Corporate M&A 2021

The new Corporate M&A 2021 guide covers 58 jurisdictions. The guide provides the latest legal information on acquiring a company, antitrust regulations, restrictions on foreign investments, stakebuilding, negotiation, mandatory offer thresholds, conditions for a takeover offer, squeeze-out mechanisms, disclosure, duties of directors, defensive measures and shareholder activism.

Last Updated: April 20, 2021


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Sullivan & Cromwell LLP provides the highest-quality legal advice and representation to clients worldwide. S&C’s record of success and unparalleled client service has set it apart for 140 years and made the firm a model for the modern practice of law. Today, it is one of the leaders in each of its core practice areas and geographic markets. S&C advises a diverse range of clients on corporate transactions, litigation and estate planning matters. It comprises more than 875 lawyers who conduct a seamless, global practice through a network of 13 offices located in Asia, Australia, Europe and the United States. S&C is a perennial leader in M&A, having advised on some of the world’s largest and most noteworthy cross-border and domestic M&A transactions. S&C has acted in over USD4.5 trillion in announced transactions worldwide over the past ten years.


Introduction

M&A in 2020 began in much the same way as the seven years preceding it: filled with promise of robust M&A activity with market participants continuing to enjoy the tailwind of a low interest rate environment and easy access to capital. Although regulatory and geopolitical uncertainty around the globe continued to introduce deal execution risk in 2020, its impact had not been prohibitive other than in a few specific types of transactions. M&A parties and their advisors continued to adapt to navigate the new normal.

Then, the COVID-19 pandemic suddenly became the dominant force, dramatically changing people’s daily lives, business activity and, of course, M&A activity all around the world. The onset of the pandemic brought market disruption and volatility on a scale unseen for more than a decade, triggering a slowdown in the longest M&A bull market to memory. Almost as suddenly, M&A activity picked up in the autumn and remained strong through the rest of the year.

In the year ahead, although M&A activity would be expected to continue to be negatively impacted by economic instability, major geopolitical tensions and the continued heightened scrutiny by foreign investment, antitrust and other merger control regulatory bodies in many jurisdictions around the globe, many other factors, such as the promise of fiscal stimulus coupled with continued easy access to capital, rising popularity of transactions involving Special Purpose Acquisition Companies (SPACs), the recent increase in distressed M&A and recent announcements of several COVID-19 vaccines would suggest elevated levels of M&A activity in 2021.

M&A Volume Trend in 2020

Although 2020 marked the slowest start of dealmaking in years, a resurgence of M&A activity in the second half of the year suggests a high volume of deal work in the year to come. In the first half of 2020, many pre-COVID deals were put on hold and global M&A activity plummeted by 50% compared to the first half of 2019, the lowest first half level since 2012. However, M&A activity unexpectedly rebounded quickly as the year unfolded, with approximately 75% of US transactions and the five biggest global mergers, led by S&P Global’s announced acquisition of HIS Markit for USDUSD43 billion, occurring during the second half of the year. Despite the increased activity over the second half of the year, total annual global M&A activity dropped 5% to USD3.6 trillion, with 48,226 deals announced in 2020 as compared to the 50,113 deals announced in 2019.

Aggregate transaction value in the USA

In the United States, the aggregate transaction value for M&A deals fell 28.4% from USD1.9 trillion to USD1.4 trillion when comparing the 12-month period ended 31 October 2020 to the 12-month period ended 31 October 2019. Despite this initial drop, 2020’s nearly USD1.4 trillion annual deal value ranks sixth in total annual US M&A deal values since 2008, representing a significant rebound in the second half of the year.

The technology sector accounted for 32% of the total deal value last year, with 3,171 tech deals valued at USD447 billion. Deal activity in other industries was busy as well. The financial services sector was up 13% year over year from 1 December 2019 to 30 November 2020, with 658 deals valued at USD170 billion. Media and Entertainment is up 8% year over year for the same period, with 151 deals valued at USD87 billion.

Looking outside the United States, Europe’s M&A activity totalled USD989 billion in 2020, an increase of 35% over 2019. This was, in part, due to Britain’s USD302 billion total deal value, an increase of 50% over 2019. The Asia-Pacific region saw a more modest increase of 15% to USD872 billion for 2020 as compared to 2019.

The impact of COVID-19

The initial decline in M&A deal activity in the first half of 2020 as a result of the outbreak of the COVID-19 pandemic left private equity firms sitting on a record USD1.4 trillion of cash to be deployed, continuing a consistent theme over the past few years. By the end of 2020, private equity firms announced more than 8,000 deals, the most since activity was first recorded in 1980. In total, private equity deals were worth USD559 billion worldwide, up almost 20% compared to 2019 and the most in a single year since 2007.

The increase in private equity activity was driven not only be the private equity firms’ access to large amounts of cash, but also the availability of cheap debt financing. The sustained low interest rate environment has also allowed private equity firms to refinance their existing debt of the companies in which the private equity firms are invested and use the increased cash to distribute dividends to themselves and other investors. For all these reasons, private equity firms are expected to continue to have a large presence in almost any M&A process, which is a trend that dealmakers have gotten used to over the past few years.

Changes continuing in 2021

A change enacted in 2020 that is expected to continue into 2021 is the shift in the type of M&A deals being completed. While 2019 was the year of megadeals, 2020 saw greater numbers of smaller deals, carve-out sales and restructuring transactions driven by liquidity concerns, SPAC transactions and notable private equity participation. In the end, it is anticipated that 2021 to be a busy time with interesting and challenging new deals ahead as dealmakers find creative ways to execute on strategic goals while managing valuation and execution risks in our current unprecedented environment.

Factors in Favour of M&A in 2021

Many of the drivers for the high levels of M&A activity over the latter half of 2020 are expected to continue into 2021, such as easy access to capital, low interest rates and healthy corporate balance sheets. Other trends look to provide additional support for a robust M&A market in 2021.

SPAC IPOs

Rising popularity and broader acceptance of SPAC IPOs over the course of 2020, combined with the limited shelf-life of SPACs and the degree of competition for attractive de-SPAC targets, will result in increased “de-SPAC” M&A activity in 2021. A SPAC transaction involves the IPO of a shell company that is formed with the intent to later merge with a target operating company to be identified by a specified deadline following the completion of the IPO. SPACs are sometimes also known as “blank check companies”. According to Nasdaq, as of 28 December 2020, there had been 237 SPAC IPOs in the United States in 2020 to date, raising a total of approximately USD80 billion, shooting past the USD13.6 billion raise in 2019. SPACs raised more money in IPOs in 2020 than the entire 2019 IPO market. In addition, as of 5 January 2021, only ten of the 248 SPACs that completed their IPO in 2020 have completed the de-SPAC process, 29 have announced a target, and a whopping 209 are still searching for a target.

Distressed M&A

While retail bankruptcies have been the highest in over a decade, the rise in pandemic-related distressed M&A activity seemingly has been punted to 2021. Many expected a significant increase in distressed M&A in 2020, but the anticipated levels of distressed M&A never came. This is likely partly due to the various governmental stimulus measures that were implemented to ward off insolvencies and restructurings, such as loans and economic relief packages provided under the CARES Act. Once these measures are no longer in place, however, distressed M&A activity will likely increase. A rise may also be seen in consolidation activity in those industries hit hardest by the pandemic, such as aviation and leisure.

In the third quarter and the beginning of the fourth quarter of 2020, we saw a significant push to announce deals prior to the US presidential election, presumably in order to avoid related market volatility that was anticipated to occur following the announcement of the election results. After Joe Biden’s inauguration, a second round of economic stimulus legislation and the authorisations of several COVID vaccines, there is optimism that the economy will continue to recover in 2021.

The Brexit trade deal

The recently approved post-Brexit trade deal between the EU and the United Kingdom may alleviate some uncertainty that has previously negatively impacted cross-border dealmakers. After nine months of negotiations, EU Ambassadors unanimously approved the Brexit trade deal in late December of 2020, and it became law on 31 December 2020, providing for a “zero tariff-zero quota deal”.

Despite an initial dip, activism campaigns involving M&A were on the rise over the second half of 2020, with approximately 50% of third quarter campaigns having an M&A objective compared to approximately 34% in the first half of 2020. As the headwinds introduced by the onset of the pandemic in early 2020 subside, M&A can be expected to continue to be a major avenue through which activists agitate for desired change in 2021.

"Broken deal" lessons learned

Dealmakers have learned lessons and ways to deal with pandemic-related “broken deal” risks in 2020. While some deals fell apart in 2020, not nearly as many fell apart as expected following the initial waive of COVID-19 cases. Some buyers tried to use the “material adverse effect” provision to walk, even though it is often not applicable to circumstances that effect an entire industry, such as a pandemic.

While some of these “broken deal” disputes ended up in court, the majority settled with a reduction in deal price. In some cases, the price reductions were relatively small. For example, in September of 2020, Louis Vuitton owner LVMH announced that it planned to abandon its previously agreed to acquisition of luxury retail brand Tiffany & Co. The parties ultimately settled the related lawsuit, with LVMH agreeing to complete the deal at a discount of approximately 2% of the original USD16.2 billion deal value.

In the end, additional targeted COVID-19-related protections built into transaction agreements will act as a further safeguard that deals signed up in the latter part of this year will more likely reach completion in 2021.

New SEC rules

The SEC issued new rules that went into effect 1 January 2021 that, overall, reduce certain financial statement and pro forma disclosure requirements for registrants involved in acquisitions. These changes will likely give registrants that have significant internally-developed assets or both large revenue and net loss more favourable outcomes under the various significance tests, thereby reducing the scope of required disclosure. Sectors with both of these characteristics, such as tech and life sciences, will likely see the largest reduction in compliance costs, reducing their overall M&A costs.

Environmental, social, and governance (ESG) considerations have been given increased attention in deals in 2020 and this is a trend in the corporate landscape that is expected to endure. In some cases, ESG considerations may even catalyse M&A activity, such as causing oil and gas companies to accelerate their efforts to acquire assets in the renewables sector and causing automotive companies to acquire electric vehicle assets.

For example, in an effort to catch up technologically to Tesla’s and Volkswagen’s electric powertrains, Magna International Inc, a Canadian car parts manufacturer, announced a joint venture with LG Electronics, whereby Magna will acquire 49% of LG’s electric vehicle components business. With the backing of large institutional investors, major accounting firms, governments and stock exchanges, ESG considerations will continue to have a meaningful role in moulding the contours of M&A activity in 2021.

Headwinds for M&A in 2021

While there are a number of reasons to be optimistic about the pace of M&A activity going forward in 2021, there are some challenges that will continue to shape how deals are made:

New CFIUS regulations

Early in 2020, in response to concerns over national security and protection of key intellectual property assets, CFIUS issued new regulations allowing it to modify or unwind existing transactions. The telecom industry has seen even more scrutiny. In April of 2020, the Trump Administration issued an executive order formalising the “Committee for the Assessment of Foreign Participation in the United States Telecommunications Services Sector,” tasking it with monitoring and maintaining key telecom assets in the US task force.

The executive order created a formal structure and process for reviewing foreign investment in certain regulated telecommunications and broadcast companies and established timelines for review. In addition, Congress recently passed, and President Trump signed into law, the Holding Foreign Companies Accountable Act, which bars foreign companies from listing securities on any US stock exchange if they fail to comply with the Public Company Accounting Oversight Board’s audits for three years. The regulations coupled with CFIUS’s wide breath of review power over US investments may bring unintended consequences and additional risks (real or perceived) to practitioners.

Scrutiny of foreign investments

The United States is not alone in the rising trend of heighted governmental scrutiny over foreign investment. The United Kingdom’s new National Security and Investment Bill strengthens its ability to oversee and intervene in acquisitions of UK assets, and China published new rules that set up a three-tiered review process for foreign investment. The Chinese National Development and Reform Commission has said that these new rules are in line with international practice. These developments necessarily introduce a heightened level of political risk into cross-border transactions.

Bipartisan antitrust enforcement

In the United States, growing bipartisan support for antitrust enforcement against the tech giants led to a number of antitrust lawsuits in late 2020. The FTC sued Facebook, seeking a divestiture of Instagram and WhatsApp, and a coalition of 48 state and regional attorneys general filed a similar suit. Three antitrust suits were filed against Google in a span of two months. The DOJ published a revised remedies manual in September of 2020 that signals a heightened level of concern over the use of conduct remedies to address competition concerns.

FCPA enforcement

It was a record year for Foreign Corrupt Practices Act Unit (FCPA) enforcement in 2020. For instance, the year started with Airbus paying USD4 billion to settle FCPA-related charges with the United States, the United Kingdom and France. USD583 million of that amount was for FCPA offenses. The SEC and DOJ released an updated FCPA Guide that amended several accounting provisions, including a clarification that internal accounting controls and compliance programs and not synonymous potentially adding to the cost of compliance for corporations with large international presence, particularly, if there is high concentration in high-risk jurisdictions. FCPA enforcement activity is expected to continue to increase under the Biden Administration because economic downturns create greater incentive for fraud.

It remains to be seen whether the incoming Biden administration will end the Trump administration’s tariffs and trade disputes with China. In contrast, after seven years of negotiations, the EU and China agreed to finalise a political agreement that will provide the EU with better market access and investment protection in China. Meanwhile, for its next stage of economic development, China’s new “dual circulation” strategy places, in part, a greater emphasis on production for domestic consumption.

Deloitte estimates that China’s growth will exceed 3% for the year, while many developed economies will experience negative overall growth in 2020. Though foreign inbound M&A activity in China remained strong in 2020 and eclipsed Chinese outbound activity for the first time in a decade at USD9 billion, deal making activity by Chinese firms dropped 71% in volume and 88% in value in the first five months of 2020 compared to the same period in 2019. Taken together, we may see China doing more outbound deals with the EU and Belt and Road countries, rather than the USA.

In December 2020, the Trump administration signed a second stimulus package that includes extending various unemployment benefits from the first stimulus package and a second round of stimulus payments. However, it is unclear whether these measures will be continued or expanded by the incoming Biden administration. This uncertainty may lead parties to accelerate their deal timelines in order to stay ahead of potential market volatility if government stimulus ends.

Hardening D&O market

Continuing the trend that started in 2018, 2020 saw an increasingly hardening D&O market, with premium and retention increases and contracting available policy limits. In part due to COVID-19 disclosure concerns, public company D&O pricing is up by nearly 60% in the United States and up by more than 100% in the United Kingdom and Australia through the third quarter of 2020. In addition, in connection with the meteoric uptick in SPAC IPOs, SPAC D&O premiums increased by an average of USD500,000 between August and October, and are expected to continue to rise and add to transaction costs.

RWI policies

Despite the recent market practice of including COVID-specific exceptions to Representations and Warranties Insurance (RWI) policies, costs have been on the rise due, in part, to increased exposure pandemic-related risks. For example, AIG raised premiums 20% at the end of the first half of 2020 and, in the months leading up to October 2020, Euclid Transactional’s US primary policy costs increasing by 25% compared to October 2019.

Concluding Remarks

In early 2021, despite the pandemic, once again stock indices are at all-time highs, low interest rates and unemployment numbers higher than pre-pandemic but still relatively low in historical terms. Unlike the fallout from 2008, most of the corporate world was able to navigate the market turmoil and economic slowdown in 2020 by falling back on healthy corporate balance sheets and easy access to new capital. As witnessed in the latter half of 2020, M&A will likely to continue to be a valuable and practical tool as companies adjust to new challenges and execute strategic plans.

COVID-19 will continue to be a factor for dealmakers and policy makers in 2021 and governments around the globe continue to demonstrate an ever-greater willingness to involve themselves in the lives of their corporate entities, including through regulating M&A activity, which will increase deal execution risk, especially for mega cross-border transactions.

Author



Sullivan & Cromwell LLP provides the highest-quality legal advice and representation to clients worldwide. S&C’s record of success and unparalleled client service has set it apart for 140 years and made the firm a model for the modern practice of law. Today, it is one of the leaders in each of its core practice areas and geographic markets. S&C advises a diverse range of clients on corporate transactions, litigation and estate planning matters. It comprises more than 875 lawyers who conduct a seamless, global practice through a network of 13 offices located in Asia, Australia, Europe and the United States. S&C is a perennial leader in M&A, having advised on some of the world’s largest and most noteworthy cross-border and domestic M&A transactions. S&C has acted in over USD4.5 trillion in announced transactions worldwide over the past ten years.