Mergers and acquisitions transactions, which has reached a global record level of 5.9 trillion dollars in 2021, are considered as one of the legal transactions with the highest potential for disputes, even though its grounds for disputes are striven to be reduced or at least brought to a foreseeable level by detailed agreements. Agreements and afterwards transactions that comply with the intentions of the parties may result in unintended consequences later. Due to geopolitical tensions, soaring inflation, turmoil in finance and energy sectors, more disputes have been arisen after the closing of M&A transactions comparing to last year. That is with respect to Berkeley Research Group’s third-annual M&A Disputes Report (“Report”), which is prepared with contributions from some of the world’s top lawyers, private equity professionals and leading experts. Report brings forth a broad perspective, on how the current market environment has changed the essence of disputes.
Key Findings of the Report
According to the key takeaways of the Report,
- Macroeconomic concerns as rising interest rates, heightened energy costs and global recession are increasing dispute likelihood, especially in the crucial areas of the agreements, such as valuations.
COVID-19 pandemic’s lasting effects, geopolitical tensions like Ukraine – Russia war and related international sanctions, and urgency around energy security are expected to drive growth in dispute numbers in coming years.
- Whilst it is expected that the disputes that concentrated in APAC (Asia – Pacific) countries last year will shift to EMEA (Europe, Middle East, and Africa) region (which includes our country) due to the deepening economic and political volatility, EMEA is shown as the key region to be monitored.
- The pressures to digitize industries are causing many traditionally non-tech companies to acquire or collaborate with technology companies, hence that is increasing M&A transactions. It is estimated that this digitalization through acquisition will result in administrative and cultural conflicts after the transaction.
- The temporary and volatile nature of the prices due to economic recession and inflation makes possible the disputes likely to increase, according to the report. The time elapsed between the commencement of the deal and its completion may increase the likelihood of complete change of the valuations and assumptions that the parties agreed upon at the beginning of the process. This results in construction of more robust price adjustment mechanisms in agreements and even renegotiation of purchase prices, and making the valuations adaptable to drastic market volatility.
- This year, FinTech is considered as top-ranked sector for disputes to spark and escalate, due to the implosion of cryptocurrencies, slowdown in available capital and regulatory challenges. According to the report, this “crypto winter”, when crypto asset prices have been under pressure for an extended period, is expected to last until next year, owing to the increasing conflicts stemming from failed projects.
- It is claimed in the report that, M&A based transactions may catalyse future dispute activities since the energy sector is in turmoil because of the Russia – Ukraine war increasing investments around renewable energy.
Key Steps to Take for Dispute Resolution
The report reveals that in 2022, lawyers are more encouraging their clients to take preventive measures to mitigate the risk of a dispute, such as doing more comprehensive due diligence, pre-litigation counselling, and investing in litigation preparation tools, than has been done so far. According to the report, although these measures do not completely eliminate the disputes, they narrow the scope of it.
Nevertheless, although the M&A disputes had increased in 2022, most of the disputes are settling before trial. This is due to the fact that, the parties do not want to lose their commercial relations with each other. Negotiations with good faith between the parties in order to resolve the disputes within the time stipulated in the agreement, negotiations of disagreements by senior executives such as board members, and efforts of the parties to resolve the dispute with a third party (mediator) can be cited as examples of amicable and effective resolutions.
The Role of Arbitration
In addition to above, if the provisions stipulating alternative dispute resolution before the trial causes the proceedings to be prolonged and the costs of the proceedings to increase, a direct application is made to the court or arbitration. In this regard, arbitration has been considered as a frequently preferred method for M&A disputes in recent years, since its advantages such as; the selection of arbitrations can be made among the experts from related area, the language in which the proceedings will be held can be same with the language of the agreements and negotiations, the chance of the foreign litigants to avoid unfamiliar legislation in domestic courts, the ability to conduct detailed examinations on technical issues and getting faster resolution than court proceedings. In particular, the fact that the transaction takes place between different variety of companies from different industries corroborates the necessity of sectoral expertise, along with the M&A knowledge. According to the early statistical report released by the International Chamber of Commerce, with each passing years, arbitration continues progressively to be a trusted and preferred method for dispute resolution for commercial disputes, including high-demanded, comprehensive, and complex disputes.
As the foreign investment has been increasing in our country, the application range of arbitration has been expanding. Distinctive features of arbitration proceedings such as, possibility for the parties to pick the arbitrator, the arbitrator’s wide discretion to take effective injunction reliefs depending on the case, and the arbitrator’s expertise on the dispute and its ability to get a solid knowledge on the case quicker than the expert examinations practicing in the judiciary, make the arbitration preferable as the primary solution for M&A disputes, especially when it comes to share purchase agreements and shareholder agreements finalized as a result of protracted negotiations.
Over the next year, the report predicts that the adverse economic conditions and increasing energy costs will produce an upswing in M&A disputes, and a further slowdown in new M&A deals will be seen, if sellers do not adapt to more unfavourable valuations. On the other hand, it is also among the predictions that those who avoid risks and seek the way of practicing economy, will chose to resolve their disputes internally in 2023, instead of bearing the costs of litigation or arbitration.
By Onur Kucuk, Managing Partner, Cemile Demir Gokyayla, Partner, and Beste Unsoy, Junior Associate, KP Law