Q3 | Torys QuarterlySummer 2022

4 top trends in U.S. M&A

While global market volatility has begun to impact the mergers and acquisitions market, deal terms in the U.S. remain seller-friendly, at least for the time being. Below we highlight four trends that illustrate the continuing seller-market dynamic.

To learn about the cross-border M&A market, see our mid-year Canada-U.S. outlook.

1. Public style and no survival deals

It is increasingly common for acquisition agreements, particularly those at the high end of the market, to provide that seller representations and warranties do not survive the closing of the transaction. The “no survival” deal is even more frequent in transactions in which the buyer purchases representations and warranties insurance (RWI). In a no survival deal, the buyer has no recourse against the seller for breaches of representations and warranties (even fundamental reps, such as ownership of shares), except in the case of fraud. Often, the no survival concept extends beyond the reps—that is, sellers require a “public company style” deal, which does not permit any buyer recourse against the seller for pre-closing taxes or breaches of covenants either.

This trend is the result of the recent seller-friendly M&A market and continued aggressive competition for “hot assets”, coupled with the availability of RWI (which frequently covers not just the reps but also standard pre-closing tax indemnities).

We are also seeing a related trend, where a buyer accepts the “no survival” construct and initially pursues RWI coverage, but ultimately opts against purchasing RWI. This is likely driven by the recent rise in RWI premiums as well as the additional transaction expenses that the RWI underwriting process generates. These factors have led some buyers to effectively forgo indemnity coverage altogether and accept that they have no post-closing recourse.

Takeaway: A seller-friendly M&A market is combining with aggressive competition and the availability of representations and warranties insurance to make public style and no survival deals more popular.

2. Full equity commitments

In competitive, or “hot”, auctions, sellers are sometimes asking financial sponsor bidders to provide equity commitment letters for the full purchase price, as opposed to the more traditional combination of debt and equity commitments that aggregate to the full purchase price. While a 100% equity commitment improves closing certainty for the seller (especially in light of the current uncertainty in debt markets), some financial sponsors are not able to oblige if the required equity check would exceed their funds’ concentration limits. Unsurprisingly, the 100% equity backstop is more frequently seen on smaller deals.

Eliminating a debt commitment also has knock-on effects, as a buyer not relying on debt funding may seek to eliminate the reverse termination fee, which is usually payable by a buyer when it does not receive its debt funding at closing and cannot complete the deal (along with the limited guarantee backstopping the reverse termination fee). However, reverse termination fees are also payable when the buyer is unable to bring down its reps or covenants at closing, and for that reason sellers are still seeking to include reverse termination fees in deals even in the absence of debt financing.

Sellers making a rollover investment should also beware of the allure of a fully equity financed deal, as it will lead to substantial dilution of rollover equity versus a traditional leveraged transaction.

Takeaway: Some sellers are requesting equity commitment letters for the full purchase price, rejecting the traditional combination of debt and equity commitments. These full equity commitments improve closing certainty for the seller, but they are not always practical.

3. Return of club deals

Club deals, in which two or more private equity firms combine forces to acquire a company, have been experiencing a resurgence over the past year or so (headlined by the blockbuster acquisition of Medline by Blackstone, Carlyle and Hellman & Friedman). This trend can be attributed to the mountain of “dry powder” held by private equity firms, as well as the run-up in valuations during the pandemic (which has made some targets too expensive for one private equity firm acting alone). The fact that some would-be strategic acquirers for larger targets are staying on the sidelines due to regulatory concerns also favours private equity club arrangements.

Club deals allow private equity firms to acquire larger targets while sharing risk and increasing negotiating power with lenders to improve the terms of debt financing for a deal. Club deal partners can also benefit from each other’s expertise and experience. On the flip side, some limited partners dislike these arrangements, because club deals present a concentration risk (i.e., several private equity funds in which limited partners are invested hold the same asset). In addition, these transactions require careful negotiation of equity arrangements between the different private equity firms (which may have different strategies, objectives and exit timing). Some observers view the recent increase in club deals as a repeat of the lead-up to the 2008 financial crisis, when the prominence of these arrangements signaled the market peak and excessive valuations.

Takeaway: Club deals, where two or more private equity firms team up to acquire a target, have made a comeback of late. It remains to be seen whether this phenomenon is here to stay or whether their resurgence signals a coming downturn, as they did in the lead-up to the 2008 financial crisis.

4. Evolution of COVID-19 clauses in acquisition agreements

At the beginning of the pandemic, following a flurry of litigation involving buyers attempting to back out of M&A deals (including Simon Property Group in its purchase of Taubman Centers and Sycamore Partners in its deal for Victoria’s Secret), buyers and sellers began modifying a number of acquisition agreement clauses to take account of the pandemic and many targets’ Paycheck Protection Program (PPP) loans, including representations and warranties, the definition of Material Adverse Effect (MAE) and interim operating covenants. While COVID-19 related reps and warranties and escrows for PPP loans have become less prominent, changes to the MAE definition and interim operating covenants appear here to stay.

Most acquisition agreements no longer include representations and warranties specifically addressing risks associated with COVID-19. There is some logic to this retrenchment, as these reps are typically excluded from coverage under RWI policies. In many cases, the substance of these reps is already covered by other customary reps and warranties, including those pertaining to compliance with law, litigation and employment matters. As PPP loans are forgiven (or paid off), fewer acquisition agreements need to take such loans into account, although some buyers still ask for representations and warranties with respect to the accuracy of the initial loan and forgiveness applications, in case of a future audit by the Small Business Administration.

On the other hand, adverse effects from the pandemic are still almost uniformly carved out of MAE definitions—preventing buyers from calling off a deal because of the impact of COVID-19 and variants on a target business. After buyers had some success citing breaches of the interim operating covenant (i.e., the target’s obligation to operate between signing and closing in the ordinary course of business consistent with past practice) as the basis to terminate deals (as affirmed by the Delaware Supreme Court in the AB Stable case), sellers now look to carve out both reasonable responses to the pandemic (including associated legal requirements) and reasonable responses to exigent circumstances more generally.

Takeaway: While COVID-19 related reps and warranties and escrows for Paycheck Protection Program loans are less prominent than during the heart of the pandemic, changes to the definition of “material adverse effect” and interim operating covenants appear here to stay.


To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2022 by Torys LLP.

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