A year of long tails and shop windows
The direction of travel in M&A activity and litigation in 2021
Coming to the end of what can safely be described as an unprecedented year, we look ahead to 2021, alive to the fact that predictions are, at best, difficult.
While we are currently sailing in relatively calm waters, with economic indicators better than predicted, most commentators agree that a storm is approaching. We simply do not know when or how it will hit.
Mergers and acquisitions
Mergers and acquisitions (M&A) will be driven by sector and business fundamentals plus a need for good returns.
Logistics is a good example of a sector that was already on an upward trajectory before COVID-19, as online shopping had sharpened the focus onto the rapid distribution of goods. Pandemic lockdowns have put the sector under a spotlight as manufacturers and producers of goods, as well as retailers, become more responsive to customer demands and work to get closer to the point of consumption.
Manufacturers of essential products – such as Fisher & Paykel Healthcare – have been growing at speed to meet demand in New Zealand and overseas. IT businesses across a range of sectors have also been of interest to investors.
Interest in buying businesses in these more COVID-proof sectors has risen due to several well-known factors such as historically low interest rates, market stimuli and the current lending climate. Government stimulus packages are ongoing, procurement is pushing ahead at pace, and private equity firms, especially in New Zealand, are active with a number having recently raised new funds.
Furthermore, we predicted in our 2020 M&A forecast that we saw good-quality assets attracting international attention as there was still plenty of capital looking for a home in New Zealand. This was backed up by Shamubeel Eaqub, who said: “The world is still awash with easy money. Weight of money globally provides a positive backdrop to deal-making.” This still holds true to an extent.
At a time when financing is relatively cheap, and New Zealand’s attractiveness as a haven for international investors has risen due to our country’s global prominence this year as a relatively safe, well-managed place, we can expect M&A interest and activity to rise into 2021. However, it won’t be all plain sailing for international investors – they will face stiff competition from local investors, have to deal with the Overseas Investment Office regulations, and have to deal with conducting due diligence from a distance for the time being.
We’ve already seen this creating issues for offshore investors where they cannot “kick the tyres” or “eyeball management”. There’s only so much due diligence you can do over a Zoom call.
What appears clear is that M&A activity is less likely to be driven by insolvency as some first thought. Acquisitions are likely to continue with businesses and investors looking to consolidate or expand through acquisition, aligned with clear business strategy. This gives directors the opportunity to look at acquisitions of complementary businesses to strengthen their market position.
Our message to directors in this environment – particularly directors of businesses that are likely acquisition targets – is that you need to be ready. Ensure that your shop window is clean and clear so you are best able to explain to any potential acquirer how the current circumstances have impacted your business, describe future plans and demonstrate how the business is an attractive proposition.
Litigation turned upside down
Class actions, climate change and increasing pressure on directors were emerging litigation risks before COVID-19 came along. While these issues remain top of mind, and topics that demand continued attention at most board tables, COVID-19 has forced other issues to the top of the agenda.
The pandemic has generated a wide array of disputes arising from allegedly frustrated contracts, reliance upon force majeure and material adverse change clauses.
"The pandemic has generated a wide array of disputes arising from allegedly frustrated contracts, reliance upon force majeure and material adverse change clauses."
However, with limited exceptions, we have not yet seen many of these civil disputes in the public eye as many are making their way through mandated or voluntary private mediation, or are dealt with in confidential arbitrations with court action likely a last resort due to the time and cost involved.
In the construction industry there was concern that lockdown delays could drive parties into litigation mode over costs relating to extensions of time. Thankfully, most COVID-19 claims were dealt with outside formal processes, and by and large the parties came together to resolve differences rather than litigate. However, on some bigger infrastructure projects, COVID-19 claims remain unresolved and various dispute resolution processes will likely be employed. These will bleed into next year.
It has also become apparent that there is likely to be a longer lead up to the predicted wave of insolvencies following the 2020 COVID-19 lockdowns. This is due in the main to better than expected economic conditions, government stimuli and other regulatory and reputational impediments to lenders taking action in respect of defaulting customers.
Predictions vary from an uptick in insolvency activity from Q1 2020 to as far out as 2022/2023 following the more typical trend of two to three years after the first signs of a recession.
Continued low interest rates, further government stimuli and a less severe economic experience may well result in fewer insolvencies than initially feared. On the other hand, the Supreme Court’s recent decision in Debut Homes is likely to cause directors themselves to reach more quickly for formal insolvency or restructuring options when deciding whether to trade businesses on in the face of difficult trading conditions.
One thing is for certain, directors’ risk profiles have increased.
We also expect continued interest – and growth – in class (or more accurately “representative”) actions. While class actions have historically been relatively uncommon in New Zealand, they may increase in line with the Australian experience. Particularly following the Supreme Court’s decision in Southern Response v Ross, which upheld the Court of Appeal’s decision permitting opt-out class actions under New Zealand current procedural rules. An “opt-out” class action is where all prospective claimants are automatically included in a proceeding unless they expressly opt out.
Further, as we predicted in our 2020 Litigation Forecast, the Law Commission has again picked up its Class Actions and Litigation Funding project. With terms of reference and further progress predicted soon. The outcome of that project ought to provide guidance on next steps in regulating (or not) this space, which will impact on the number and frequency of cases.
We also continue to expect an increase in securities actions, regulatory involvement from the increasingly active Financial Markets Authority and a further hardening of the D&O insurance market as a result.
As directors are likely to be targets in class actions and regulatory involvement, our message is to ensure you are attuned to your risk profile and that your insurances are appropriate and in place. Directors should also be aware of the options, and when to employ them, if businesses are facing headwinds in terms of trading conditions.