Transaction Toolkit For A More Litigious M&A Environment

By Martin Klusmann, Nicholas Frey and Angela Landry
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Law360 (February 24, 2021, 6:24 PM EST) --
Martin Klusmann
Martin Klusmann
Nicholas Frey
Nicholas Frey
Angela Landry
Angela Landry
In 2021, evolving market conditions — including regulatory intervention, technological innovation, a new U.S. presidential administration and the continuing impact of COVID-19 — will likely shift deal dynamics and contribute to a higher volume of threatened deal disputes, both with authorities and between merging parties.

Against this backdrop, it is vital for companies to adopt effective strategies to identify and mitigate transaction risks, while remaining live to opportunities of deal making in this environment.

Practically, this means sellers and buyers should equip themselves with the right transaction toolkit.

Shifting Deal Dynamics

In 2020, the COVID-19 crisis brought with it the threat of merger litigation, including the dispute Tiffany & Co. v. LVMH Moet Hennessy-Louis Vuitton SE in the Delaware Court of Chancery, regarding LVMH's efforts to obtain antitrust approvals.

A dispute was also brought before a district court in Rotterdam, the Netherlands, between EssilorLuxottica SA and GrandVision NV regarding GrandVision's management of its business in light of the pandemic.

Although many of these disputes settled in the latter half of 2020, there has nonetheless been a growing trend toward more threatened deal disputes.

In light of increased deal uncertainty and risk, 2021 is likely to see more transacting parties reverting to, or at least threatening, litigation to challenge the scope of provisions in their transaction agreements.

Avoiding Disputes — Deploying the Right Transaction Toolkit

Breaking Up

In an environment in which the outcome of merger control review is becoming increasingly uncertain, merging parties may want to consider negotiating reverse termination fees that become due in the event of failure to receive the requisite regulatory clearances. The triggering events and exceptions to these fees can be nuanced and can make a difference for a well-advised party.

Protecting Yourself

Companies may consider incorporating extensive obligations to close the deal swiftly, including through contractual obligations to obtain promptly all necessary regulatory clearances, potentially subject to remedies required by the agencies. The negotiation of such clauses will involve a thorough analysis of potential antitrust risks.

Long-Stop Dates

Long-stop dates can be valuable in uncertain economic markets to ensure a purchaser's prompt compliance with its regulatory obligations. Long-stop dates should be balanced against the need for time to comply with increasingly lengthy merger control timetables internationally and also to take account of the interplay between those investigations and any subsequent remedies process.

Being Specific

Specificity is key with respect to contractual provisions which address regulatory approval obligations. Companies should ensure that deal documentation properly outlines the types of actions required to satisfy merger control processes and that documentation reflects negotiated terms specific to the jurisdictions where regulatory approval is required. This may not only prevent future litigation but will provide greater deal certainty for buyers and sellers alike.

Consistent Communications

In light of the extensive document disclosure obligations in many merger control processes internationally, communications — both internal and external, and with investors and other stakeholders — must be clear, unambiguous and consistent.

Substantive Challenges

We saw a number of significant substantive agency challenges in 2020. In the European Union, the European General Court court upheld the appeal brought by CK Hutchison Holdings Ltd. against the European Commission's prohibition of its proposed acquisition of rival company Telefonica SA's O2 — the first review of the "significant impediment to effective competition" test that was introduced by the EU in 2004.

Meanwhile, ThyssenKrupp AG's appeal against the EC's decision prohibiting the proposed joint venture with Tata Steel Ltd. is pending before the General Court and covers a broad range of issues.

In the U.K., the Competition Appeal Tribunal has — in a rare move — remitted the Competition and Markets Authority's phase 2 prohibition decision back to the CMA for reconsideration as a whole in the JD Sports-Footasylum completed merger.

In the U.S., the U.S. Department of Justice has shown an openness to using nontraditional tools for challenging transactions it deems problematic, using arbitration to resolve a dispute over market definition in Novelis Inc.-Aleris Corp. — a first for the DOJ — and has indicated its intent to keep arbitration in its repository of tools.

The DOJ's recent challenge in the U.S. District Court for the Northern District of California to Visa Inc.'s acquisition of Plaid Inc. is an example of authorities viewing acquisitions of nascent or potential competitors with more skepticism.

Procedural Challenges

Procedural disputes are also becoming more commonplace. The recent, failed attempt by the CMA to fine JD Sports for its alleged failure to comply with a hold separate order — issuing the joint largest fine to date for such a breach — illustrates the heightened interventionism of the U.K. authority and highlights the need for parties to ensure they are ready to respond to agency challenges as necessary.

As the decisional practice of agencies evolves, it is strategically advantageous for parties to be aware of the ways in which the execution of transactions may be hindered or even thwarted. Ensuring involvement of litigation teams in transactions from the outset will help lay the foundation for substantive or procedural disputes that may arise later.

Martin Klusmann and Nicholas Frey are partners, and Angela Landry is a senior associate, at Freshfields Bruckhaus Deringer LLP.

Disclosure: Freshfields advised CK Hutchison, Thyssenkrupp, JD Sports and Visa in the matters discussed in this article.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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