Disputes arising from M&A deals in Africa

Mergers and acquisitions (M&A) activity in Africa has witnessed significant growth in recent years, driven by factors such as economic development and globalisation. As African businesses increasingly pursue M&A opportunities to expand their market presence, diversify their portfolios, and gain competitive advantages, it remains imperative to understand the complexities and challenges associated with such transactions. We explore some of the more common causes of commercial disputes within the M&A space and how businesses can navigate them.

Investments into, and particularly within Africa have increased over the past 20 years. While there have been significant foreign direct investments, the spate of intra-Africa M&A is noteworthy. Market analysis shows that in recent times, notwithstanding the economic effects of the COVID-19 pandemic, there has been an increase in African-led acquisitions, Africa-focused private equity investors, and privatisation of state-owned assets.

Significant foreign direct divestments in major African economies have created opportunities in the M&A deals space and contributed to the rise of African-led acquisitions. Some of these divestments have involved businesses completely exiting the African market or certain business divisions or economic sectors (e.g. international oil and gas companies divesting their onshore assets while retaining the offshore assets). There has also been an increase in technology, media, and telecom deals with an upward trajectory in the sector.

At the core of these M&A deals may be certain post-acquisition or post investment issues which could give rise to disputes between the parties. Depending on the structure of the transaction, either as an asset sale or share sale or combination of both, the intricacies of these transactions can introduce complexities that may lead to disputes on various aspects of the transaction.

Common issues that may lead to post-M&A disputes

1. Purchase price adjustment disputes

In M&A transactions, parties will typically agree a mechanism for determining the purchase price which could be based on completion accounts (i.e. subject to necessary valuations and adjustments at completion) or locked box approach (i.e. purchase price fixed pre-completion usually based on recent audited financial statements). The pros and cons of both purchase price mechanisms must be clearly understood by the parties and their advisers. Historically disputes have arisen with the completion accounts mechanism where, for instance, both the purchaser and the seller dispute the value of assets, cash, debt or working capital after the necessary company valuations and adjustments have been applied to the final purchase price.

Purchasers have often initiated disputes based on the locked box approach where there have been allegations of misrepresentation by the seller, wilful misconduct or material adverse changes which could have affected or influenced the purchase price. Additionally, disputes may arise from claims for indemnity usually given by the seller in the event of any decline in value during any applicable interim period or during the locked box period.

2. Breach of conditions precedents (CPs)

The CPs are the lifeline of most M&A transactions as the transaction cannot be effectively delivered without fulfilment of the CPs. With the breach of CPs, parties may be able to evoke termination clauses and make claims for a break fee or other remedies under the applicable contracts.

For breach of CPs, many M&A transactions will contain a specified financial threshold in the limitation of liability clauses perhaps because it is anticipated that, at the CP stage, parties have not incurred substantial costs to be able to claim large quantum in damages. However, disputes may arise where parties make claims for anticipated loss of profits which they could have earned had the breaches not occurred and had the contract not been terminated on account of the breach of CPs. While claims for anticipated loss of profits or projected earnings may require detailed expert evidence, the success or otherwise of such claims will be largely dependent on the substantive law of the dispute and how such claims are determined in that jurisdiction. For instance, in some jurisdictions, claims for anticipated loss of profits/ projected profits fall under claims for special damages which must be specifically proven to be successful with such claims.

3. Breach of warranties

Disputes pertaining to breaches of warranties often arise from untrue, wrong, inaccurate, or misleading statements pertaining to the asset/ share/ business value of the target company. Others could relate to disclosures and third-party representations which could not have been easily discoverable during the due diligence process. Depending on the contractual terms, parties may be able to claim indemnity for the breach of warranties. It is also not unusual that the liability for such indemnity claims may have been capped at a certain amount. In any event, breaches of warranties usually form the basis for many M&A disputes. To protect against liability for such disputes, some jurisdictions, such as South Africa, now recognise warranty & indemnity insurance (W&I) policies whereby the need for providing warranty and/ or indemnity may be dispensed with. This is often favoured by private equity companies; however, this can lead to other disputes on risks, awareness, coverage or quantum applicable to the substantive claim in dispute and in some cases, disputes may arise as to the applicability of the dispute resolution mechanism under the W&I policy.

4. Material adverse change (MAC)

The MAC clause in M&A transaction documents will usually provide parties (often the purchaser) with the option of terminating the sale and purchase agreement during the interim period, particularly if the MAC event occurs during the CP stage. MAC events are typically included to protect the purchaser if circumstances occur which make the transaction no longer suitable or viable for the purchaser. The interpretation of MAC events may be subjective, and disputes will usually arise as to whether the events truly qualify as a MAC event such that the transaction has materially differed from what was anticipated by the parties. The purchaser thus has the burden of establishing, amongst others, for instance that as a result of the MAC event, the asset/ shares have suffered significant devaluation and in turn the transaction is no longer financially viable. Disputes could also arise as to: (i) what qualifies as a MAC event; (ii) whether such events affected the valuation of the business or assets and the final purchase price; and (iii) which party should bear the liability for the MAC event.

5. Investment treaty claims

Some business exits in Africa have been preceded by significant business losses for the exiting parties. Some of the businesses have cited adverse regulatory frameworks, profit repatriation issues, currency devaluation and foreign exchange restrictions and insecurity as part of the reasons for their exit in certain parts of Africa. Some of these exits may thus give room for investment treaty claims against states. Through Investor-State Dispute Settlement (ISDS) mechanisms, foreign investors may bring claims against states for alleged breaches of investment treaties or investment chapters in free trade agreements. If a merger or acquisition results in disputes related to breaches of investment protections, expropriation without compensation, unfair treatment, or denial of justice, investors may invoke ISDS mechanisms to seek compensation.

Conclusion

As M&A activity in Africa continues to evolve, so do the opportunities and risks. Effective dispute avoidance strategies and dispute resolution procedures must, therefore, be considered carefully within the context of the transaction's nature, its sector, and its country, to ensure contracting parties are adequately protected.