M&A disputes are a growing issue – How can they be prevented and resolved?

With economic turmoil leading to a drop in dealmaking appetite and tougher financing conditions, buyers are being more selective with the targets they go for, while owners are increasingly struggling to attain the kinds of valuations that they’d expect when selling their companies. This has led to valuation gaps being one of the key barriers to M&A so far in 2023, while geopolitical and social events have seen buyers adopt more stringent due diligence processes and increasingly embrace less risky deal structures.

Amidst an increasingly uncertain dealmaking environment, M&A disputes are on the rise, with recent figures from Grant Thornton (in a survey of 200 US-based dealmakers who had completed over 1,300 deals during 2022) suggesting that close to half of deals feature some kind of dispute in the post-closing transition stage.

According to data from Solomonic, there was a 200 per cent increase in High Court claims relating to M&A disputes between 2019 and 2021 – a period in which M&A was heavily disrupted by the COVID-19 pandemic.

A mid-year report on M&A disputes from Berkeley Research Group (BRG), meanwhile, found that 42 per cent of dealmakers expect an increase of up to 20 per cent in M&A disputes, while 21 per cent expect a “significant” increase of more than 20 per cent. Against this backdrop, just ten per cent forecast that there would be a decline in disputes compared to 2022.

Clearly, disputes are set to become a more prominent theme in M&A, both during deal negotiations and post-closing. With this in mind, it is important to analyse and understand the reasons that disputes are on the rise, as well as to look at the steps that dealmakers on both sides of transactions can take to minimise the chances that disputes will happen and, in the event that they do, how they can be mitigated to ensure that they do not derail deals.

Why are disputes rising?

COVID-19
Perhaps the biggest contributor to the rise in M&A disputes is the ongoing fallout from the COVID-19 pandemic, which has had a lasting impact on numerous facets of dealmaking, increasing the scope for disputes to arise in several ways.

One of the primary challenges that dealmakers had to navigate in the post-COVID M&A boom was how they understood and interpreted a target business’ financials. For the vast majority of businesses, the pandemic severely disrupted trading, meaning that many companies – even those that did encounter severe financial distress as a result of COVID-impacted trading – posted weaker revenues and profits or extended their accounting periods in an attempt to offer a truer representation of the state of the business.

As Grant Thornton explained in their 2022 report: “While dealmakers found creative new ways to structure deals, M&A advisors found creative new ways to understand historical financials and, in turn, understand the sustainability of near-term earnings […] Operating working capital levels fluctuated significantly, often out of line with prior operating levels. Working capital was especially impacted by supply chain constraints, which resulted in temporary buying pattern changes to minimise the impacts of stock-outs and material shortages. [...] Due diligence focused increasingly on historical working capital levels, to negotiate and set working capital pegs.”

In order to facilitate deals, alternative approaches were often utilised to set purchase price adjustments, such as forward-looking targets based on the likelihood of the target business’ post-COVID recovery and increasing reference to performance prior to the pandemic, under the assumption that trading would return to these levels.

However, as economic conditions have worsened over the past year and companies continue to struggle with the impact of COVID-19 and the huge debt liabilities that many have been left with in the wake of it, many buyers are finding that their acquisitions are not performing to the levels that they may have envisioned and that they are not seeing a return on their investment, or may even be incurring significant losses that put their business at risk.

To put it in basic terms, this has seen many acquirers experience a sort of buyer’s remorse and seeking to adjust the final sale consideration accordingly. Coupled with the seller-friendly M&A environment that prevailed during the latter half of 2020 and much of 2021, this has created a situation in which buyers may face significant challenges seeking to ensure that they do not pay an overly high price for an underperforming acquisition – particularly if they are tied into a deal structure such as an earnout.

Earnouts
One of the key M&A trends to emerge since the COVID-19 pandemic has been the rise of valuation gaps While deals flowed freely during 2021 as pent-up demand was released, the subsequent economic downturn has left many sellers struggling to attract the kind of valuation they’d hope to achieve for their business, while buyers seek to bring targets down to a level that better reflects the kind of risk inherent in doing deals during a downturn.

This has been a major contributor to the rise in earnouts over recent months, enabling buyers to pay a lower upfront cost that limits their exposure to economic risk in the event that adverse trading conditions persist and their acquisition fails to deliver value, while helping buyers to potentially reach a total consideration that better reflects their own valuation of the business.

However, while earnouts can prove invaluable in bridging valuation gaps and helping to get difficult (but potentially lucrative) deals over the line, they also open up a whole world of potential disagreements and this is one of the main factors that is fuelling the rise in M&A disputes.

Fundamentally, earnouts are inherently based on a conflict, with a seller ultimately seeking to maximise the returns they see from the sale and the buyer looking to ensure that the amount they ultimately pay reflects the value they have seen from the acquisition.

Particularly in such a febrile economic environment, there is a huge potential for disputes to arise in relation to a business’ performance during the earnout period. Given the financial pressures that businesses are facing in the current climate, both buyers and sellers will be on the lookout for any point at which they can either limit or maximise the financial outlay for the acquisition.

As a result, any part of the earnout agreement that is open to interpretation becomes a potential point of dispute, for example, whether the business has met the performance targets required to trigger a portion of the earnout or not or whether revenue generated during the earnout period be classified as exceptional or repeating (with many earnout agreements insisting that payments are only triggered by recurring revenue). In some scenarios, this could even lead to legal action being taken – something that could prove fatal to the successful integration of the business post-deal.

This is before considering the possibility of unethical practice on behalf of either party, with a
noting that “each party may be motivated to manipulate financial statements in order to ensure that the performance milestones are met or missed (as appropriate).”

The scope for earnouts to generate disputes in the current environment has been demonstrated by Grant Thornton’s recent report, which found that, of deals analysed involving earnouts, 47 per cent were disputed.

Heightened due diligence and ESG create more scope for disagreements
A key concern to emerge from the post-COVID M&A boom is that due diligence performed on acquisitions during this time may have been lacking, as a result of the haste with which buyers were proceeding with in order to close deals.

In order to remedy this, and to account for the tough economic environment, many buyers will have tightened their due diligence processes and will be less accommodating when it comes to things like factoring the impact of COVID-affected trading.

This could create more potential for disputes during the negotiation stage of an acquisition, with sellers likely to argue that recent trading may not represent an accurate reflection of their business, while buyers will seek to use this to drive down valuations. If parties are not receptive to adjusting their valuations or to bridge gaps using structures such as earnouts, then this could lead to disagreements that may derail deals early on.

Perhaps the best encapsulation of how shifting due diligence priorities can lead to potential M&A disputes is the growing importance of ESG, which is currently driving a near constant change in the kinds of things that buyers must look at during due diligence. As these changes evolve, sellers are faced with an ongoing quandary over what needs to be disclosed, complicating the process and ramping up the scope for potential disputes, even after a deal has closed.

BRG’s analysis of M&A dispute trends identifies the shifting nature of ESG rules as arguably the key potential driver of disputes, with close to 80 per cent of respondents to the survey saying that the lack of established rules on ESG, combined with an increasingly aggressive regulatory environment, make this a more likely area for M&A disputes in 2023.

While few small and mid-sized firms are likely to contend with such an issue, BRG highlights a 2021 case in which oil giant Shell was ordered by the Hague District Court to reduce its CO2 emissions worldwide by 45 per cent by 2023. The decision was based on an unwritten duty of care in Dutch tort law that, according to the court, required the company to act in order to prevent dangerous climate change.

The report highlights the implications of this and the potential for a rapidly shifting regulatory environment to create M&A disputes: “such litigation and court decisions show that companies can be found liable for historical acts that, on the face of it, may have appeared at the time to be consistent with then-applicable legislation or ESG standards. Due diligence during M&A processes is evolving to encompass these considerations and must assess whether liability might arise from acts or omissions, whether or not these comprised breaches.”

“Under this lens, a warranty that the operation of an asset was compliant with prevailing in-country regulations may not be adequate to protect a new owner’s reputation and ESG record. Instead, the due diligence must drill down into the scale and nature of the impact of that operation on the environment and local communities; then an informed decision must be made as to the extent to which this might come back to bite the new owner—if the risk is deemed too great, it could prevent the acquisition. Similarly, sellers are taking greater care about whom they sell to if one of the reasons for the sale of an asset is that it no longer fits within their ESG tolerance.”

Amid widespread rapid change across numerous emerging sectors – from AI to digital assets – it is likely that the need to adapt (and potentially pre-empt) regulatory changes could heighten M&A disputes both during the negotiation of deals and post-closing, should new rules have a bearing on the business involved in the transaction.

Rise in W&I
With the economy and dealmaking environment becoming increasingly unpredictable over recent years, buyers have taken significant steps to protect themselves from the impact that risks can have on the performance of their acquisitions and on their own operations. One of the central themes to emerge from this growing sense of caution is the increasing usage of warranties & indemnities (W&I) insurance in M&A transactions.

In brief, W&I is an insurance policy covering a seller’s liability in the event that they breach warranties in a sale purchase agreement (SPA). W&I cover guarantees the seller makes regarding the state of the business, or information provided on the business such as detailed financial accounts. If information is inconsistent with these warranties, then the insurance enables the buyer to bring a claim for the duration of a warranty period.

W&I offers numerous benefits, protecting buyers in the case of discoveries being made post-deal that were missed during due diligence or inconsistent with the information they were provided and, for sellers, enabling a quicker, cleaner exit.

It helps deal with a leading source of controversy during M&A negotiations: acceptance of obligations by the seller to indemnify the buyer in respect of identified risks, such as those arising from pending litigation, harmful pollution / contamination or tax risks related to past events.

Given the aforementioned shifting due diligence environment, it is no wonder that W&I policies are increasingly popular in M&A transactions. Primarily, W&I is popular in larger transactions, in which due diligence is more complex and wide-ranging and the potential financial risks greater for the buying party. According to recent data from CMS, W&I insurance was obtained for 58 per cent of deals valued at over €100 million in 2022.

However, its popularity is also growing for smaller deals, with CMS reporting that 32 per cent of all deals involved W&I insurance and a separate report from Howden’s finding that deals valued at €50 million or less had a more than 10 per cent W&I notification rate – higher than the 9 per cent average rate across all deals.

While W&I offers significant benefits to both parties, it can also create more potential for M&A disputes, albeit within a framework that gives established recourse for such disputes to be settled. According to law firm Bryan Cave Leighton Paisner, there are three ways in which the increased uptake of W&I could drive an increase in M&A disputes.

Firstly, policies can make claimants more confident about pursuing claims in the event that a discrepancy is found post-closing, removing the risk that a buyer may not be able to secure damages from a seller (this is particularly relevant given the increasing number of distressed acquisitions taking place).

Secondly, the rapidly growing popularity of W&I is leading insurers to write broader coverage policies, with the lack of specificity potentially increasing the scope of coverage for buyers seeking claims, whilst also possibly opening up more points at which claims could be disputed.

Finally, the law firm states that having a formal policy in place “can remove some of the emotions and reputational concerns that may otherwise factor into considerations for a buyer looking to sue a seller.”

The increased licence that W&I can give buyers to pursue claims, coupled with the tough economic environment, heightened due diligence requirements and prevalence of distressed acquisitions, could mean that buyers are more emboldened to pursue disputes in order to account for the heightened risk they are facing.

As Howden’s note in their report: “Transactions during economic downturns are more likely to result in unexpected outcomes. Businesses being acquired are more likely to be in distress, and acquirers will be keeping a closer eye on cashflow. In these times, policyholders are expected to take a more precautionary approach and will be increasingly ready to trigger a notification when there is a potential for loss.”

What are the solutions?

Although disputes are on the rise, buyers are more defensive due to the greater risk they face and sellers are seeking to stand their ground over issues such as valuations, this does not mean that there is an appetite for disputes, or that both buyers and sellers cannot make common cause in seeking to amicably settle disputes and pave the way for a successful acquisition or integration in the wake of a disagreement.

Even in such a tense dealmaking environment, there are still numerous steps that parties on both sides can take to prevent disputes from happening, negotiate and resolve them in a professional, respectful manner when they do arise and mitigate the damage that they can cause, helping to ensure that potentially successful deals are not derailed as a result.

A collaborative, comprehensive due diligence process
Perhaps the most useful exercise that can help to minimise the potential for post-closing disputes is due diligence. Whilst itis increasingly difficult to investigate every aspect in such a rapidly shifting economic, regulatory and political environment, there are steps that can be taken on both sides to lessen the possibility that disputes will arise later on.

Firstly, an obvious step is for sellers to not conceal important information during the due diligence process. While the changing nature of due diligence may mean that some things are missed that later may be considered relevant, sellers can help to minimise the potential for disputes by not withholding critical information from the buyer or presenting misleading information that paints an inaccurate picture of the company’s state.

For buyers, the key is to ensure that due diligence is thorough enough to uncover potential risks or liabilities that could affect the business post sale – something that has potentially been lacking over recent years, as buyers sought to rapidly complete delayed deals during the post-COVID boom or, more recently, were contending with tighter timeframes when making distressed acquisitions.

Having a comprehensive due diligence checklist in place can be invaluable when seeking to establish due diligence processes that are in-depth, successful at assessing the state of a business and, for buyers operating at scale, can be repeated across numerous transactions.

As law firm Ashurst observes: “We often see parties attempting to limit these exercises to save time and cost but without acknowledging the false economy that this can create. M&A disputes are inflamed and prolonged when risks are either not identified or inadequately bottomed-out in due diligence exercises and subsequently not clearly allocated in the purchase contracts. Comprehensive due diligence and clear risk allocation are always the best way to prevent disputes.”

When it comes to navigating issues such as rapidly changing ESG regulation, buyers may be best advised to seek outside counsel regarding what due diligence should be examining for each specific transaction. Engaging a specialist diligence provider who is well-versed in the latest ESG developments could help both buyers and sellers to preempt potential points of contention and parse out which details are really relevant to the due diligence process.

Well-structured earnouts
Despite how useful they are in helping to push difficult acquisitions to completion, earnouts are also a minefield of potential disputes and parties involved in acquisitions utilising earnouts will need to make a concerted effort to limit the scope for disputes.

The key element here will be ensuring that there is full clarity on both sides regarding when earnout payments are triggered and what needs to be achieved in order to activate payments. When drafting the agreement, it will be vital to eliminate any vague language that could potentially be misinterpreted or open to dispute at a later date.

Crucial issues such as what kind of revenue is or isn’t applied when calculating earnout payments (e.g. exceptional or repeating revenue), the accounting principles applied and the structure, governance and control of the business during the earnout period (e.g. the roles of the new owner and outgoing owner) will need to be fully specified and agreed upon by both parties.

Ensuring that both parties are clear on the terms of the earnout prior to closing the deal will be invaluable in preventing potential disputes. Further to this, the two parties should also seek to agree on mechanisms for measuring and tracking the achievement of the metrics required to trigger earnout payments – such as tracking performance milestones through operational reports and financial statements.

Finally, where possible, the earnout agreement should also seek to address the risks that might arise during the earnout period and what implications these would have for earnout payments. This may include specific recourse in the event of things such as changes in the business environment, regulatory changes, unexpected economic events. Such considerations will be the hardest to preempt during deal negotiations, but could still prove valuable in preventing or mitigating disputes further down the line.

Dispute resolution clauses
In the case of particularly complex deals, in which the scope for disputes might be higher, then the risks that these pose to the deal can be significantly limited in advance, with clear steps on how each party should proceed in the event that specific disputes arise.

According to Grant Thornton’s 2022 study, 85 per cent of respondents said that they include detailed post-closing dispute resolution processes in their purchase agreements. The report stated that it is best practice for these processes to define:

The timeline for the dispute resolution process, including the number of days a buyer has to prepare earnout or working capital schedules and the number of days the seller has to respond.

The number of days that the parties have to negotiate a resolution between them in good faith.

How processes are to be extended if necessary and guidance on how a neutral arbitration process should proceed, with a named independent accountant that both parties have agreed upon.

Having such processes in place can avoid many of the most costly elements of disputes, even if they do arise. Without such provisions, disputes can become time-consuming, expensive processes, particularly over issues such as which outside professionals to involve in the dispute. Without both parties having agreed on an independent arbitrator in advance, then this can become an unseemly point of conflict later on when a dispute has already festered and both sides are seeking to gain the upper hand.

Dispute resolution processes may not prevent disputes from happening at all, but they establish a sense of trust, a shared goodwill and common purpose in getting the deal done and dealing with any disagreements through the correct channels and, should disputes ultimately arise, a pre-determined set of processes that can help to manage and limit the potential cost (both financial and transactional) that the disagreement might have.

Call in experts as soon as possible
When a dispute begins to emerge, then it is best for all parties that it is referred to an outside expert – such as independent accountant or other external adviser – as soon as possible. This can help to prevent a simple disagreement escalating into something that could cause bad blood between the two parties and potentially put the deal at risk.

The earlier that disputes are referred to a relevant, independent arbitrator then the earlier they can be assessed and, ultimately resolved. The sooner that disputes are resolved, then the less damage that they can do to the deal – whether they arise during the negotiation stage prior to an acquisition or in the post-closing period.

This is one of the main reasons why it is so important to have dispute resolution processes in place ahead of a deal being completed, including full details on external experts that can be called upon to mediate specific disputes: for example, legal experts for contractual issues or accountant for disputes around matters such as earnout payments and purchase price adjustments. Both parties agreeing on these figures in advance will protect against the process engendering further disputes if a dispute arises without the relevant third party experts already being named.

On occasion, parties that are otherwise on very good terms might get into some kind of a dispute during an M&A deal. In this instance, the temptation to mediate the dispute between themselves without outside guidance should be avoided. While a strong relationship may exist between the two parties, attempting to navigate a complex M&A dispute on these terms could put this in serious jeopardy.

Engaging an outside party with experience mediating the specific kind of dispute will ensure that the process is handled independently and without being informed by the biases or competing interests of either party. Ultimately, this will be the best way to both preserve the good relationship between buyer and seller, ensure a successful resolution to the dispute and pave the way for a profitable acquisition on both sides.


In such an uncertain dealmaking environment, with widespread distress and ongoing economic and geopolitical upheaval, it is inevitable that disagreements during M&A transactions will increase. However, with the right measures in place and a mutual interest between buyers and sellers in completing a successful deal, then there is no reason why disputes should put deals in danger.

Ultimately, mitigating and navigating disputes – while undoubtedly complex – comes down to a few very simple principles: strong due diligence and clear, specific deal structures to minimise the chances of disputes arising and predetermined recourse and independent parties to consult in the event that they do in order to minimise the damage they can cause.

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