Top five tips to avoid transaction disputes has been saved
Top five tips to avoid transaction disputes
Transaction related disputes have been a feature of M&A since the beginning, but as we navigate new economic realities it is even more important to handle them carefully. Uncertain trading conditions, coupled with inevitable nervousness about possible outcomes, both personal and professional, increase the likelihood of already-challenging situations becoming contentious.
Below we share our “top tips” on some actions that may help to reduce the extent, and ease the handling, of transaction-related disputes that may arise in the current climate.
- Consider flexing the timetable
In normal circumstances, a party may seek to leverage an agreed deadline to its advantage - for example, delivering draft accounts early to ensure that the review period available to the other party falls across a holiday period, reducing access to relevant finance staff. In the current climate, such an approach, or a refusal to consider a reasonable request for a time extension to allow for COVID-19 effects to become clearer, may be perceived negatively. Parties should consider carefully the effect of such a stance on both imminent negotiations and any desired ongoing relationship.
Timelines set down in a SPA can generally be varied by agreement. Whether extending for additional review or negotiation time, or resetting a reference earnout period to permit a more sensible assessment of ongoing profitability, a more flexible approach may reap dividends in keeping both parties committed to achieving a commercial outcome rather than a scorched-earth attempt to mitigate a position that was never anticipated.
The date of ‘hindsight cutoff’ for information is frequently the cause of disputes in normal circumstances. The present rapid pace of economic and social developments increases the chance that a few days may make a material difference to an accounting judgment. If a specific date has not already been agreed, it may be wise to seek such agreement between the parties at an early stage to avoid further contention and events arise.
- Communicate effectively and proactively
Management of expectations around a deal, both internal and external, has always been important – but this is heightened by current events. Communications with the other party are vital, around both timelines and the potential outcome of the preparation, or review, of draft accounts. Parties are far more likely to react uncooperatively if bad news is ‘sprung’ on them at the last minute, rather than trailed well in advance with credible reasoning.
From an internal perspective, most organisations are carefully managing their cash flows, so an early view on the likely outcome of an ongoing completion accounts or earn out process is vital. Early engagement with both the deal team and a dispute specialist on likely outcomes can help in this process.
- Understand when the target might be expected to recover
The recoverability of assets (particularly receivables and inventories) and the status of payables under the present economic shock will need particularly close review. How much support may the target and its customers receive from their governments and their creditors (e.g. landlords)? How quickly might business flows be expected to head back towards normality as lockdowns are lifted thus beginning to cycle working capital again, and will the creditors of the target consider waiving, discounting or extending credit? Regular, proactive communication by the acquired business with its own debtors and creditors will help to firm up a view on the real state of the balance sheet.
- Use the available technology
While negotiations may be harder in the present circumstances, they are not impossible. Video conferencing can provide an imperfect, but adequate substitute for in-person negotiations and is preferable to voice only calls for negotiations of this nature. Some video conferencing facilities have “break out” rooms to allow negotiating teams to discuss matters amongst themselves before re-entering the main call.
Similarly, video calls between client teams and professional advisers – using in-call whiteboard facilities and shared screens – can progress matters more effectively than a voice alone.
- Use the available alternative dispute resolution methods
Most SPAs allow for expert determination as a dispute resolution mechanism. As a largely document based process, we see no reason that (subject to the availability of relevant experts and of client teams) expert determination processes should not proceed in the usual way, even during these disrupted times.
Clients will, as has been the case for a while, want to consider asking their expert to set up appropriate documentation management systems, to facilitate the exchange of documents between parties who may not be in the same location and may have unusual levels of limitations on their data bandwidth.