M&A Report

2021
Featuring contributions from

AllBright Law Offices K&L Gates

ASAR – Al Ruwayeh & Partners Latham & Watkins
Bär & Karrer Lee and Li, Attorneys-at-Law
EY Law Raposo Bernardo & Associados
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Lead contributor
 CONTENTS

4 & 8 Bouverie Street, London EC4Y 8AX Introduction 51 Luxembourg

Email: [firstname].[surname]@euromoneyplc.com
Marcus Peter and Kate Yu Rao, GSK
Customer service: +44 20 7779 8610 2 Rising regulation requires
Stockmann
EDITORIAL agility from M&A deal teams
Managing editor John Crabb
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M&A REPORT 2021 | IFLR.COM | 1

 Rising regulation requires agility
from M&A deal teams
Nick Cline, Robbie McLaren, Douglas Abernethy and Catherine Campbell of
Latham & Watkins consider key developments likely to impact M&A in 2021,
and how dealmaking is likely to progress in light of these developments

I f 2020 was the year that COVID-19 precipitated extraordinary

government intervention and regulation of our lives, 2021
looks set to be the year that regulatory interventions in M&A
precipitate changes to the way that dealmakers approach
transactions.
After a disrupted first half of 2020 and a respectable rebound later
in the year, M&A market sentiment for 2021 is generally positive.
Absent unanticipated shocks, factors including the resolution of www.lw.com
Brexit, a new US administration, and the widespread rollout of
COVID-19 vaccines bring expectations of a busy year ahead for
deals. awaited National Security and Investment Bill (NS&I Bill), which
As regulators and governments push to introduce or enhance a is expected to come into effect later this year but will have
wide range of rules impacting investments in multiple sectors, retrospective review powers over certain investments. The NS&I Bill
dealmakers should expect that the hand of government will still be includes powers to void, prohibit or unwind transactions, mandatory
felt, even for businesses not traditionally viewed as ‘regulated’. notification and preclearance for investments relating to 17 broadly
Successfully executing an acquisition in 2021 will require skilful defined sectors (considered to be sensitive from a national security
navigation of a complex and evolving legal and regulatory landscape perspective) and voluntary notification for other sectors.
— and deal teams must remain agile to successfully clear hurdles. While the government has indicated that investment in the UK
is still actively encouraged, the scale of the proposed changes means
that a significant number of transactions are likely to be caught.
Anticipated changes
Increasingly assertive pensions regulator to gain new
CMA to take more prominent role in global deals powers

Amid the changes to UK laws and regulations brought about by With multiple employers deferring deficit recovery contributions in
Brexit, the end of the transition period means that acquirers face 2020 and growing holes in defined benefit pension plans, pension
parallel EU and UK competition investigations — with the effect liabilities should be front of mind for dealmakers — especially as
that the UK’s Competition and Markets Authority (CMA) will play the Pensions Regulator will gain enhanced powers later this year.
a more prominent role in reviewing global M&A deals. Unlike the NS&I Bill, the Pension Schemes Act will not have
Dealmakers must be alert to the increasingly interventionist retrospective effect, however, it expands the circumstances in which
approach of the CMA, including in transactions with a limited nexus the Pensions Regulator can exercise existing moral hazard powers.
to the UK. This is likely to increase the regulatory burden on The Pension Schemes Act also creates new moral hazard powers that
acquirers, including for non-problematic cases, since the CMA has can be exercised against any ‘person’ and includes penalties that
no equivalent to the EU’s ‘short form’ procedure, which allows for a encompass criminal sanctions. Given increasing political and public
more truncated and less burdensome notification in simple cases. pressure on the Pensions Regulator, dealmakers should anticipate
The increase in workload is also the result of the CMA taking an increased scrutiny of deals that involve a defined benefit pension
expansive approach to jurisdiction. Cases such as Sabre/Farelogix plan.
and Roche/Spark demonstrate that the CMA is making dynamic,
forward-looking assessments of parties’ overlaps, even in cases in The global regulatory direction of travel: More
which the target had no revenues directly attributable to the UK. enforcement

Economic nationalism drives creation of new FDI This year is likely to bring a general step-up in enforcement, as
screening regime regulators increasingly coordinate efforts, share learnings, and seek
to take action on a growing range of issues and perceived concerns.
Growing economic nationalism is threatening to impact M&A Amid the tumult of 2020, the risk of short-term corporate
across Europe. decisions having long-term financial and reputational consequences
Multiple jurisdictions are actively enforcing foreign direct is heightened. Large and well-publicised fines, including for bribery,
investment (FDI) screening regimes and intervening in the cyber and data breaches, and cartel behaviours, mean that
acquisition of strategically important companies. dealmakers must remain alert to the risk of inheriting liabilities for
In November 2020, the UK government published its long- historical regulatory non-compliance.

2| IFLR.COM | M&A REPORT 2021

 UNITED KINGDOM

Nick Cline Robbie McLaren

Partner Partner
Latham & Watkins Latham & Watkins
T: +44 20 7710 1087 T: +44 20 7710 1880
E: [email protected] E: [email protected]

About the author About the author

Nick Cline is an M&A lawyer at Latham & Watkins, with more Robbie McLaren is a partner at Latham & Watkins, and serves
than 20 years of experience. He focuses on UK and as global vice chair of the firm’s healthcare and life sciences
international, cross-border M&A, corporate reorganisations, industry group and co-chair of the London corporate
and joint ventures and is a member of the firm’s executive department.
committee. Robbie’s practice focuses primarily on cross-border M&A,
Nick has extensive experience advising UK plc and joint ventures and emerging companies. He represents clients
international client boards and legal teams on their most who primarily operate in the life sciences, healthcare, and
complex M&A matters, as well as advising them on their day-to- technology industries. He is highly regarded by clients and
day corporate advisory needs. He is ranked by legal ranked by legal publications.
publications and rated highly by clients.

How should dealmakers respond? Allocate risk and uncertainty

Assess the opportunity Deal documents will need to respond to the regulatory framework to
which the transaction and the target company are subject or will
This year the market is likely to place a greater emphasis on deal become subject once new legislation is fully implemented.
planning and critical assessment of regulatory risks, including Latham’s 2020 Private M&A Market Study — which examined
developing a strategic regulatory clearance plan focused on managing more than 260 European deals — found that FDI approval conditions
the impact of filings, clearances, and other hurdles. Nascent regimes were beginning to increase between 2018 and 2020 but remained
and amended approaches mean that work is required to mitigate relatively uncommon, and were seen in just 11% of deals.
unexpected delays or remedies. If a transaction falls within scope of a By comparison, the prevalence of FDI conditions is significantly less
particular regime, screening processes may well involve extensive than that of merger control conditions, which were included in 54%
disclosure requirements that can impact deal timetables, creating of deals analysed. This appears likely to change, given the expansive
barriers to closing. scope of the NS&I Bill and similar regimes applicable in other
More clients have undertaken a merger control-style analysis of FDI jurisdictions. Dealmakers should consider terms and scope of such
approval issues, including analysing their own shareholder base and conditions and the efforts that parties are compelled to take to satisfy
that of any other investors involved in the deal. Deal teams should them, in addition to the implications on deal timetable and, in some
consider opening a dialogue with regulators to allay concerns. cases, deal certainty.
For problematic cases, dealmakers should consider what remedies or Further, compressed deal timetables and a sellers’ market in recent
undertakings they might be willing to accept, and how this would years have contributed to a downward trend for liability caps on
impact deal value. Balancing the requirements of different regulators warranty claims — 65% of sellers in Latham’s 2020 Private M&A
in different jurisdictions requires agility. Market Study limited their commercial warranty liability to less than
The Committee on Foreign Investment in the United States 20% of equity value, compared to 41% in the 2014 edition.
(CFIUS) may accept undertakings as a condition of clearance, While buyers may have sought additional warranties, indemnities,
including prohibiting or limiting the transfer of certain intellectual and post-closing price adjustments to mitigate the uncertainties of
property, trade secrets, or know-how. 2020 (including fines and other regulatory risks), the M&A market for
The UK government has also accepted undertakings (e.g. in Advent’s attractive assets has remained competitive, meaning that acquirers are
2019 takeover of aerospace company Cobham). However, differences frequently forced to accept less-than-perfect deal protections. This
in process between the CMA and other antitrust regulators are likely emphasises the importance of a detailed regulatory diligence exercise
to create challenges in ensuring that remedy offers can successfully and the potential need, in some cases, for a risk-based post-closing audit
straddle the EU and UK systems effectively. and remedial processes.

M&A REPORT 2021 | IFLR.COM | 3

UNITED KINGDOM

Douglas Abernethy Catherine Campbell

Partner Knowledge management counsel
Latham & Watkins Latham & Watkins
T: +44 20 7710 4760 T: +44 20 7710 1016
E: [email protected] E: [email protected]

About the author About the author

Douglas Abernethy represents clients in a range of complex Catherine Campbell is a knowledge management lawyer in
corporate finance and M&A matters, with a particular focus on Latham & Watkins’ M&A Practice. Before joining the
public takeovers and take-private transactions. knowledge management team, she was an associate in the
Douglas delivers pragmatic and commercially driven advice M&A Practice. Prior to joining Latham, she was an associate at
on M&A matters to multinational PE firms, financial institutions, an international law firm in London.
and UK-listed companies. He represents clients in connection
with significant acquisitions and divestitures involving assets in
a diverse range of industries. He also advises financial
institutions serving as lenders and advisors to parties on M&A
transactions.

Mind the gap New deals, new challenges

Gap covenants governing the conduct of the target business between Special purpose acquisition companies (SPACs) emerged, somewhat
signing and closing came under heightened scrutiny in 2020, as unexpectedly, as the hottest market trend in the US in 2020, allowing
dealmakers debated what type of business conduct counted as ‘ordinary SPAC sponsors to launch shell companies with the goal of taking
course’ in extraordinary times. private companies public via merger.
In an increasingly regulated M&A environment, deal teams should The launch of European-style SPACs, the growing number of triple-
expect a greater focus on these covenants, particularly given lengthening track deal processes (i.e. with an auction sale, an IPO, and a SPAC sale
timelines between signing and closing. Buyers need sufficient control as possible outcomes), and increasing instances of stressed or distressed
of and confidence in the operation of the business by the seller, but M&A present novel, complex deal structures and new challenges — all
without having full control through equity ownership, always being of which require agile legal advisers who are able to navigate regulatory
cognisant of gun-jumping rules. interventions and give dealmakers the competitive edge.

4| IFLR.COM | M&A REPORT 2021

 Germany
Nikolaos Paschos and Sebastian Goslar, Latham & Watkins

A fter a severe slowdown of deal activity in the first half of 2020,

the German market now appears quite resilient despite the
challenges resulting from the COVID-19 pandemic. Potential
buyers nonetheless remain cautious, more than ever aiming for a fair
assignment of risks. Thus, there has been a noticeable increase of
minority investments and joint ventures. Cross-border, as well as
domestically public M&A transactions have also received growing
interest from private equity (PE) investors. www.lw.com
Public and private M&A both play an important role in German
transactional practice. Private deals often dominate the market as the
number of listed companies is not as big as in other markets and there are The healthcare and life sciences (HCLS) sector also experienced
some peculiarities to the German law that make the full integration of a strong deal activity throughout 2020 despite the uncertainties caused
listed company complex and difficult to assess from a financial perspective. by the COVID-19 pandemic. This trend, which had already started
The spin-off of Siemens Energy from the Siemens Group and its before the pandemic outbreak, has only accelerated due to the
subsequent listing in the prime standard of the Frankfurt Stock disproportionately large impact that the virus has had on certain other
Exchange is a good example of a deal structure that has been sectors of the economy (e.g. logistics, real estate, automotive,
encountered more often in recent months and which will likely hotels/travelling).
continue to be attractive under COVID-19 restrictions. The Corporates clearly focus on their core activities, spinning-off and
transaction comprised a spin-off of the energy business to a newly carving-out business units that do not perform or support the main
established company, Siemens Energy, that has subsequently been listed business. Further acquisitions of minority stakes in listed companies,
on the Frankfurt Stock Exchange. including by way of private investment in public equity (PIPEs), are
also on the rise.
One of the drivers in M&A for the next few years will be distressed
COVID-19 and recovery plans M&A. Not only financial investors are revisiting old targets to spot
distressed assets, but also activists are increasingly focusing on capital
There is a clear shift by businesses to move towards digitalisation, a structure imbalances, vulnerabilities, and management responses to the
progression that would likely spur M&A activity by companies seeking pandemic. So far, activist investors have been relatively quiet, however,
to improve their capabilities in this space. they have quietly accumulated equity positions, and larger corporates
The substantial capital markets activity that the technology industry continue to be seen as value plays.
has seen will also impact the M&A process. In particular, companies
that view the IPO road as a credible alternative to a sell-side liquidity
event can use this leverage to drive better terms in an M&A event. Legislation and policy changes
The trend towards increased public M&A activity is confirmed by
the notable rise in dual-track and even tri-track processes. Growth Acquisitions of private companies are primarily structured as share deals
equity also rose significantly, as Europe’s start-up scene further matures. and are in principle not governed by a legislative offer process but are
In the US, the tech industry has also seen a rise in the number of direct rather a matter of negotiation between the respective bidder and seller
listings and special purpose acquisition company (SPAC) transactions. as most of the applicable general rules of the civil and corporate law is
It remains to be seen whether these trends will also manifest in not mandatory.
Germany. Public M&A transactions on the other hand have to comply, inter
alia, with the German Securities Acquisition and Takeover Act
(WpÜG), the Market Abuse Regulation
(Marktmissbrauchsverordnung) and the German Stock Corporation
“One of the drivers in M&A for Act (AktG). Furthermore, public takeovers are subject to the
supervision of the German Federal Financial Supervisory Authority
the next few years will be (BaFin).
The Federal Ministry of Economics (BMWi) has the power to review
distressed M&A” direct or indirect acquisitions of voting rights in German-based
companies by foreign investors. The BMWi may prohibit a transaction
or request commitments if it poses a threat to German public order or
security or violates essential national security interests.

M&A REPORT 2021 | IFLR.COM | 25

GERMANY

Nikolaos Paschos Sebastian Goslar

Partner Counsel
Latham & Watkins Latham & Watkins
T: +49 211 8828 4647 T: +49 211 8828 4658
E: [email protected] E: [email protected]

About the author About the author

Nikolaos Paschos is a partner in Latham & Watkins’ Düsseldorf Sebastian Goslar is a counsel at Latham & Watkins. He
office and the local chair of the firm’s German corporate advises German and global public companies as well as
department. He advises clients on corporate law, M&A, and financial investors on corporate transactions, capital markets,
related capital markets matters. and corporate governance.
Nikolaos advises public companies and their boards on Sebastian regularly helps clients navigate public M&A
general meetings, shareholders’ litigation, activist and (including defence), public company representation issues
stockholder matters, and corporate governance. As one of the (including stock corporation and (corporate transformation
leading corporate and M&A lawyers in Germany, he is regularly law), corporate governance/compliance, and capital markets
ranked in leading legal publications, including IFLR1000. compliance and transactions.
Nikolaos regularly writes and publishes on corporate and Sebastian provides clients pragmatic and efficient advice,
takeover law, notably the 2016 Paschos/Fleischer ‘Handbook drawing on his broad experience with more than 150
on Public Takeover Law (Handbuch des Übernahmerechts)’. transactions. He writes frequently on corporate and takeover
law, including in the ‘German Public M&A Handbook
(Handbuch Übernahmerecht nach dem WpÜG)’.

In addition, public and/or private M&A transactions that are investment opportunities. ESG has reached an inflection point, with
deemed a concentration may be subject to German merger control. boards of directors, investors and other market participants and
As distressed M&A market will be one of the drivers in M&A for observers focusing on questions regarding corporate purpose and
the next few years, the Act on the Further Development of the recognising the critical importance of environmental, social and
Restructuring and Insolvency Law (SanInsFoG) that the German governance factors in the sustainability and long-term value creation
legislator passed on December 17 2020 is of utmost importance. It potential of the corporation and, ultimately, broader economic
implements a wide catalogue of restructuring instruments offering prosperity.
debtors the opportunity to implement a restructuring concept with the
support of a majority of creditors against obstructing creditors. Many
of the companies currently in distress actually only face liquidity or Market norms
over-indebtedness problems; their core business is intact and will
remain so after the COVID-19 pandemic. Under the new legislation, In the majority of private M&A transactions, shares in a German
restructuring can be carried out in a minimally invasive manner and limited liability company (GmbH) are sold by way of a share purchase
potential investors need not fear hold-out value creditors when it comes agreement (SPA). The disposal of GmbH shares requires notarisation
to financial restructuring. of the SPA including all annexes which in fact means that the notary
The Digitalization Act, which entered into force on January 19 public must read out loud the SPA in front of the parties involved.
2021, substantially extends the scope of German antitrust law to tackle Depending on how complex the transaction is, this may be a rather
presumed enforcement challenges in the digital economy and raises lengthy exercise that needs to be interrupted each time one of the
merger control thresholds across all industries. The Digitalization Act signing parties leaves the room or talks on the phone. Therefore, it is
is the 10th amendment of the German Competition Act (GWB), the customary to have authorised representatives to sign the
so-called ‘GWB10’. Among other important changes, the current documentation.
merger control thresholds have been substantially raised in order to Depending on the deal structure, it is highly advisable to seek
relieve (mid-sized) companies from notifying transactions of minor employment and tax law advise early in a German M&A deal as
economic importance. German law provides some unique peculiarities in these legal practices.
Finally, foreign investment control has been tightened and carefully Law firms are using artificial intelligence (AI) tools more and more,
assessed, in particular by non-EU parties in certain key sectors. i.e. to conduct due diligence in M&A transactions while also using e.g.
M&A decision-making is influenced more and more by project management and translation tools to assist with a smooth
environmental, social and governance (ESG) matters when evaluating transaction through to closing.

26| IFLR.COM | M&A REPORT 2021

 GERMANY

OUTBOUND INBOUND

$57,611m $34,001m

182
5,023 1,734 4 2,261
543
2,350 8,368

4,549
12,003
1,798

12,769
1,819

470
25,567
12,173

NB only deals with publicly disclosed values are represented in the charts and infographics

■ Consumer products ■ Healthcare ■ Leisure and hospitality

■ Energy and natural resources ■ Industrial goods ■ Professional services
■ Financial services and investment management ■ Infrastructure and public services ■ Telecoms, media and technology

Electronic and digital signatures and digital transaction management increasingly encourage stock corporations to focus on shareholder value
platforms, such as DocuSign, are making it easier to execute M&A as liquidity and transparency of capital markets have developed.
transactions. It enables parties to review the final documents and sign After the decision to launch an offer has been published, the
electronically, which can overcome significant logistical issues for management board must not take any action that could prevent the
complex global transactions where parties are in difference locations success of the takeover offer. However, the following actions of the
and time zones. However, most of the German private M&A management board (including defensive measures) are permitted,
transactions involve the transfer of GmbH shares that require without approval of the shareholders’ meeting:
notarisation and thus is currently not eligible for electronic signature. • Searches for a ‘white knight’;
• Any action within the scope of the management board’s powers if
approved by the supervisory board and if the law (e.g. the AktG)
Public M&A does not set forth further requirements; and
• Actions that would have reasonably been taken if no offer had been
A shareholder holding at least 30% of the voting rights in as listed company launched, for example, measures in the ordinary course of business,
has ‘control’ over the company according to German takeover law. measures to execute contractual obligations entered into before the
The scope of legal documentation required for the assumption of bid or measures executing the established strategy of the target
shares in a public company depends on the type of business company.
combination chosen, i.e. reorganisations and mergers, acquisitions of Furthermore, the shareholders may, under certain restrictions,
a certain stake or a public takeover, or cooperation models as well as authorise the management board to take actions within the scope of
on the type of shares being acquired (namely bearer shares, registered the powers of the shareholders’ meeting before and independent from
shares, etc.) and whether these shares were bought over the stock any takeover offer.
exchange, subscribed for in connection with a capital increase or The BaFin takes a rather restrictive position regarding offer
bought from other shareholders. Depending on the structure of the conditions. Voluntary public takeover offers are usually subject to
transaction, more documentation than only a purchase agreement may regulatory approvals, fairly standardised market- and company-
be required. material adverse changes (MACs) and no defensive measures, such as
A public tender offer requires an offer document governed by capital increases during the offer period, being taken. There is often a
German law. Unsolicited takeover attempts are still rare in Germany, minimum acceptance threshold. Mandatory offers, i.e. those triggered
however, the general attitude with regard to hostile transactions is less by reaching a minimum 30% shareholding, can only be subject to
negative than it was in the past. Private and institutional investors regulatory conditions.

M&A R E P O RT 2021 | I F LR.C O M | 27

GERMANY

INBOUND OUTBOUND
“The market for exits still
30000 remains resilient"

25000
The study also revealed the continued limited use of escrows in
private M&A deals (19% of deals surveyed, a third successive year of
escrows featuring in 20% or less of deals), and a steady use of warranty
20000
and indemnity (W&I) insurance (45% of German deals). For deals
that were signed in the first half of 2020, there was even an increase in
the prevalence of escrows to 25%, reflecting changing business
15000 conditions and ongoing COVID-19-related uncertainties.
Private M&A transactions are typically subject to:
• Merger control clearance by the Federal Cartel Office or the
10000 European Commission; and
$11,363m $19,069m $28,129m $17,567m • Foreign investment control clearance by the BMWi.
Further deal conditions, if any, depend on the transaction specifics.
SPAs relating to German targets are usually governed by German
5000
law and are subject to the German courts unless the parties have agreed
on arbitration. For cross-border deals, depending on the role and
strength of the parties involved, purchase agreements are frequently
0 governed by German law but may alternatively be subject to the laws
PUBLIC PRIVATE PUBLIC PRIVATE and courts of another jurisdiction.
TARGET TARGET TARGET TARGET
However, German law applies a twofold approach, i.e. the purchase
NB: Values may exclude certain transactions, for example asset acquisitions/sales agreement determines the framework under which the shares are sold
whereas the transfer agreement determines how and when title to the
shares actually transfers to the buyer. While the parties are generally
Break fees in public M&A deals, when the target pays the prospective free to choose the governing law for the purchase regulations of a
buyer, have traditionally been unpopular in Germany and few target transaction, the actual transfer of the shares must be governed by
companies or bidders are willing to accept a break fee. German law.
Due to the remaining uncertainties of the COVID-19 pandemic,
there is no reliable valuation basis that consequently makes appropriate
Private M&A pricing very difficult for all parties involved. Whereas strategic investors
implement risk sharing structures such as earn-outs for acquisitions,
According to the Latham & Watkins 2020 Private M&A Market Study these are impracticable for PE exits, which call for the distribution of
(the study), which examined over 260 deals signed between July 2018 funds.
and June 2020, 47% of deals included a locked-box mechanism, 25% Under the current circumstances, nobody sells who is not forced to
of deals included a completion accounts mechanism and 28% of deals sell. Appropriate pricing is hardly possible without a reliable basis for
did not provide for price adjustment. This trend is consistent with valuation. Therefore, PE follows a ‘buy and build’ strategy to create
results from the previous four editions of the study and reflects the value by pursuing COVID-19 related opportunities. Implementing
seller-friendly nature of the European M&A market until COVID-19 such an approach takes time and therefore requires longer holding
emerged in March 2020. periods.
Thereafter, buyers found pricing deals using locked-box mechanisms IPO exits are on the rise, more so than trade sales but secondaries
far more challenging given the significant changes seen in company have factually dropped off. With regards to the exit environment, the
earnings and the lack of reliable financial forecasts. Whether market for exits still remains resilient, with sellers seeking an IPO (or
Germany—under the given circumstances—returns to the prevalent merger with a SPAC) or sale to realise their investment; in some
usage of completion accounts remains to be seen. instances, sellers employ dual-track exits to give greater certainty that
The number of deals that featured an earn-out remained limited at an exit will occur.
18% (albeit an increase of 4% from the previous study) according to the
study. Earn-outs are less popular with PE sellers. However, as valuation
uncertainties continue, earn-outs may serve as a means to unlock the gap Looking ahead
between buyers and sellers, although COVID-19 disruption and many
of the challenges that made valuation tricky during deal negotiation are Strategic investors have and will continue to pursue transactions to
likely to remain during the earn-out period. Therefore, careful improve their competitiveness in an increasingly digital and rapidly
specification of financial performance metrics is essential. changing world. To face the uncertainties caused by the COVID-19

28| IFLR.COM | M&A REPORT 2021

 GERMANY

pandemic, companies will continue to review their portfolios and The uncertainty about the short and long-term consequences of the
dispose non-core assets as well as unprofitable business units by way of pandemic and the respective influence on the business of potential
spin-offs or carve-outs. The proceeds will likely be used for investments target companies cause high insecurity with regard to reliable company
in innovation, digitalisation and disruptive technologies. The disposed evaluations. This will and already has inevitably influenced transaction
assets on the other hand continue to attract PE investors in hope for structures, i.e. re-participations, earn-outs and vendor loans will be on
superior returns on a stand-alone basis. the rise to bridge evaluation uncertainties.
Despite COVID-19, PE firms are still sitting on a huge amount of It is projected that PE firms will not act on the sell side as often as
dry powder for which they seek investment opportunities. Starting in the past so that so-called ‘secondary transactions’ will significantly
already before COVID-19, PE investors have proved to be more decrease until the market and the portfolio companies have stabilised.
flexible with regard to investment structures. In an aim to mitigate A lot of companies struggle hard due to the COVID-19 crisis so that
COVID-19-related uncertainties, it is expected that there will be competition for healthy and promising targets among PE investors but
significantly more minority shareholdings and co-investments. also between PE and strategic buyers will markedly increase.

M&A REPORT 2021 | IFLR.COM | 29

 Hong Kong SAR
Simon Cooke, Amy Beckingham, Frank Sun, Terris Tang and Maurice Conway,
Latham & Watkins

W hile Hong Kong SAR saw a modest decline in the

number of M&A deals for 2020, the total deal value rose
overall compared to 2019, thanks to a solid recovery in
the second half of the year. There has been an increase in outbound
activity, with a focus on Chinese target companies.
Heightened geopolitical tensions and logistical difficulties caused by
COVID-19 have presented challenges to cross-border deal-making,
resulting in lengthened deal timetables and market uncertainty as www.lw.com
buyers conduct more-detailed due diligence exercises to assess the
commercial and regulatory risks of their targets.
Hong Kong SAR continues to be a hub for large-scale private and completion. Buyers are also using earn-outs or deferred consideration
public M&A transactions. However, due to depressed equity valuations structures to address the risk of unforeseeable disruptive events.
in 2020 resulting from the pandemic, there has been an increased The last few years have seen active PE participation, fuelled by a
number of take-private and private investment in public equity (PIPE) stockpile of dry powder amassed from successful fund-raising by PE
deals. The state of the capital markets overall heavily influences deal funds. Despite the uncertain market, PE is likely to remain a driving
pricing and valuations, particularly in the case of public transactions. force in the market going forward.
The M&A market in Hong Kong SAR has proved itself robust in
the last 12 months, and despite the continuing pandemic, the relatively
COVID-19 and recovery plans strong rebound seen in the second half of 2020 combined with positive
vaccine news has paved the way for a steady recovery in 2021.
Despite experiencing an initial slowdown in M&A deal volume, Hong The pandemic, along with the uncertain geopolitical landscape,
Kong SAR experienced a strong rebound in the second half of 2020 as including trade tensions between the US and China, means investors
it started to recover from the effects of COVID-19. will continue to approach M&A cautiously, focusing on growing
The pandemic has spurred activity in the healthcare and life sciences existing businesses and looking for niche or perceived quality
industry globally, including in Hong Kong SAR, where there has been opportunities for investment.
increased private equity (PE) interest in the acquisition of biotech and
healthcare companies. Investment in this industry has had the benefit
of the new listing regime, which was introduced last year and allows Legislation and policy changes
for pre-revenue biotech companies to apply to list on the Hong Kong
Stock Exchange (HKEX). M&A transactions involving public companies or companies with a
COVID-19 has had a significant influence on how deals are primary listing of their equity securities in Hong Kong SAR are subject
structured. Market uncertainty has made it difficult to value targets to the regulations of the Code on Takeovers and Mergers (Code), which
and forecast future performance. Buyers are considering their walk- is administered by the Securities and Futures Commission (SFC), the
away rights more carefully, leading to negotiation of more favourable Listing Rules, and the Securities and Futures Ordinance.
material adverse change (MAC) clauses, although enforcement of Against a backdrop of COVID-19, the increasing trend of
MACs remains an issue. protectionist policies by international governments, as well as trade
Difficulty in agreeing company valuations has meant that tensions and geopolitical uncertainties, are likely to be challenges for
completion accounts mechanisms are being favoured by buyers as a cross-border transactions.
way to mitigate the risk of shifts in the value of businesses pre- For Hong Kong SAR specifically, 2020 saw new legislation
introduced (the Limited Partnership Fund Ordinance (Cap. 637)),
which enables private funds to be registered in the form of limited
“New legislation enables partnerships in Hong Kong SAR. The regime is intended to attract PE
and venture capital funds to set up in Hong Kong SAR to direct capital
private funds to be registered into corporates. 2020 also saw the implementation of the Inland
Revenue Department’s electronic service, which allows contracts and
in the form of limited instruments of transfer to be e-stamped. The timing of this
implementation was fortunate given COVID-19 and the shift to
partnerships” remote working arrangements.
Hong Kong SAR’s merger control legislation currently only applies
to M&A transactions that involve an undertaking that directly or

30| IFLR.COM | M&A REPORT 2021

 HONG KONG SAR

Simon Cooke Amy Beckingham

Partner Partner
Latham & Watkins Latham & Watkins
T: +852 2912 2709 T: +852 2912 2550
E: [email protected] E: [email protected]

About the author About the author

Simon Cooke is deputy managing partner of Latham & Watkins Amy Beckingham is a partner in the Hong Kong SAR office of
Asia offices, advising clients on a broad range of corporate Latham & Watkins and a member of the corporate department
transactions. and the PE practice.
Simon regularly serves Asian and global PE clients on Amy specialises in public and private M&A and joint
domestic and cross-border buyouts, growth capital, pre-IPO, ventures, acting for PE and other financial investor clients on
PIPE, privatisations, and other PE transactions. He also transactions throughout Asia, across a wide range of industry
advises a range of clients on general private and public sectors. She has also advised PE clients on their IPO exits in a
company cross-border M&A and corporate finance number of jurisdictions across Asia.
transactions.
Simon is consistently listed as a leading advisor on
corporate, M&A and PE transactions in Asia by ranking guides.

indirectly holds a carrier licence within the meaning of the

Telecommunications Ordinance. The Competition Commission is “There has been an increase
thought to be reviewing the existing framework of its broader anti-
competition regime; however, whether the merger regime will expand
in outbound activity, with a
to other sectors remains to be seen. focus on Chinese target
Market norms
companies"
It is commonly assumed that the Code only applies to companies listed
in Hong Kong SAR when in fact it applies to public companies in Public M&A
Hong Kong SAR, which may include unlisted companies. Another
common misconception is that there is no merger control regime in A takeover of a public company listed in Hong Kong SAR may be
Hong Kong SAR. As mentioned above, there is a merger regime, but executed principally by way of a general offer (mandatory or voluntary)
it currently only applies to the telecommunications and broadcasting or a scheme of arrangement (SOA). If a takeover offer is made and
sectors. acceptances are received in respect of 90% or more of the shares to
Hong Kong SAR maintains its own law for M&A transactions that which the offer relates, the offeror may compulsorily acquire the non-
is still closely based on English law (as opposed to the civil law regime accepting shareholders’ shares. An SOA requires approval by members
that applies in China), which includes connections to the Code. Parties representing at least 75% of the voting rights of members present and
are increasingly using W&I insurance on M&A deals both on the sell- voting in person or by proxy at the meeting, with not more than 10%
side to execute a clean break and on the buy-side to create a more of the voting rights attached to all disinterested shares opposed to the
competitive bid in an auction context. Typically, there are premiums scheme.
in the range of 1%–2% of the sum insured. Most listed companies in Hong Kong SAR have a controlling
During the COVID-19 period, technology has been key. shareholder that holds more than 30% (and often more than 50%) of
Organisations have had to ensure that their IT is sufficiently robust to the company’s shares, making it vital to have the controlling
support remote working. Electronic signing platforms such as shareholder’s support in any attempt to obtain control. As a result,
DocuSign have become more commonly used in transactions. More hostile bids, while allowed, virtually never occur.
generally, transaction management platforms are gaining traction, COVID-19 has not affected public takeover rules in Hong Kong
simplifying and automating certain legal processes such as completion SAR. All conditions to a voluntary general offer or an SOA must be
checklists, and there continues to be a trend towards using cognitive satisfied within the time periods prescribed by the Code.
or artificial intelligence (AI) software for due diligence. Consequently, many takeovers in Hong Kong SAR are affected by way

M&A REPORT 2021 | IFLR.COM | 31

HONG KONG SAR

OUTBOUND INBOUND

$11,501m $4,197sm

1,030 440 9
690

806
3
1,430 234

2,209

779
6,807
153 77
44 48

112
827

NB only deals with publicly disclosed values are represented in the charts and infographics

■ Consumer products ■ Healthcare ■ Leisure and hospitality

■ Energy and natural resources ■ Industrial goods ■ Professional services
■ Financial services and investment management ■ Infrastructure and public services ■ Telecoms, media and technology

of a pre-conditional offer in which there are mandatory regulatory

conditions that cannot (or may not) be satisfied within the prescribed
time periods.
Other than the acceptance condition, conditions that are usually
attached to a takeover offer include regulatory approvals and
various standard no occurrence of MAC or illegality conditions,
although the consent of the executive is required to invoke such
conditions. No financing conditions are accepted, as the
Maurice Conway announcement of an offer should include confirmation by the
Counsel financial advisor that the offeror has sufficient financial resources
Latham & Watkins to satisfy the full offer price.
T: +852 2712 2731 Break fees in public M&A remain uncommon in Hong Kong
E: [email protected] SAR, as most deals are consensual and require the controlling
shareholder to agree to the deal. The Code provides that an
About the author inducement fee or a break fee must be de minimis (usually no more
Maurice Conway is a counsel in the Hong Kong SAR office of than 1% of the offer value). The target’s board and financial advisor
Latham & Watkins and a member of the corporate department. must confirm to the executive that each of them believes that any
Maurice’s practice focuses on international M&A and PE agreed fee is in the best interests of the shareholders, and such
transactions, as well as general corporate matters across a arrangement must be fully disclosed to all shareholders in the offer
diverse range of industries, with particular focus on announcement.
representing PE clients and corporates on investments across
Southeast Asia.
Private M&A
Consideration mechanisms involving post-completion net debt
and/or working capital adjustments based on completion accounts
are more prevalent than locked-box structures in M&A transactions
in this region, especially in 2020 when buyers saw the need to

32| IFLR.COM | M&A REPORT 2021

 HONG KONG SAR

Frank Sun Terris Tang

Partner Partner
Latham & Watkins Latham & Watkins
T: +852 2912 2512 T: +852 2912 2719
E: [email protected] E: [email protected]

About the author About the author

Frank Sun is a partner in the Hong Kong SAR office of Latham Terris Tang is a partner in the Hong Kong SAR office of Latham
& Watkins and a member of the corporate department, & Watkins and a member of the corporate department.
specialises in PE investment and public and private M&A Terris advises clients on various corporate finance
transactions. transactions, including public and private M&A, capital markets,
Frank regularly advises PE funds and corporate clients in PE including IPOs, corporate restructurings, PE and general
investments, cross-border acquisitions, PIPEs, privatisations compliance matters. He has more than 10 years of experience
and a wide range of other complex M&A transactions. advising Chinese and international corporations, PE firms, and
financial institutions across Asia and globally.

mitigate market uncertainty caused by COVID-19. For seller-

friendly transactions in which targets are being sold in competitive
auctions, locked-box structures are still very common.
INBOUND OUTBOUND Earn-out structures do not commonly feature in transactions in
this region, largely due to the uncertainties that such structures
create for both buyers and sellers. However, earn-out structures are
becoming more attractive as parties attempt to work around the
6000 difficulties in predicting future performance of the business in this
climate. Escrow arrangements are still widely used, particularly
when there are financial sponsor sellers who would not typically
5000 provide a parent guarantee.
W&I insurance continues to grow in popularity and is now a
regular deal tool used to facilitate M&A transactions. While it was
4000 initially used by PE sponsors looking to achieve a clean exit,
increasingly, parties consider its use as a tool to bridge gaps between
liability caps offered by sellers and coverage required by buyers,
particularly in PE deals. Insurance underwriters within the region
3000 generally view Hong Kong SAR as a relatively stable and low-risk
jurisdiction, which has a positive effect on premium levels.
In competitive auctions, sale conditions may be limited to receipt
2000 of requisite third-party consents, such as regulatory consents in
$893m $3,304m $4,929m $5,079m respect of targets operating in regulated industries and consents
required under contractual obligations binding on the vendors
1000 and/or target entities. In bilateral transactions, potential buyers
generally have more leverage to negotiate additional, bespoke
conditions precedent, including MAC clauses, repeated warranties
and no-breach conditions.
0 In M&A transactions involving a Hong Kong SAR target, the
PUBLIC PRIVATE PUBLIC PRIVATE transaction documentation is typically governed by Hong Kong
TARGET TARGET TARGET TARGET
SAR law, given that local laws dictate the share transfer and
NB: Values may exclude certain transactions, for example asset acquisitions/sales attendant control transfer procedures. For regional M&A

M&A REPORT 2021 | IFLR.COM | 33

HONG KONG SAR

transactions, foreign governing laws sometimes get adopted, for Looking ahead
example Singapore law or the laws of England and Wales, and
parties increasingly designate Hong Kong SAR or Singapore for Despite the pandemic and continuing geopolitical uncertainty, it is
arbitration. encouraging to see the way the M&A market has rebounded in the
In 2020, the HKEX ranked second globally in terms of IPO second half of 2020 and it is hoped that this rebound will flow through
proceeds, behind the NASDAQ. HKEX’s ranking was driven by to a stronger 2021, particularly as the vaccine rollout continues.
several secondary listings of high-profile US-listed China-based Hong Kong SAR remains an attractive hub for both inbound and
companies on the HKEX in 2020 and take-privates. The uncertain outbound investment, particularly for Chinese companies seeking
market has made it more difficult to execute trade sales and sales to alternative options due to growing regulatory pressure in the US PE
financial sponsors, both in Hong Kong SAR and globally, although houses still have significant stockpiles of capital that need to be
the market recovered considerably towards the end of 2020. deployed, which should drive deal flow in 2021.

34| IFLR.COM | M&A REPORT 2021

 United Kingdom
Nick Cline, Robbie McLaren, Douglas Abernethy and Terry Charalambous,
Latham & Watkins

T he UK M&A market in 2020 was significantly down in the

first half of the year due to the effects of the COVID-19
pandemic. Deal activity picked up in the second half of the
year, as companies navigated their way out of the immediate liquidity
crisis.
The use by a private company of a merger with a listed special
purpose acquisition company (SPAC) as an exit method and route to www.lw.com
the public markets is a growing trend in cross-border deal-making.
Both public and private M&A transactions play an important part
in the UK market, with private M&A deals making up a far higher
number of UK target M&A deals. Public takeovers have a prescribed The most significant factors influencing deal structures are related
process under the City Code on Takeovers and Mergers (the Takeover to:
Code), as administered by the Panel on Takeovers and Mergers, whereas • Industry consolidation, M&A-driven growth, financing
the structure and process of private acquisitions are a matter of considerations or other factors;
negotiation between the buyer and seller. • Distressed M&A work: takeover reorganisations, bidding, post-
Among other notable deals, Latham & Watkins advised on M&A closings; and
NVIDIA’s acquisition of Arm for $40 billion, a deal that highlighted • The impact of COVID-19 on M&A-related disputes, use of
the UK’s ongoing discussion of national interest and security. indemnity provisions.
Transactions involving overseas entities acquiring UK companies in The COVID-19 pandemic has caused companies multiple
sensitive sectors will be subject to greater scrutiny following the challenges, the effect of which has been to create a liquidity need for
announcement of the National Security and Investment Bill. many companies and an increase in refinancings and restructurings
(including debt-for-equity swaps). Latham & Watkins has advised on
several balance sheet restructuring matters in 2020 in affected sectors
COVID-19 and recovery plans including Swissport, New Look, PizzaExpress, and FatFace.
Parties are also seeking to address the allocation of risk in transaction
UK M&A activity overall decreased in 2020 as a result of COVID-19, documents. Express references to COVID-19 are being included in
as companies responded to the challenges arising from the pandemic conditions precedent (as opposed to attempting to rely on the doctrine
and focused on strengthening their balance sheets. Despite this of frustration), and earn-outs are becoming more common as buyers
backdrop, and the initial shock to businesses in the second quarter, seek comfort on a target’s financial performance during COVID-19
domestic M&A and inbound M&A increased in the third quarter; before paying full value. Warranty and indemnity (W&I) insurers have
however, outbound M&A has seen a significant drop each quarter. Real responded by including broad exclusions for breach of warranty claims
estate, financial services, retail and hospitality have all seen a decrease resulting from COVID-19.
in M&A activity, while the technology, warehousing and healthcare In 2020, there was an increase in exits by way of a merger with a
sectors have been more robust. SPAC (or blank cheque company), which is seen as a more efficient
Deal activity is expected to continue to increase in the first quarter route to the public markets, while also enabling the financial sponsor
of 2021, as vaccines are rolled out and companies look to acquisitions to participate in any upside in the enlarged structure, as evidenced by
to better protect against future challenges or disposals to increase Paysafe’s merger with Foley Trasimene Acquisition Corp. II, which
liquidity. However, with the continued uncertainty following Brexit, Latham & Watkins advised Paysafe on.
and the UK government lifelines introduced during COVID-19 The market dislocation caused by COVID-19 is encouraging
coming to an end, the speed of recovery in the first part of 2021 may financial investors to revisit old targets and move to execution quickly
be dampened. where assets are now distressed. W&I insurance uptake by financial
investors on both the buy-side and sell-side remains a common feature
in M&A transactions as they look to bridge the gap, which has also
resulted in corporates becoming more familiar with such products to
“In 2020, there was an remain competitive (on the buy-side) or to keep a larger portion of the
proceeds as free cash (on the sell-side).
increase in exits by way of a We expect UK M&A to continue to recover in 2021 as COVID-19
vaccines are rolled out and the first companies and financial investors
merger with a SPAC” emerge from the pandemic seeking to take advantage of M&A
opportunities.

M & A R E P O R T 2 0 2 1 | I F L R . C O M | 73
UNITED KINGDOM

Nick Cline Robbie McLaren

Partner Partner
Latham & Watkins Latham & Watkins
T: +44 20 7710 1087 T: +44 20 7710 1880
E: [email protected] E: [email protected]

About the author About the author

Nick Cline is an M&A lawyer at Latham & Watkins, with more Robbie McLaren is a partner at Latham & Watkins, and serves
than 20 years of experience. He focuses on UK and as global vice chair of the firm’s healthcare and life sciences
international, cross-border M&A, corporate reorganisations, industry group and co-chair of the London corporate
and joint ventures and is a member of the firm’s executive department.
committee. Robbie’s practice focuses primarily on cross-border M&A,
Nick has extensive experience advising UK plc and joint ventures and emerging companies. He represents clients
international client boards and legal teams on their most who primarily operate in the life sciences, healthcare, and
complex M&A matters, as well as advising them on their day-to- technology industries. He is highly regarded by clients and
day corporate advisory needs. He is ranked by legal ranked by legal publications.
publications and rated highly by clients.

Legislation and policy changes The Pensions Regulator will gain enhanced powers in 2021. Unlike
the NSI Regime, the Pension Schemes Act will not have retrospective
The Companies Act 2006 applies to public and private companies effect, however, it expands the circumstances in which the Pensions
registered in the UK. While the Companies Act does not govern M&A Regulator can exercise existing moral hazard powers. The Pension
activity as such, its requirements dictate the way that deals by UK Schemes Act also creates new moral hazard powers that can be exercised
companies are effected. against any ‘person’ and includes penalties that encompass criminal
The acquisition of private companies is a matter of negotiation sanctions. Given increasing political and public pressure on the
between the buyer and seller, and no regulated offer process is required. Pensions Regulator, dealmakers should anticipate increased scrutiny of
In non-regulated industries (i.e. other than financial services, telecoms, deals that involve a defined benefit pension plan.
media, pharmaceuticals), deals are not typically subject to input from As of April 2021, a dedicated Digital Markets Unit (DMU) will
regulatory bodies, save for competition and foreign direct investment be set up within the CMA that will introduce and enforce a new
(FDI) matters. code to govern the behaviour of platforms that have considerable
Public acquisitions are governed by the Takeover Code. market power — known as ‘strategic market status’.
The end of the Brexit transition period on December 31 2020 (the Under the new code, platforms including those funded by digital
transition period) marked the end of the European Commission’s status advertising could be required to be more transparent about the services
as the ‘one-stop shop’ for the review of mergers relating to the UK they provide and how they are using consumers’ data. The platforms
meeting certain monetary thresholds. This means that if a merger would also be required to give consumers a choice over whether to
satisfies the jurisdictional thresholds of the EU Merger Regulation and receive personalised advertising, and would be prevented from placing
the UK’s Enterprise Act 2002, the Competition and Markets Authority restrictions on their customers that make it hard for them to use rival
(CMA) and the European Commission may now conduct parallel platforms. Moreover, the DMU is expected to introduce greater
assessments of the same merger in their respective jurisdictions. In its scrutiny of M&A involving firms with strategic market status.
2020–2021 Annual Plan, the CMA estimated that this would result in
a 50% increase in the number of merger cases it reviews.
The National Security and Investment Bill was published in Market norms
November 2020 and is expected to become law this summer (the NSI
Regime). The NSI Regime will give far-reaching powers to the UK’s UK companies can be acquired by way of a share purchase (i.e.
Secretary of State for Business, Energy and Industrial Strategy (BEIS) purchasing all the shares of the target company) or an asset purchase
to intervene in relation to transactions that risk national security. The (i.e. purchasing all the assets of the target company) but, as a matter of
NSI Regime introduces (i) a statutory requirement for parties to notify UK domestic law, M&A transactions between private UK companies
relevant transactions in the most sensitive areas of the economy; and cannot be consummated by way of a merger by absorption. The
(ii) a ‘call-in’ power that enables BEIS to assess other transactions that Companies Act does provide for mergers for UK public companies,
may give rise to national security risks. but these provisions are generally not used and a scheme of

74 | I F L R . C O M | M & A R E P O R T 2 0 2 1
 UNITED KINGDOM

OUTBOUND INBOUND

$103,681m $210,859m

9,756 3,019 10,435

15,265

444 9,218
771

3,437
56,012
2,526
95,891

11,640

3,114
10,270

9,649
49,002 12,352 10,118

NB only deals with publicly disclosed values are represented in the charts and infographics

■ Consumer products ■ Healthcare ■ Leisure and hospitality

■ Energy and natural resources ■ Industrial goods ■ Professional services
■ Financial services and investment management ■ Infrastructure and public services ■ Telecoms, media and technology

arrangement is more commonly seen. This is in contrast to other

INBOUND OUTBOUND jurisdictions where mergers are frequently encountered.
The UK merger control regime is voluntary, and there is no
obligation for the notification of mergers in the UK, although, in
120000 practice, notifications are made to avoid any interim enforcement
orders that might create deal uncertainty or delay.
An area that is often overlooked by parties involved in M&A
100000 transactions is that buyers do not usually attend to consolidation of
group companies immediately after closing, resulting in continued
administrative and financial burdens (e.g. filing annual accounts) to
maintain dormant or inactive subsidiaries.
80000
There is an increasing use of artificial intelligence (AI) technology
to conduct more efficient due diligence in M&A transactions.
Dealmakers have also made extensive use of virtual meeting technology
60000 and electronic signature platforms to negotiate and close transactions
during the pandemic.

40000
$119,218m $80,594m $62,314m $26,151m Public M&A
A bidder may choose to stake-build in order to obtain control of a
20000
public company, however, depending on the time of such acquisition
and form of consideration, doing so may set a floor price and fix the
form of consideration for any future offer. Furthermore, acquiring 30%
0 of the voting rights in a public company will require a bidder to launch
PUBLIC PRIVATE PUBLIC PRIVATE a mandatory cash offer for the remainder of the shares it does not own.
TARGET TARGET TARGET TARGET In addition, any dealing giving rise to speculation, rumour or an
NB: Values may exclude certain transactions, for example asset acquisitions/sales untoward movement in the public company’s share price may mean an

M&A REPORT 2021 | IFLR.COM | 75

UNITED KINGDOM

Douglas Abernethy Terry C Charalambous

Partner Associate
Latham & Watkins Latham & Watkins
T: +44 20 7710 4760 T: +44 20 7710 3095
E: [email protected] E: [email protected]

About the author About the author

Douglas Abernethy represents clients in a range of complex Terry Charalambous is an associate in the London office of
corporate finance and M&A matters, with a particular focus on Latham & Watkins and a member of the firm’s corporate
public takeovers and take-private transactions. department.
Douglas delivers pragmatic and commercially driven advice Terry advises clients on M&A, PE, venture capital, and
on M&A matters to multinational PE firms, financial institutions, general corporate matters. He previously trained and qualified
and UK-listed companies. He represents clients in connection at another law firm, where he also spent time on secondment
with significant acquisitions and divestitures involving assets in to Amazon assisting with general commercial matters in the UK
a diverse range of industries. He also advises financial and across Europe.
institutions serving as lenders and advisors to parties on M&A
transactions.

conditions when it declined to permit the bidder for Moss Bros to rely
“The market dislocation on an MAE condition on the basis of the impact of COVID-19 on
Moss Bros’ business. It is possible that we will see a move by bidders
caused by COVID-19 is towards more tailored conditions aimed at events like the pandemic,
which the Takeover Panel has indicated are more likely to be exercisable
encouraging financial (assuming the relevant situation arises) than would be the case if the
bidder were seeking to rely on a general MAE condition.
investors to revisit old targets Occasionally, a bidder will announce a firm intention to bid on a pre-
conditional basis, when posting of the bid document is suspended
and move to execution pending satisfaction of stated pre-conditions, often material antitrust
quickly…” conditions if it is anticipated that these will involve protracted processes.
In public takeover offers, break fees (when the target pays the
prospective buyer) are now largely prohibited, whereas reverse break
announcement is required (if the acquirer is considering making an fees (when the prospective buyer pays the target) are not prohibited.
offer for the whole company), while disclosures will also be necessary Only in limited circumstances can a break fee be offered, for example,
once certain thresholds of ownership are crossed. a break fee may be offered to a ‘white knight’ making a bid in
A takeover offer will usually be subject to an extensive set of competition with a hostile offer that has already been announced
conditions, including: securing acceptances carrying more than 50% (subject to such fee being de minimis and payable only upon the first
of the voting rights in the target (or, in the case of a court-sanctioned offer becoming or declared wholly unconditional).
scheme of arrangement, the requisite 75% target shareholder approval), If the bidder is a UK public company and subject to the UK Listing
antitrust and regulatory approvals, bidder’s shareholder approvals, Rules, and the total value of the reverse break fee exceeds 1% of the
listing of consideration shares (when applicable), and conditions market capitalisation of the bidder, the bidder’s directors will need to
dealing with the state of the target’s business. treat the reverse break fee as a material transaction (which, among other
A bid cannot be subject to conditions that depend on the subjective things, requires shareholder approval). If the bidder controls more than
judgment of the bidder. Additionally, seeking to rely on a material 10% of the target, a reverse break fee may also constitute a related party
adverse effect (MAE) or similar bidder protective condition to not transaction for the purposes of the UK Listing Rules.
proceed with an offer requires the consent of the Takeover Panel, which
applies a materiality test with a high bar (requiring the circumstances
to be of considerable significance and aiming to strike at the heart of Private M&A
the purpose of the transaction) before it will permit an offer to be lapsed.
In 2020, the Takeover Panel effectively confirmed that it would not According to the Latham & Watkins 2020 Private M&A Market Study
make COVID-related exceptions to its general approach to MAE (the Study), which examined over 260 deals signed between July 2018

76 | I F L R . C O M | M & A R E P O R T 2 0 2 1
 UNITED KINGDOM

and June 2020, 47% of deals included a locked-box mechanism, 25% the English courts. For global transactions, depending on the location
of deals included a completion accounts mechanism and 28% of deals of the parties and their advisers, purchase agreements are frequently
did not provide for price adjustment. This trend is consistent with governed by English law (since it is viewed as stable, impartial and
results from the previous four editions of the study and reflects the commercial, with a developed litigation infrastructure) but may
continuing seller-friendly nature of the UK M&A market. The number alternatively be subject to the laws and courts of another jurisdiction,
of deals that featured an earn-out remained limited at 18% (albeit an such as New York.
increase of 4% from the previous study). The market for exits remains resilient, with sellers seeking an IPO
The Study also revealed the continued limited use of escrows in (or merger with a SPAC) or sale to realise their investment; in some
private M&A deals (19% of deals surveyed, a third successive year of instances, sellers employ dual-track or triple-track exits to give greater
escrows featuring in 20% or less of deals), and a steady use of W&I certainty that an exit will occur.
insurance (34% of deals).
In private M&A, the conditions to closing that are included in a
purchase agreement will vary based on the circumstances of each Looking ahead
transaction. Historically, conditionality beyond regulatory and anti-
trust clearances is uncommon, but the increasing role of regulation in We expect UK M&A activity to continue to increase in 2021.
deal making and the impact of COVID-19 could change this. However, remaining uncertain following the end of the Transition
According to the Study, only 10% of deals included a material adverse Period and the continuing impact of COVID-19 mean that the speed
change clause (which refers to events that have a negative impact on the of recovery is likely to be slower in the first part of 2021.
market generally or, more specifically, on the target company’s business). We expect the market to continue to be ‘seller friendly’, with sellers
The use of breach of covenant/warranty conditions remains very limited seeking greater certainty as to a buyer’s financial ability and covenant
(8%), but we are seeing an increase in the use of FDI conditions (11%). strength. We are also likely to see an increase in the use of earn-outs
Purchase agreements relating to UK companies and assets are and escrows as buyers seek comfort on the financial performance of a
typically governed by English law and are subject to the jurisdiction of target during COVID-19.

M & A R E P O R T 2 0 2 1 | I F L R . C O M | 77
 United States
Robert Katz, Allison Eitman, Bharath Mohan and Karen Song,
Latham & Watkins

T he US M&A market is recovering from a roller-coaster year

due to the COVID-19 pandemic. The onset of the pandemic
in early 2020 caused a slowdown in deal activity, but the
recovery in the second half of 2020 set the stage for a continued
increase in deal activity into 2021.
Representation and warranty insurance (RWI), increasingly common
in private M&A transactions, has adapted to the changing M&A www.lw.com
landscape by accounting for pandemic-specific risks. RWI brokers are
also emphasising the availability of particular policies, such as
contingent liability policies, that may apply outside the M&A context.
The scope of cross-border transactions subject to governmental target, particularly as those effects fell within a ‘calamities’ exception
review has increased. In February 2020, the Committee on Foreign to the MAE definition.
Investment in the United States (CFIUS) implemented a set of rules
that expanded CFIUS’s jurisdiction and mandated filings in the case
of investments in certain specified critical technologies. COVID-19 and recovery plans
The market continues to be driven by both private and public M&A
transactions, although private M&A is more prevalent because there COVID-19 caused a sharp decline in deal volume and deal value in
are many more private companies than public companies. Ready the first half of 2020. Even with a strong rebound in the second half of
availability of financing is a driving factor, particularly for private 2020, M&A activity still ended down 21% by value compared to 2019,
company and private equity (PE) deal-making, for which acquirer stock according to Mergermarket. Despite the challenges faced by the M&A
is not available as transaction consideration. market in 2020, deal activity is expected to accelerate in 2021.
Several recent transactions highlight the importance of considering More deal parties adjust their transaction structures and use
how certain measures taken in response to COVID-19 could be COVID-specific terms and conditions to allocate pandemic-related
interpreted (or provide a basis for termination) under transaction risks, including through the use of contingent pricing structures and
agreements, including in transactions in which a target does not suffer carveouts in MAE definitions and interim operating covenants to
a material adverse effect (MAE). For example, in May 2020, L Brands permit targets to take actions in response to COVID-19.
and PE firm Sycamore Partners agreed to terminate their agreement The frequency of distressed asset sales increased (and is expected to
under which Sycamore Partners would have acquired L Brands’ remain at elevated levels) in industries that have been severely negatively
majority stake in Victoria’s Secret. Prior to the termination, Sycamore impacted by COVID-19, such as the transportation, lodging,
alleged that by taking certain actions in response to COVID-19 (e.g. hospitality, and live entertainment industries.
furloughing a large number of employees), L Brands breached its In 2020, there was a dramatic surge in the volume and size of special
obligation to operate the business ‘in the ordinary course consistent purpose acquisition company (SPAC) deals, an alternative path to
with past practice’. taking a private company public whereby a SPAC is formed to raise
In November 2020, the Delaware Court of Chancery held in AB cash in an IPO, and the proceeds are subsequently used to complete a
Stable VIII LLC v. Maps Hotels and Resorts One LLC et al. that business combination with a private target, typically within two years
the seller breached its covenant to operate the target business ‘in the of the SPAC’s IPO.
ordinary course of business consistent with past practice’ by taking Private equity firms remain a driving force of deal-making. Despite
various actions in response to COVID-19. The court determined that COVID-19, uncommitted capital at PE firms remains at record levels,
COVID-related economic effects did not constitute an MAE of the which can be expected to continue to drive M&A activity in 2021 as
firms look to deploy that capital.

“More deal parties adjust their

Legislation and policy changes
transaction structures and use
US M&A transactions are subject to regulation by both the federal
COVID-specific terms and government and the target’s state of incorporation.
The federal government primarily regulates the issuance and sales of
conditions to allocate securities through the Securities and Exchange Commission (SEC),
pandemic-related risks” antitrust matters through the Federal Trade Commission (FTC) and
the Antitrust Division of the Department of Justice (DOJ), and foreign

78 | I F L R . C O M | M & A R E P O R T 2 0 2 1
 UNITED STATES

Robert Katz Allison B Eitman

Partner Associate
Latham & Watkins Latham & Watkins
T: +1 212 906 1609 T: +1 212 906 4734
E: [email protected] E: [email protected]

About the author About the author

Robert Katz regularly represents financial institutions, public Allison Eitman is a corporate associate in the New York office
companies, and private equity sponsors and their financial of Latham & Watkins and a member of the M&A practice.
advisors in their highest-stakes M&A transactions. His practice Allison advises public and private companies and PE firms
includes cross-border transactions, governance matters, joint across a range of industries in domestic and international
ventures, leveraged buyouts, public and private acquisitions transactions, including M&As, dispositions, carve-outs, auction
and divestitures, spin-offs, takeover and activist defence processes, and general corporate matters.
strategies, and tender and exchange offers. Allison’s experience also includes representing boards of
Robert, a nationally recognised corporate lawyer, helps directors and special committees in connection with corporate
clients navigate both negotiated and unsolicited M&A governance and shareholder activism matters.
transactions across geographies and industries, including
industrials, healthcare, technology, and media and
communications.

investment that may have national security implications through adjustment based on the amounts of certain financial accounts of the
CFIUS. The laws, rules and regulations administered by the SEC are target (e.g. cash, indebtedness and net working capital) on the closing
particularly relevant in the purchase or sale of a US public company. date. Under this approach, the parties generally must spend more time
The laws of the target’s state of incorporation govern that company’s negotiating the adjustment mechanisms and related accounting
internal affairs and impose requirements for shareholder approval of methodologies.
mergers and the procedures for effecting mergers. Under the laws of most states, public target boards must generally
In June 2020, the FTC and DOJ issued the final Vertical Merger retain the right (commonly referred to as a ‘fiduciary out’) to terminate
Guidelines (Guidelines). Unlike the draft version, which proposed a the transaction agreement after signing but before the target’s
safe harbour if the parties to the vertical merger had less than a 20% shareholders approve the transaction to accept a higher offer.
share of the relevant market, the final Guidelines do not include a safe Shareholder litigation is common in such transactions, and the buyer
harbour based on either party’s market share. It remains unclear is generally liable for related costs.
whether behavioural remedies will be acceptable to resolve issues in RWI and transaction structures that provide for no post-closing
future vertical mergers and whether the Guidelines will remain in effect recourse by the buyer against the seller except for fraud are increasingly
under the Biden administration. common in private company transactions.
The Biden administration has indicated that it expects to adopt As a result of the pandemic, dealmakers have had to adjust to a
policies and pursue legislation that could significantly impact M&A in virtual environment in which almost every aspect of an M&A
certain sectors of the economy (e.g. increasing federal infrastructure transaction relies on technology, necessitating a keener focus on
spending and adopting laws or regulations to address climate change). cybersecurity issues in the deal execution process. Also, data privacy
Several states have adopted legislation limiting the amount of energy and cybersecurity have become critical elements of the business and
that can be used or generated by fossil fuels, which should continue to operations of most companies and thus should be a key focus of due
encourage renewables investments. diligence in any M&A transaction.

Market norms Public M&A

Unlike the ‘locked-box’ approach that is more common in many non- In light of the fiduciary duties of public company directors that
US jurisdictions, in most US private acquisitions, the purchase price generally require them to maximise shareholder value in a sale, target
agreed to at signing is usually subject to closing or post-closing boards often conduct some form of a pre-signing market check.

M & A R E P O R T 2 0 2 1 | I F L R . C O M | 79
UNITED STATES

OUTBOUND INBOUND

$262,690m $289,319m

5,364 8,615 14,593

67,682
44,684
71,751

82,095

6,810 21,634
4,111

14,981

13,643
53,031
12,818
8,925
15,435 101,181
4,655

NB only deals with publicly disclosed values are represented in the charts and infographics

■ Consumer products ■ Healthcare ■ Leisure and hospitality

■ Energy and natural resources ■ Industrial goods ■ Professional services
■ Financial services and investment management ■ Infrastructure and public services ■ Telecoms, media and technology

INBOUND OUTBOUND However, in some deals the target board will forego a pre-signing
market check in exchange for a ‘go shop’ right to solicit competing
offers for a limited period of time (usually 30–60 days) after signing
the transaction agreement.
150000
While state law generally requires target boards to preserve a
‘fiduciary out’ to accept a higher offer under certain circumstances,
buyers usually negotiate for a prohibition on the target’s right to
affirmatively solicit competing offers (except in the case of a ‘go shop’
120000
right), and the right to receive a ‘break-up’ fee if the target’s board
terminates the transaction agreement to accept a higher offer.
Most states require shareholder approval (usually by a majority of
outstanding shares) of most mergers. Certain regulatory approvals,
90000
including clearance under the Hart-Scott-Rodino antitrust statute, and
for non- US acquirers, from CFIUS, must be obtained before an
acquirer can take control of a US company. Acquiring a US company
in regulated industries such as financial services and energy may be
60000
subject to additional regulatory scrutiny at the federal and/or state level.
The acquisition of a US public company can be structured either as
$108,862m $118,412m $114,664m $129,257m a one-step merger between the acquirer (or more commonly a
subsidiary of the acquirer) and the target (typically requiring majority
30000
shareholder approval), or a two-step transaction involving a tender or
exchange offer by the acquirer for all of the target’s outstanding shares
followed by a back-end merger. Both types of transactions are typically
subject to the following conditions (among others):
0
• Accuracy of representations and warranties;
PUBLIC PRIVATE PUBLIC PRIVATE • Material compliance with covenants;
TARGET TARGET TARGET TARGET
• No MAE on the target; and
NB: Values may exclude certain transactions, for example asset acquisitions/sales
• Receipt of regulatory approvals.

80| IFLR.COM | M&A REPORT 2021

 UNITED STATES

Bharath Mohan Karen Jinmeng Song

Associate Associate
Latham & Watkins Latham & Watkins
T: +1 212 906 4574 T: +1 212 906 1687
E: [email protected] E: [email protected]

About the author About the author

Bharath Mohan is an associate in the New York office of Karen Song is a corporate associate in the New York office of
Latham & Watkins. Prior to joining Latham full time, he was a Latham & Watkins and a member of the firm’s M&A practice.
summer associate at the firm. He works within the firm’s M&A Karen advises public and private companies, including PE
department. firms, strategic investors, and financial institutions, in
Bharath earned his JD from Duke University School of Law, connection with M&As, PE investments, and general corporate
where he graduated magna cum laude and served as articles law matters. She has experience representing issuers and
editor for the Duke Journal of Gender Law and Policy. Earlier, underwriters in capital markets transactions and advising
he earned his BA from Dartmouth College, where he graduated public companies with respect to the review and preparation of
cum laude. SEC filings, corporate governance matters, and interactions
with security holders and stock exchanges.
Karen holds a degree from the University of International
Business and Economics in China, and a LLM from Harvard
Law School.

Nearly all public target M&A deals in 2020 included an MAE

exception for changes, effects or conditions arising out of the COVID-
19 pandemic and governmental responses thereto, according to Deal “In 2020, there was a dramatic
Point Data. Many agreements also provide for greater flexibility under
the interim operating covenants to permit the target to take action in surge in the volume and size of
response to COVID-19.
Public company merger agreements generally require the target to SPAC deals”
pay a termination fee if the target terminates the agreement to accept
a superior offer, or if the buyer terminates because the target changes
its recommendation in favour of the deal. These fees usually comprise acquisitions. Locked-box transaction structures are much less prevalent
2% to 4% of the transaction’s equity or enterprise value, but can vary in private company acquisitions in the US than in many other
based on deal size and other factors. jurisdictions.
In some transactions, the buyer is required to pay the seller or the At the beginning of the pandemic, RWI carriers started including
target a reverse termination fee under certain circumstances (for broad COVID-related exclusions in their policies. These exclusions
example, the failure to obtain required regulatory approvals, or the have been narrowed to focus on the target’s COVID-related risks.
failure to close the transaction even if all the buyer’s closing conditions All the conditions listed above for a public M&A (see the bullet
are satisfied). These fees are highly variable but often range between points above), except the minimum tender condition, generally also
5% and 7% of the transaction’s equity or enterprise value. apply in private M&A transactions. However, in the absence of RWI,
representations and warranties usually survive the closing in private
M&A transactions and may give rise to post-closing indemnity claims.
Private M&A Merger and share purchase agreements are typically governed by the
law of the target company’s state of incorporation. If a target company
There was an increased use of earn-outs in 2020, under which the seller is incorporated in a state with sparsely developed corporate law, the
will receive one or more additional payments, contingent on the target’s parties sometimes provide that Delaware law will govern certain issues.
future performance, in part to account for increased earnings The exit environment in the US remains robust, and was
uncertainty due to COVID-19. substantially boosted in 2020 by so-called ‘de-SPAC’ transactions, i.e.
Completion accounts (known as working capital or balance sheet mergers between SPACs and private companies. PE firms recorded 952
adjustments in the US) are common in US private company exits in 2020 (a 14% decrease compared to 2019), with a combined

M&A REPORT 2021 | IFLR.COM | 81

UNITED STATES

value of $378.3 billion (a 6% increase compared to 2019), according Among the factors likely to drive and sustain M&A activity in the
to Pitchbook. Public listings (consisting of traditional IPOs and de- near-term are pent-up demand from the M&A slowdown during the
SPAC transactions) comprised eight of the 10 largest exits. first half of 2020, greater political certainty following the presidential
election, continuing low interest rates, and the general availability of
credit. Moreover, the amount of capital to be invested by PE firms, the
Looking ahead Biden administration’s likely support for infrastructure and renewables
investment, the gradual recovery of oil prices, and the continuing
There is growing confidence in the market that M&A activity in the popularity of de-SPAC transactions will also help create a positive
US will return to, or even surpass, pre-COVID-19 levels in 2021. environment for increased deal flow.

82| IFLR.COM | M&A REPORT 2021

 REPORT PARTICIPANTS

Angola Austria Bahrain China

Costa Rica Germany Hong Kong SAR India

Indonesia Japan Kuwait Luxembourg

Portugal Slovenia Switzerland Taiwan

United Kingdom United States Vietnam