Today’s M&A landscape is challenging, with everything from increased regulatory scrutiny to the aftermath of the Covid-19 pandemic affecting deal-making. In-House Perspective assesses how the role of in-house counsel has evolved against this background.

The global M&A market has slowed, particularly in the past year and a half. There have been fewer deals at the top end of the market, while the deals that are around have taken longer to close. The myriad reasons for this trend include macroeconomic uncertainty, geopolitical tensions, volatile capital markets and rapidly rising interest rates, as well as investors taking more time to conduct thorough due diligence, investors embarking on prolonged negotiations and parties discussing corporate governance in greater depth than previously.

M&A cooldown

That there are fewer mega cap deals at the top end of the market compared with a year to 18 months ago stands in stark contrast with the peak seen during the Covid-19 pandemic, explains Harry Coghill, Secretary of the IBA Private Equity Subcommittee and a partner at Macfarlanes, in London. Back then, the M&A market was very busy. ‘Now, there’s difficulty getting financing and differences between buyers’ and sellers’ expectations’, says Coghill. ‘The change in interest rates has meant that the financial environment is difficult, and financing is more expensive. That’s in addition to the impact caused by the conflict in Ukraine and the macroeconomic uncertainty. Buyers are also no longer willing to pay what they were, say, 18 months ago.’

There’s also an increased focus on M&A deals by regulators, which has meant that there’s more uncertainty as to regulatory outcomes. The Microsoft/Activision deal is a good example of this, says Coghill. The proposed acquisition by technology corporation Microsoft of video game developer and publisher Activision was initially blocked by the UK’s Competition and Markets Authority (CMA), while the US Federal Trade Commission (FTC) sought to prevent the deal via the courts. The FTC formally withdrew its challenge in July after failing to obtain injunctions to block the merger, while the CMA announced that its investigation would be extended until the end of August at the latest, pending the review of a new proposal submitted by Microsoft.

The CMA’s decision on the deal has received attention from the UK’s Parliament given the country’s focus on becoming a technology and innovation hub, and particularly after the European Commission’s decision to approve the deal.

On the regulatory side, the EU Foreign Subsidies Regulation came into force in mid-July. It provides a system of protection for competition and trade under which the European Commission has new powers to investigate, challenge and act against organisations operating within the EU’s Single Market and that are in receipt of subsidies from outside the EU. In addition to the existing rules on antitrust and foreign direct investment, the new rules give the EU review and blocking rights if a company has benefitted from a foreign subsidy. ‘M&A practitioners will be looking at how the new rules are applied in practice’, says Coghill.

For Michael Coates, Senior Vice-Chair of the IBA Corporate and M&A Law Committee and General Counsel, Corporate and Chief Ethics & Compliance Officer at Shell plc, who’s based in the Netherlands, the growth in regulation is an increasingly important aspect of the M&A landscape. ‘This can impact a range of M&A topics, ranging from due diligence, deal execution and post-closing issues like integration’, he says. ‘Being able to look forward and undertake “horizon scanning” is equally important, as it helps anticipate and address future issues when planning M&A transactions – for example, where legal risks may arise in the future, and what protections should be sought in the deal documentation’, which might include representations, warranties and indemnities to protect against legal risk.

Aftermath of the pandemic

The unprecedented uncertainty brought about by the Covid-19 pandemic and the subsequent economic downturn had a significant impact on the M&A landscape. Notably, there was a surprising increase in M&A activities by some organisations during the pandemic, including those involving big tech companies, who turned such circumstances into deal-making opportunities.

In respect of managing uncertainty, Rabindra Jhunjhunwala, Membership Officer of the IBA Corporate and M&A Law Committee and a partner at Khaitan & Co in Mumbai, highlights the increasing use of conditionality in recent years as a measure to protect M&A deals. Contractual conditions that are common in M&A transaction documents include the use of no material adverse effect/change clauses related to events that occurred between signing and closing, as well as clauses stipulating that representations and warranties remain true and accurate as on the signing date and the close date. Further, there might be an obligation placed on the seller to deliver a no-objection certificate in respect of the transfer of shares, and the procurement of a valuation report in support of the purchase price for the shares.

The Covid-19 pandemic also led to some countries adopting increasingly ‘protectionist’ policies and an increase in governments and regulators intervening in M&A transactions that raise national interest or security concerns. So-called protectionism can come in many forms, such as restrictions on foreign investment and through antitrust regimes, export controls and takeover rules, which can be used to block or influence M&A deals. During the pandemic, for instance, certain jurisdictions engaged in activities or implemented policies to obtain medical equipment crucial for combatting the virus, such as face masks and ventilators. ‘The increased protectionism has contributed to the slowdown in global growth’, says Abhijit Mukhopadhyay, Website Officer for the IBA Corporate Counsel Forum and President (Legal) & General Counsel at transnational conglomerate the Hinduja Group. ‘Protectionism has direct effects on deal flows, import costs and supply chain. It also has an indirect effect on investment and uncertainty. Widespread national and supranational clearances arising from mergers, foreign investment and subsidy controls to sanctions, counter sanctions and export controls are making cross-border M&A transactions significantly more complex and drawn out, dramatically impacting deal certainty and thereby affecting global capital flows.’

The pandemic also highlighted the importance of establishing and maintaining robust and diverse global supply chains. Weaknesses in these supply chains became apparent – leading to delays and disruption – as companies struggled to keep their businesses running given the widespread restrictions imposed because of the pandemic and the extraordinary changes in supply and demand. An article published by the World Economic Forum in January 2022 concluded that two years after the pandemic began, many chief executives identified supply chain turmoil as the greatest threat to their companies’ growth and the economy.

Due to global supply chain disruptions, India has become an attractive market for global companies to expand their supply chains, with some legal professionals predicting robust inbound M&A deals in the country as a result. ‘Supply chain diversification is becoming critical for companies to achieve their net zero targets and to transition to ESG-compliant suppliers (with limited disruption to business operations)’, says Jhunjhunwala. ‘Diversification also helps in expanding accountability, transparency and supply chain efficiency’.

Counsel as business partners

Against this backdrop, the role of in-house counsel in the M&A space has evolved in the past decade or so, with such lawyers becoming strategic business partners who support the organisation by being involved in major decisions and providing legal advice on areas such as due diligence, compliance, transaction structuring, risk assessment and pre- and post-completion matters. As such, the role of in-house counsel is crucial to the successful completion of a deal, meaning counsel must be aware of a plethora of rules, such as industry-specific and exchange and control regulations, broader government policy changes and sector-specific rules. In addition, the role of in-house counsel has grown to include a focus on innovation and technology – including making the M&A process more efficient, corporate governance and environmental, social and governance (ESG) aspects, as well as reputation management.

For Deborah Lucy, Vice President, Corporate Law at private broadband company Cox Enterprises, Atlanta, ‘the critical distinction between in-house and outside counsel in the M&A space is keeping a strong focus on the business strategy for doing any particular deal – it’s not just whether the deal gets done, it’s whether the company is poised to capture the benefits it sought. That requires a holistic viewpoint that goes beyond the negotiation of terms and the resolution of deal-level issues, but also encompasses integration readiness.’

Lucy adds that as integration is not generally overseen by the in-house M&A attorney, there’s a real investment in learning about the pain points her colleagues – and their client groups – experience and ‘navigating solutions that we are reasonably able to implement within the crucible of a deal’.

Coates explains that at Shell, in-house counsel are expected to be proactive in leading the transactions they are working on and are a central and critical part of the deal process. ‘The role includes ensuring alignment with the commercial and strategic objectives of the company, making sure that Shell’s management is properly briefed on the legal aspects of a transaction – including the relevant legal risks – and ensuring effective execution of the deal, including working with outside counsel where relevant’, he says. ‘We also place a heavy emphasis on post-closing rights and obligations to ensure that value is preserved and that obligations are fulfilled, and the legal team has a large role to play in this regard’.

ESG awareness

Investors around the world are increasingly taking ESG factors into account when making business decisions related to M&A deals, particularly in cross-border transactions. ESG considerations are important throughout the lifecycle of a deal, from the early stages when a transaction is being contemplated, through the due diligence process, negotiation of the definitive agreement and post-closing. The evolving ESG reporting and disclosure obligations in some jurisdictions – including from the EU’s Corporate Sustainability Reporting Directive – have also increased the attention and pressure on companies in this regard.

Mukhopadhyay explains that ‘Companies are attempting to improve their ESG practices through implementation of carbon capture and energy transition preparedness. Some sectors are being severely disrupted by the energy transition, hence there is a jump in M&A in renewable energy to meet environmental targets’. 

Legal counsel within an organisation are included in executive level and boardroom decisions and must help align an organisation’s business model and operations with its ESG strategies and commitments, advise management and catalyse change within the organisation, says Mukhopadhyay.

The assessment of ESG factors is now a crucial part of the M&A due diligence process, both in terms of identifying the risks associated with the target business or assets, as well as in devising strategies for mitigating and managing them. Due diligence covers a range of areas, including legal, financial, compliance, reputation and ESG.

Coates believes that growth in the compliance and governance aspects of the M&A process will continue to impact on activity as regulators globally revise and often increase requirements in key areas such as antitrust and foreign investment. This is also true for each of the ESG component areas – environmental, social and governance – he explains, which are increasingly important considerations in any M&A deal. ‘In-house counsel have a key role to play in supporting the business to identify and manage these issues to ensure that the full value can be realised from any M&A transaction’, he says.

Jhunjhunwala says that ESG has become a crucial factor in conducting M&A due diligence in the pre-acquisition phase. ‘In India, ESG is in its growth phase and has a visible impact on cross-border M&A considerations’, he explains. ‘Companies with a sustainability ethos and buyers with international ESG commitments have made drawing up an ESG roadmap a mandatory pre-investment factor’.

Jhunjhunwala adds that in-house counsel are usually well-versed in the ESG performance of a company, given the nature of their role, their deep entrenchment, their awareness of the data points and their engagement with senior stakeholders. He suggests that conducting regular training to decode ESG regulations as they evolve could further assist in-house counsels’ ESG awareness.

Handling M&A transactions in 2023

Given their importance to M&A deals, in-house counsel have a crucial role to play in making M&A deals more efficient. ‘The M&A process can absolutely be made more efficient, but that does involve trade-offs’, says Lucy. ‘It’s the old joke about “you can have it fast, good, or cheap, but not all three!” So, to navigate M&A efficiently, you are trading off between speed, quality of decision, and expense incurred. You can make it fast and well-informed, but it’ll cost you.’ 

Lucy adds, however, that muscle memory itself enhances efficiency – the more you do something, the better you get at it. ‘Companies that are planning an inorganic growth strategy are [well-placed] to implement routine after-action reviews, make sure the learnings – both good and bad – are shared out broadly without judgment, and [to ensure that] process improvements are revisited to make sure they stick’.

Coates believes that in-house counsel should continuously improve and make the M&A process more efficient. ‘This can be done in a number of ways, for example by moving towards more automated due diligence processes, by ensuring that external law firms offer the right level of service at a competitive price, and by learning from external best practices and prior transactions wherever relevant’, he explains.

For in-house counsel dealing with an M&A transaction in 2023, Coates suggests that, first and foremost, they fully understand the commercial and strategic drivers and rationale behind any proposed transaction – the question of ‘why are we doing this deal and what do we hope to achieve by it?’ This, he says, should be the fundamental focus throughout the transaction and afterwards in terms of prioritising effort and managing legal risk.

‘The next step is to ensure proper resources for effective execution – this includes both the core M&A team but also specialists from other relevant topic areas such as antitrust, employment and pensions, corporate and finance’, he says. ‘Finally, I would recommend that in-house counsel plan for integration well in advance of closing, since much of the value of an M&A transaction can be won or lost through the integration phase’.

Counsel shouldn’t forget that no amount of diligence will ever uncover all the issues in a business, says Lucy. ‘Just as you are undoubtedly surprised on a regular basis by things that come up in businesses your organisation has owned for many years, you will find issues, problems, and inefficiencies in any new acquisition – plus of course the challenge of integration’, she explains.

That said, Lucy adds, a really important opportunity for in-house counsel is to be part of the strategy team’s discussions on potential acquisition sectors. ‘While this can be a use of time that doesn’t have an immediate legal work-product associated with it, having your ear to the ground while new and adjacent businesses are evaluated by the business will give you an opportunity to assess potential new risks the business could bring, resource planning and integration demands early in the planning cycle’.

Overall, Coates believes that the role of in-house counsel will only increase in importance in the future. ‘In years gone by, many in-house counsel left it to the law firms to negotiate their transactions, but now we are seeing in-house counsel as key members of the negotiating team and, quite often, leading deal negotiations’, he says.