Charging up – Key players in the global battery sector
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The pre-signing phase of a deal involves primarily due diligence, negotiation, and disclosure. At this stage of a deal, common disputes include claims relating to breach of confidentiality obligations in NDAs, violations of exclusivity agreements and breaches of letters of intent or term sheets.
Disputes at the pre-signing phase are liable to increase due to the rise of shareholder activism. Activist tactics are now extending beyond traditional activist shareholders to include institutional and minority shareholders who are not only ready to publicly contest transactions and board recommendations, but they're also proposing their own M&A initiatives. As result, deals are far more precarious in this nascent stage than has historically been the case and letter of intent / term sheet disputes may rise in 2025.
Pre-signing phase
Once the SPA is signed, the focus shifts to satisfying conditions precedent and fulfilling conduct of business obligations. Condition precedents are a common source of disputes. Geopolitical risks, macroeconomic factors and regulatory changes often impact the fulfilment of these conditions. Buyers may claim material adverse changes if significant negative events affect the deal's viability, while sellers may breach covenants on how to conduct business during the interim period.
In 2025 we anticipate that deals will continue taking longer than usual to close due to lengthy regulatory clearance periods and a heightened risk of intervention, particularly within the technology sector. Increased scrutiny from regulatory authorities, such as the US and UK's Foreign Direct Investment (FDI) agencies, is leading to prolonged execution times and additional execution risk. In certain jurisdictions, competition authorities are exploring ways to assert jurisdiction over transactions below certain thresholds and gain more control over deals.
Sanctions regimes also continue to impact M&A deals, requiring increased time and attention to analyse sanctioned entities, ownership structures, associated supply chain risks and protecting employees in higher-risk jurisdictions.
With closure periods being elongated as a result of these delays, more attention is given to topics that could arise during this time, such as warranty bring-downs, termination rights (and termination fees) and material adverse change clauses.
Geopolitical risks have added a new layer of complexity and are being seen as potential deal breakers. Post-completion geopolitical risks and regulatory conditions not being met contribute to an increased risk of deal failure, requiring factoring into deal terms including price.
Additionally, changes in the approach to addressing issues raised in due diligence have emerged along with more buyer-friendly protections to keep transactions alive. In a bid to ensure the certainty of a deal, buyers are increasingly requiring sellers to resolve issues identified in due diligence as a condition to close the deal.
These completion delays, increased buyer contractual protections and due diligence compliance are likely to lead to a surge in deal failure disputes.
Between signing and completion
Completion marks the finalisation of the deal. Disputes can arise from breaches of warranties and indemnities, misrepresentations, and disagreements over price adjustments. Disagreements over purchase price adjustments often relate to changes in the target company's value between signing and closing. Aligning valuations between buyers and sellers continues to be a critical challenge as buyers may find acquisition targets falling short of expected returns. Claims of representation and warranty breaches often surface after the deal closes, with parties alleging that the seller's statements were inaccurate.
The hot trends of ESG and AI are likely to play a role in a new frontier of post-completion disputes.
With respect to ESG, it is increasingly common for deal terms to include mandatory Seller representations and warranties of compliance with ESG obligations/standards. Each pillar of the ESG therefore represents an area of risk of breach of warranties claims including greenwashing elements in respect of "E", labour-related problems such as equal pay and modern slavery for "S", and data privacy issues representing "G". Buyers who subsequently face class action litigation or regulatory scrutiny (including fines) will naturally look to recover these losses as well as the overvaluation of the Target by means of breach of warranty claims and claims relating to purchase price adjustments.
In a similar vein to ESG, buyers are more frequently requesting explicit AI risk representations, warranties, and indemnifications, giving special attention to third-party intellectual property rights, data security, and litigation risks. Incomplete disclosures will expose sellers to risk of breach of misrepresentation and warranty disputes or, in serious cases, allegations of fraud. With respect to the acquisition of AI-developing enterprises, deferred consideration mechanisms are likely to be used due to the lack of historical accounts to provide a reliable basis for valuation. As the AI market evolves in terms of regulation, ethics, and governance, Target valuations may be materially affected (both positively and negatively) giving rise to disputes between transaction parties relating to the post-completion valuations.
Post-completion
HSF represented a Korean private equity firm in a post-acquisition dispute relating to a Vietnamese e-payment platform. The deal had successfully closed, but post-completion an investigation launched into the acquired Vietnamese company revealed fraudulent payment transactions had inflated the Sale Price, resulting in considerable financial repercussions for our client. This gave rise to a breach of warranty arbitration, in which our client ultimately prevailed.
"This case is emblematic of the type of breach of warranty risk which is higher than ever. Companies are struggling to navigate the evolving, novel risks arising from ESG and AI. However, increasingly deals are allocating that significant risk heavily to the Seller. This is a potent combination. Inadvertent (and, of course, deliberate) failure to disclose will place the Seller at jeopardy of claims for misrepresentation, breach of warranty or even fraud."
Case Study: Breach of warranty risks in Post-Completion stage
Mike McClure KC
Partner, Disputes,
London
HSF represented a client in a dispute relating to the satisfaction of a condition precedent. The transaction contained a condition precedent requiring the approval of the Reserve Bank for entering into an indemnity. The agreement specified that this approval was needed "to the extent required." A dispute arose between the parties over whether the approval was necessary at the time of entering into the indemnity or when a payment under the indemnity was called. This situation exemplified how a clause could be used to stall a deal, especially when it was anticipated that the Reserve Bank approval would not be granted. Ultimately, the case was settled.
"Claims relating to whether completion conditions have been met are common. However, with increased uncertainty swirling and activists watching, it would not be surprising to find buyers masquerading change of mind as material adverse change or failure to meet CPs. Sellers will not always take this lying down and can be anticipated to initiate claims relating to improper exercise of termination rights."
Jonathan Ripley-Evans,
Partner, Disputes,
Johannesburg
Case Study: Condition Precedents as Roadblocks in Pre-Completion Stage
