Surge in antitrust and FDI intervention means appropriate deal provisions are vital

Published Date
Feb 23, 2023
As intervention by both antitrust authorities and governments shows no sign of abating, allocating execution risk in transaction documents is ever more crucial. Unsurprisingly, the number of our deals subject to antitrust and foreign direct investment (FDI) approval conditions increased in 2022. Inclusion of “hell or high water” obligations fell while we saw an uptick in reverse break fees.

Antitrust and FDI conditions on the rise

According to our research on global private M&A deals,[1] the number of deals subject to antitrust (ie merger control) approval conditions rose in 2022, from 41% to 45%.

We saw an even greater increase in FDI approval conditions – from 18% in 2021 to 23% last year. Looking only at deals with a transaction value of more than USD500m, half of all our private M&A deals in 2022 were subject to an FDI condition.

This is expected. It reflects the continued proliferation of FDI regimes around the globe, strengthened powers of governments/regulators and increased intervention (see chapter 7 for more on this trend).

Steep drop in “hell or high water” commitments

In last year’s report we commented on a sharp rise in the inclusion of “hell or high water” obligations in our private M&A deals (up from 32% in 2020 to 44% in 2021). These are provisions that compel the purchaser to do everything in its power to secure merger control approvals.

However, in 2022 hell or high water obligations declined significantly and were included in just 20% of deals subject to antitrust conditions.

There is no single reason for this dip. It is likely that a general shift to a softer M&A market has played some part. Antitrust authorities’ increasing scepticism about whether remedies can adequately address antitrust concerns (as discussed in chapter 2) as well as their more aggressive stance more generally may be another cause. Sellers may have taken the view that it is fruitless to oblige the purchaser to do everything it can to secure merger control clearances if an antitrust authority is likely to block the deal.

Instead, we saw a range of more nuanced provisions.

Limited divestment obligations were included in 17% of deals. These often required the purchaser to sell the target’s assets if required, but not its own, or applied a materiality threshold above which divestment was not required. In a further 28% of transactions, purchasers committed to use reasonable or best efforts to obtain clearance.

Use of reverse break fees increased although fee levels dropped

Given the increase in merger control and FDI hurdles, and the decline in hell or high water commitments, it is perhaps not surprising that we saw more reverse break fees last year. Such fees were agreed in 12% of our conditional private M&A deals, up 50% from 2021. The average fee was 2% of enterprise value.

Looking beyond our transactions, we saw a number of instances of reverse break fees becoming payable in 2022 after deals were frustrated due to antitrust concerns:

  • Penguin Random House was obliged to pay Simon & Schuster’s parent Paramount USD200m (9% of deal value) after its acquisition was prohibited.
  • China International Marine Containers committed to pay USD85m (7.7% of deal value) on the collapse of its acquisition of Maersk Container Industry.
  • The reverse break fee in Microsoft/Activision Blizzard, which is still undergoing merger control reviews, is USD2-3bn (3-4% of deal value), depending on timing.

Going forward, we may see a further rise in the use of reverse break fees, as well as a resurgence of hell or high water provisions in certain deals. In particular, we expect private equity buyers to attempt more complex deal strategies during 2023. If so, sellers are likely to push for deal provisions that hold buyers accountable for securing regulatory approvals.

[1] Global trends in private M&A, research based on over 1,700 M&A deals on which A&O has acted. Please get in touch with your usual A&O contact if you would like to learn more about the results.


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This content was originally published by Allen & Overy before the A&O Shearman merger