legal research publications for our legal expertise and service. We have been recognised as one of Australia’s top 40 law firms by the Australian Financial Review. We have also received over 80 awards and recognitions, including MergerMarket, Doyle’s, Australasian Lawyer, Best Lawyers, Chambers and Partners, and Legal 500.

For more information, please contact Peter Williams, Mark Schneider and Timothy Flanagan.

1 Pitcher Partners, Megermarket, Dealakers: Mid-market M&A in Australia 2022 Outlook. 2022 https://www.pitcher.com.au/wp-content/uploads/2022/02/Pitcher_Partners_DealMakers2022_FINAL2_15FEB.pdf.

2 Pitcher Partners, Megermarket, Dealakers: Mid-market M&A in Australia 2022 Outlook. 2022 https://www.pitcher.com.au/wp-content/uploads/2022/02/Pitcher_Partners_DealMakers2022_FINAL2_15FEB.pdf.

3 ASIC v Mariner (2015) 241 FCR 502, per Beach J.