As the 2022 pipeline continues to flow, here’s a quick preview of where the tensions, action and hot spots will be in M&A this year, together with explanations of why this will be the case.
Regulatory covenant litigation. Case law on the enforceability of “hell or high water” and other regulatory covenants is sparse. The existing decisions all involve relatively blatant violations – e.g., the failure to submit a document expressly requested by the antitrust or foreign investment regulator or other examples of intentional “foot dragging.” There have been cases involving nuanced situations where the buyer purported to be acting in good faith to obtain regulatory clearances, while the target/seller was fretting that the drop-dead date was rapidly approaching and that the buyer had to make more draconian concessions more quickly to obtain clearance in time to permit a closing before the drop-dead date; but those cases all settled. Entering 2022, when you combine the number of actual or near “hell or high water” undertakings to which buyers signed up over the last year with the increasing aggressiveness and unpredictability of antitrust and foreign investment authorities in the UK, Europe and the US, the result is a combination that is likely to make 2022 the year of regulatory covenant litigation.
Regulatory headwinds will not stop merger agreements from being signed up, but they will change deal terms. Now that everybody has had time to calm down after being outraged by reports about the breadth and assertive reach of the UK CMA and the views of officials in charge of the US and European agencies, the focus of clients has turned to how to navigate the new terrain. We will not see dealmaking dry up, even M&A by so-called dominant players or those seeking to consolidate within a sector will proceed, but we will see “fix it first” approaches more regularly in 2022 and, in anticipation of (or at least in response to) the litigation referenced in the preceding bullet, we will see a lot more nuance and detail in what merger agreements require of buyers and when – much more than in your generic “hell or high water” or reasonable best efforts undertakings. Reverse termination fees will remain part of the equation but there is a limit to how much comfort they will provide boards of sellers and targets. The real action in 2022 will be in the details of regulatory covenants.
Interim operating covenants as trip wires. Again, the antitrust and foreign investment regulators are the culprits. Due to the regulatory environment, we are going to have periods between sign and close that more routinely extend well beyond one year and even beyond 18 months. That’s a lot of time for targets to comply with interim operating covenants and for buyers to experience some remorse that they’ve agreed to a misguided trade. Expect lots of scrutiny in 2022 of whether there’s been a failed closing condition arising from breach of an interim operating covenant. The Delaware Supreme Court’s Maps Hotel decision in December 2021 provided useful guidance for both buyers and targets on how to position a party for a win in interim operating covenant litigation, but left enough wiggle room on issues of what “unreasonably withholding consent,” “ordinary course (without a “consistent with past practice” modifier) and “in all material respects” mean that interim operating covenants, in an environment where it takes well over a year to get to closing, will be a ripe area for disputes.
Supply chain issues will mean more M&A. Two ways that supply chain problems will add momentum to M&A in 2022. First, corporations will decide that, even if the margins of the key players in their supply chain are unattractive, the benefits of certainty and stability that arise from vertical integration make acquisitions of supply chain actors worthwhile. Second, optimism among buyers about the prospects for the eventual elimination of supply chain downsides is going to be a potential source for juicing their M&A models with another “synergy” type upside that is not reflected in a target’s recent performance and may not be included in a target’s projected performance either.
De-SPACs – the dealmakers’ gift that keeps giving. De-SPAC transactions have been a corporate lawyer’s dream – PIPEs, IPO disclosure, corporate and securities law complexities, and a big M&A deal all rolled into one – but the fun is going to continue in 2022 even after 2021’s de-SPACs are consummated and the pipeline of new SPAC IPOs slows to a trickle. The recently de-SPACed companies have lots of long-term upside, but many of them are slow out of the gate and therefore prime targets for shareholder activism, guidance misses, management missteps, accounting restatements, and material weaknesses in internal controls. Moreover, relative to those that went public through IPOs and direct listings in 2021, hardly any of 2021’s class of de-SPACed companies have dual class capital structures to insulate themselves from the rough waters of public company life in 2022. The year will see a disproportionate number of de-SPACed companies lose their footing and be taken private by financial sponsors and more mature strategic players, and the institutional investor universe will largely help catalyze these transactions. The only force going in the other direction to give these companies more time to remain publicly traded will be the underwater status of many of their large PIPE investments and the unwillingness of some of these PIPE investors to cut their losses and move on.
COVID work conditions – accelerating the pace of dealmaking to extremes and challenging the sustainability of the people-centric businesses, including investment banks, pr firms, proxy advisory firms and, most of all, big law firms, that drive the dealmaking; and there’s no going back. It is no coincidence that M&A has been off the charts during these work-from-anywhere-but-the-office times. Clients love the hyper-efficiency that comes with the near-complete deterioration of the personal-life/work-life divider and being able to skip many of the time-consuming formalities that would typically accompany a significant M&A transaction, especially in the cross-border context. That’s why we are probably never going back to the pre-COVID style of work, even when COVID itself is neutralized. If you had told any experienced M&A hand that you would be doing major cross-border US M&A opposite old-line Asian and European companies without any in-person meetings, they would have called you an amateur – but that’s where we are now and it’s full steam ahead. In addition to record dealmaking metrics, the consequence of the hyper-efficiency of work-from-anywhere-all-the-time is a material adverse impact on the mental health of the lawyers, bankers and other deal professionals. Twelve consecutive hours of remote work is a lot more brutal on one’s mental health than 12 hours in a conference room with peers. We’re going to need to take care of one another on a number of levels to keep up with this pace and under these conditions in 2022.
In sum, while 2022 will be an active year for M&A, it’s not going to be an easy one. Complexities, hurdles and messy situations are going to abound, while the urgency and press for excellence and efficiency that continues to characterize M&A will not let up.
