What is behind the increase in M&A litigation in the UK? | Bryan Cave Leighton Paisner

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Litigation resulting from mergers and acquisitions has always been a source of important court decisions on critical legal issues. However, can he tell us more about the state of the transaction market and the direction future litigation could take?

Data Salonika shows that there has been a 200% increase in High Court claims issued from 2019 to 2021 which are merger and acquisition related litigation. This trend is industry independent, with M&A requests across all industries increasing over the period.

2019

2020

2021 (year to date)

Total

Total merger and acquisition requests

16

43

48

107

Financial services – including insurance

1 (6.25%)

12 (27.9%)

12 (25%)

25 (23.36%)

Financial services

1 (6.25%)

10 (23.25%)

10 (20.83%)

21 (19.63%)

Assurance

0

2 (4.65%)

2 (4.16%)

4 (3.74%)

Retail

1 (6.25%)

4 (9.30%)

1 (2.08%)

6 (5.61%)

Energy

1 (6.25%)

5 (11.63%)

2 (4.17%)

8 (7.48%)

Health care

1 (6.25%)

0

3 (6.25%)

4 (3.74%)

TMT

3 (18.75%)

6 (13.95%)

7 (14.58%)

16 (14.95%)

Real estate (including construction)

2 (12.5%)

5 (11.63%)

5 (10.42%)

12 (11.21%)

We believe that there are a number of possibilities where M&A litigation has increased significantly over this period, and given that the transaction market in recent years has been dynamic, this suggests to us that this trend will continue. These possibilities include:

1. Wider and more mature adoption of warranty and indemnity insurance policies:

  • We believe that the increased adoption of W&I insurance makes claimants more confident to pursue claims when enforcement considerations (which would otherwise be a primary concern) have been effectively reduced. There is no point in suing your sellers for damages if they are ultimately not good for them and W&I insurance removes this risk.
  • There is a lot of price competition in the W&I market, so insurers are now writing broader warranty coverage, which increases the scope of coverage for buyers when reviewing claims.
  • The existence of a W&I insurance policy can eliminate some of the emotions and reputational issues that might otherwise be considered for a buyer seeking to sue a seller.

2. An upward trend in complaints focused on often overlooked boilerplate provisions. While bridging issues, such as whether notices were served correctly, have always been a breeding ground for litigation, we have noticed a growing tendency among litigants to raise issues with other standard provisions such as the clauses of variation, non-waiver and assignment.

3. Litigation is used to try to re-price agreements. While transactions often include agreed price adjustment mechanisms, litigation is another avenue that parties can use to try to correct prices that, in hindsight, appear to have overstated or undervalued the asset.

4. Attempts to remedy a lack of due diligence. The booming transaction market in recent years has inevitably meant that some transactions will have been completed with limited or hasty due diligence. Concerns about incomplete disclosure during the due diligence period can often lead to litigation.

There is also the possibility that the Salonika the data does not really reflect an increase in M&A litigation, but rather reflects the growth of the transaction market proportionately. We should get a better idea of ​​this as cases stemming from the pandemic begin to go to court. Between Q1 and Q2 2020, a number of M&A deals collapsed due to the pandemic and existing deals may have ended up between the trade and closing, where parties may have -be sought to exit the operation before its conclusion. While a number of claims have been initiated, we expect more to follow and show whether litigants now have a greater appetite to litigate following mergers and acquisitions.

Conversely, there also appears to be a noticeable reduction in M&A litigation citing fraud or negligent misrepresentation compared to 2021 to 2020.

Total merger and acquisition requests

M&A claims citing fraud OR negligent misrepresentation

Percentage of overall M&A claims citing fraud OR negligent misrepresentation

2019

16

5

31.25%

2020

43

9

20.93%

2021 (year to date)

48

3

6.25%

This is not surprising given the difficulties in carrying out these claims, which are complex to plead and prove. This difficulty is confirmed by Solomon Islands data. Data shows that for negligent fraud or inaccuracy cases, 52.8% failed in 2019, 58.1% failed in 2020 and 43.3% failed so far this year.

This suggests to us that as M&A litigation grows, claims will focus on simpler causes of action, such as breach of contract.

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