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They say that in fashion, trends are always cyclical – keep those once fashionable purchases, relegated to the back of the wardrobe, long enough and eventually they'll come back into style. Like the wide-legged trousers that have recently made a come-back, 2024 saw lawyers delving deep into the back of their wardrobes to dig out clauses that haven't been seen regularly for a number of years, but provided some neat solutions to the current market environment.

Over the last couple of years, there has been a significant shift of power from the sellers of companies to buyers as a combination of factors has shifted what once seemed an inexorable trend towards competitive auction processes and ever more seller-friendly terms which reached its zenith in 2021/22. Now, however, while the best assets are still in significant demand, with fierce competition from bidders and deal terms negotiated accordingly, many other assets have struggled to attract real competition (despite the impression sellers may have tried to give buyers). This dynamic has resulted in buyers having the power to push for terms which were not commonly seen in the seller-driven era.

Terms which buyers are seeking more successfully include material adverse change (MAC) or material adverse event (MAE) clauses, allowing the buyer to walk away from the deal if there is a significant event or deterioration in the business between signing and closing. While these are still by no means standard in many jurisdictions, or even common, we have seen more being negotiated as the pendulum swings back in favour of the buyer. They inevitably are bespoke to a particular transaction and target company, although some broader economic or other global events could also be included as a potential trigger.

We are also seeing parties agreeing other buyer-friendly terms including indemnities, pre-closing covenants and termination rights, in part at least as a result of the change in the balance of power between the parties. And, along with vendor financing, discussed in the "Art of (financing) the deal", we are also seeing alternative structures being used, for example companies being sold in tranches, minority investments and broader commercial arrangements alongside the M&A transaction.

The main reason for the dusting off of these deal terms is the valuation gap, with sellers and buyers continuing to have differing views on the valuation of assets. This has driven the market to revisit some creative solutions to bridge these gaps."

Emma Stones
London

Cost coverage

One feature that has seen a revival is the use of cost coverage as a means of getting buyers to engage more substantively in processes. When competitive auction processes were ubiquitous, it was common for buyers to accept that they needed to do substantive due diligence and engage on transaction documents at risk of wasted costs. As processes have become more drawn out and less competitive, buyers have been less willing to do this and sellers have responded with an increased willingness to offer some costs coverage to one or more bidders to maintain a competitive environment or invest in a favoured bidder, recognising the work that a buyer will need to do even with the provision of substantive vendor due diligence reports.

Hybrid price adjustment provisions

As bridging value gaps has become a greater consideration, buyers and sellers have looked to compromises away from the standard locked box and up-front consideration that were previously dominant.

While the certainty that locked boxes bring is still attractive to sellers (and also to some buyers), buyers are increasingly seeking to protect their value through targeted hybrid provisions. This might include, for example, true-ups following completion for specific line items in the accounts or, alternatively, having a fuller completion accounts style true-up but with certain line items fixed. Other approaches include capping the adjustment that can be made for certain line items in the completion accounts, or adjustments that work in one direction only.

Sophisticated consideration structures

There has also been a proliferation of more sophisticated and complex consideration structures, with buyers seeking to protect their interests and ensure that the consideration paid reflects the value and performance of the business post-completion. This could include a simple earn-out on a traditional financial measure, but also incentives linked to more specific matters which will impact the success of the transaction for the buyer, for example the achievement of integration steps following completion or even additional payments to sellers based on the achievement of synergies (particularly if the seller's assistance is required before or after completion).

Pre-closing covenants

Pre-closing or interim covenants are nothing new, but we are seeing a sharp swing back in favour of narrowly defining the ordinary course of business activities and lowering the thresholds within which the business being sold can operate without requiring the buyer’s consent.  This follows the uncommon level of relaxed restrictions often agreed during the Covid pandemic and its aftermath, together with wide ranging carve-outs which were considered acceptable to deal with the pandemic’s various consequences. The key here is to find a balance which is practically workable for the business without creating hold-ups for consent over immaterial matters and to achieve that balance, focused assessment by management personnel is required on these provisions.

What will 2025 bring?

As we look to the year ahead, we foresee these trends continuing, with buyers trying to protect their downside and sellers taking advantage of their ability to extract favourable terms for truly high-quality assets. Keep looking backwards to move forward.

Key contacts

Frédéric Bouvet photo

Frédéric Bouvet

Partner, Paris

Frédéric Bouvet
Malika Chandrasegaran photo

Malika Chandrasegaran

Partner, Head of M&A, Asia, Singapore

Malika Chandrasegaran
Nicole Pedler photo

Nicole Pedler

Partner, Sydney

Nicole Pedler
Charles Steward photo

Charles Steward

Partner, London

Charles Steward

Transactions

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