Dealmaking in an everchanging world

Since the breakout of the COVID-19 pandemic, the geopolitical landscape on the African continent and the rest of the world has been characterised by various disruptions. Whether it is violent conflict, unconstitutional political transitions, electoral disputes, economic sanctions or national lockdowns, many M&A deals have been stopped in their tracks because of these constant changes. As various global superpowers search for new opportunities and trade relationships, it has become ever more important for advisors to be mindful of these challenges and the impact they may have on transactions.

Changes in the geopolitical landscape may impact M&A transactions in the following manner:

• transactions may no longer be economically viable or legal (in the case of sanctions) due to macroeconomic events. The inclusion of "material adverse event" clauses continues to be an important mechanism that allows purchasers to terminate such transactions. One anticipates increased litigation over the termination of transactions due to material adverse events, as increased socio-political uncertainty may cause more investors to reconsider their investment decisions;
• investors looking to exit portfolio companies by way of a public offering on a stock exchange may have to delay their exits if markets experience volatility due to political changes. Exits by way of a private auction may be more desirable as they allow sellers to target trade buyers and institutional investors without having to factor in volatile equity capital markets;
• regulatory approvals may be delayed or denied because of changes in political leadership and the resultant change in economic and regulatory policy objectives. It may be necessary for multijurisdictional transactions to be crafted in a flexible manner, that allows for the carve-out of certain jurisdictions if regulatory approvals are not obtained within a reasonable time. Parties may also have to restructure transactions in a manner that permits the cession of underlying cashflows (profit or revenue shares, or a cession of dividends) pending regulatory approvals. However, such structures may be prohibited as some regulators take a substance-over-form approach to economic regulation;
• on cross-border deals in the developing world, parties may struggle to fulfil their obligations due to foreign exchange shortages. If an agreement does not provide for an extension of the implementation date, the purchaser may be able to rely on defences such as the supervening impossibility of performance, which may release the purchaser from the duty to perform and any alternative liability (such as for damages). The principle of supervening impossibility requires that the following requirements must be met:

1. performance must have become objectively impossible. The circumstances must be such that no one could tender performance, and not just the particular party. If a purchaser can find alternative methods of performance, irrespective of how costly or inconvenient such other options may be, it cannot rely on this defence; and
2. the impossibility of performance must not have been avoidable or reasonably foreseeable by the party attempting to invoke the principle of supervening impossibility;

• where the parties have agreed to an earn-out clause, the seller should ensure that changes in the performance of the target business that are due to the abovementioned geopolitical changes are not factored in the calculation of the earn-out targets; and
• sellers should be mindful of the warranties and undertakings that they give and carve-outs should be negotiated for everchanging sanctions lists and the potential revocation of regulatory permits.

The implementation of M&A deals has never been without risk. Often, parties overcome these challenges due to the will of the seller and purchaser and the commitment and experience of the advisors. However, as the horizon presents a potential realignment of global economic relations, advisors will need to ensure that transaction agreements adequately cater for a change of circumstances so as to prevent a transaction from being derailed.