Mergers & Acquisitions 2022 Annual Review

2022 M&A ANNUAL REVIEW Regulatory Hurdles for Inbound M&A in Europe In response to geo-political tensions, the EU and its member states have strengthened their FDI controls. Since 2020, the EU has set minimum requirements for member states’ FDI screening mechanisms and required coordination of their FDI reviews. Member states must consult with other member states and notify the European Commission of any concerns, increasing the duration of FDI review proceedings. Some large EU member states, such as France and Germany, overhauled their FDI regimes to significantly increase the scope of acquisitions subject to notification and approval requirements. The UK, as noted above, followed the same trend, establishing a broad FDI regime enabling control of investments into sensitive industries. Trends for M&A Transactions in Europe ■ Carve-Outs and Spin-Offs on the Rise. The increasing financing costs and uncertain economic environment, with high energy costs and softening consumer demand, is expected to result in companies revisiting their portfolios. This is likely to result in more carve-out deals and spin-offs. ■ Increased Use of Completion Accounts. Locked box arrangements have been popular in auction sales. However, as we move to a more buyer-friendly market, the use of completion accounts mechanisms is increasing. Given the sometimes substantial delays between signing and closing and high market volatility, parties should pay close attention to the contractual provisions providing for the completion accounts and related review mechanism. ■ Earnout Structures. Due to difficulties with the valuation of assets in a volatile economic climate, earnouts are increasingly used to bridge valuation gaps. This applies especially to technology and life sciences/biotech deals, as the valuation-multiples are high, and a fair valuation of a target based on current KPIs can be challenging. In European transactions, the earnout metric most commonly used has been EBITDA. More creative measures may start to also be used, particularly for start-up businesses. Some parties may also allow for an extension of an earnout period or for adjustment of earnout calculations, in case of certain external circumstances, such as a new wave of COVID or energy shortages. ■ More M&A Disputes. M&A claims in Europe have increased over the past two years, and we expect this to continue given the significant challenges faced by businesses throughout Europe. In particular, disputes over adjustments to the purchase price are expected to rise, as parties are more likely to argue about valuation metrics post-acquisition. Disputes also may rise with any increase in the use of earnout structures. ■ VC Consolidation. Venture-backed companies are highly affected by the market uncertainties by way of negative effects on their valuations. This applies to already-listed companies and late-stage companies nearing an initial public offering. We expect the VC market to experience an increase in transactions aiming at a consolidation of competing VC business in order to reduce the cash burn. 8. EUROPEAN M&A 15 ABA M&A Committee Private Target M&A Deal Points Study (2020–1Q2021). 16 Pacira Biosciences, Inc. v. Fortis Advisors LLC (Del. Ch. Oct. 25, 2021). 17 Pavel Menn v. ConMed Corporation and Endodynamix, Inc. (Del. Ch. June 30, 2022).