M&A in 2022 and Trends for 2023
M&A in 2022 and Trends for 2023
Following a year of unprecedented M&A deal activity, 2022 saw the global M&A market settle back into a more familiar pace. The year finished 38.8% lower than 2021’s record level, but only 9.3% lower than 2015-2019 averages, and on par with 2020, according to MergerMarket.
A year of two halves, 2022 deal volume dropped 40% between the first and second halves as rising interest rates, inflation, a war in Europe, and volatile equity markets chipped away at market confidence and lending conditions tightened.
Private equity buyers, buoyed by dry powder, continued to drive market activity. While down from last year’s high, 2022 was still the second highest year for private equity activity since 2007.
In this alert, we review the M&A markets in 2022 and major legal and regulatory trends that will impact deal-making in 2023.
In 2022, global M&A reached $3.6 trillion in value. The year started strong, but activity trailed off in Q3, falling below $1 trillion for the first time in eight consecutive quarters. Deal activity continued, but buyers went small, with megadeals (those valued above $10 billion) dropping 31% compared to 2021, according to Refinitiv.
Looking at markets around the world:
Technology continued to be the top industry for acquirers, accounting for 20% of 2022 dealmaking. In our 2022 Tech M&A Survey, respondents named artificial intelligence/machine learning as the first-choice subsector for dealmaking opportunities in 2023 by a wide margin (22%), followed by e-commerce and robotic process automation, each receiving 13% of the vote.
Private equity acquirers continued to transact in record numbers. Though activity was down from 2021’s records, buyouts were 50% higher and exits were 43% higher than 2015-2019 numbers, according to MergerMarket. Technology was the top sector for sponsors, accounting for nearly 30% of all deals. Our annual Global PE Trends and Outlook report details these and other themes.
Despite the macro headwinds, the strategic goals supported by well-planned M&A, including diversification (or, conversely, focusing on core businesses or separating unrelated businesses), achieving scale, and entry into new markets, remain. The trend toward digitalization continues to push tech M&A, and the volatility (and sometimes freeze) in equity markets will increase the interest in M&A of companies and investors searching for liquidity. Buyers (both private equity and corporate) have plenty of dry powder. Savvy buyers will take advantage of current pricing and, conversely, companies need to be ready to respond to unwanted advances. Changes in currency exchange rates, such as the weakened Euro, pound and yen, may attract some buyers. Companies also may consider other forms of transformations, such as spinoffs and carve-outs, as they seek to increase efficiencies of operating units and foster growth and investment. However, given the potential risks, buyers likely will review potential target companies and transactions carefully, doing more diligence and adjusting deal structures and terms in response to continued and new risks.
Learn more about Morrison & Foerster’s Global M&A Practice.
In 2022, antitrust scrutiny of acquisitions continued to increase, with U.S. and global antitrust agencies coalescing around broader investigations and more aggressive enforcement. Some transactions were blocked or abandoned, and U.S. agencies, despite losing a few merger challenges in court, remained resolved to challenge more deals.
In 2023, merger agreements should proactively address increased agency review and prolonged investigatory timelines, the low probability of the agencies accepting a settlement, and the heightened possibility of protracted litigation. By anticipating new enforcement rules and policies, such as the updated merger guidelines and potential FTC rulemaking, dealmakers can limit, or at least address, delays caused by merger review.
Despite Losses, Agencies Won’t Back Down. In 2022, DOJ lost three merger challenges in federal district court (U.S. Sugar/Imperial, Booz Allen Hamilton/EverWatch, and United/Change) and is appealing two of those (U.S. Sugar and United). The FTC lost its administrative challenge to Illumina/Grail, and is appealing to the full Commission. Despite these losses, the agencies maintained a busy docket – DOJ went to trial with American Airlines and JetBlue over a joint operating alliance and sued to block a merger in the door locks industry, ASSA Abloy/Spectrum.
FTC Sets a More Aggressive Enforcement Policy. The FTC likewise has trended toward more aggressive enforcement and reliance on non-traditional theories of liability.
Legislative Developments. Many observers expected comprehensive antitrust legislation in 2022, but action is still pending. Proposed bills include calls to prohibit Big Tech companies from prioritizing their own products on their platforms over those of competitors, open app stores to rival marketplaces, and promote interoperability between platforms.
The recent spending bill increased funding for DOJ and FTC and implemented some potentially significant changes:
International Enforcement. International developments have paralleled the more aggressive approach to antitrust in the U.S. and in some instances have gone even further.
On the Horizon. With both U.S. agencies rounding out their leadership teams in 2022, 2023 likely will continue the trend of aggressive enforcement actions. The agencies will adopt new merger guidelines that include new, more expansive thinking about potential harms to competition and liability. Mergers will likely be scrutinized under the new merger guidelines. DOJ’s pending appeals in U.S. Sugar and United, trials in ASSA Abloy/Spectrum and Microsoft/Activision, and the conduct litigations involving Google and Meta, will provide more instances to observe whether courts are sympathetic to increased enforcement efforts or continue to reject this approach, as largely seen in 2022. Additionally, Republican control of the House will result in new priorities and likely increased scrutiny of ESG and antitrust.
“With both U.S. agencies rounding out their leadership teams in 2022, 2023 likely will continue the trend of aggressive enforcement actions.”
In 2022, legislatures continued to narrow the permissible scope of employee non-competition agreements, at least outside the context of the sale of a business, while courts enforced them, albeit with increasing scrutiny. Dealmakers will need to review the scope of a target company’s non-competes, including those in existence prior to a transaction as well as those entered into in connection with a transaction, and consider whether other protections, such as an NDA or other long-term employment incentives, may be necessary or appropriate.
“Dealmakers will need to review the scope of a target company’s non-compete’s… and consider whether other protections, such as an NDA or other long term employment incentives, may be necessary or appropriate.”
Corporate M&A dealmakers have been particularly interested in two provisions of the August 2022 Inflation Reduction Act (or “IRA”):
Excise Tax on Corporate Stock Buybacks
The IRA imposes a 1% excise tax on stock repurchases by certain publicly traded U.S. corporations and, in some cases, U.S. subsidiaries of non-U.S. corporations. Under a “netting” rule, the excise tax generally does not apply to the extent a corporation also issues stock during the same tax year, including most stock issued in connection with an acquisition or to employees as compensation or pursuant to option exercises, but not including stock dividends or stock splits.
“The [excise tax on corporate stock buybacks] goes well beyond conventional share buybacks and must be considered in many common M&A transactions involving public companies.”
The tax goes well beyond conventional share buybacks and must be considered in many common M&A transactions involving public companies. The Department of Treasury has provided some relief from the tax in specific instances, while generally confirming its broad scope. More specifically, under Notice 2023-2:
The above is a simplified description of certain excise tax provisions of greatest potential relevance to M&A transactions.
The IRA imposes a new 15% minimum tax on certain large corporations, effective for tax years beginning after December 31, 2022. Specifically, the corporate alternative minimum tax (“Minimum Tax”) generally applies to U.S. corporations (other than RICs, REITs, and S corporations) that have average annual “adjusted financial statement income” (“AFSI”) in excess of $1 billion over a rolling three-year test period.
A corporation’s AFSI is the net income or loss reported on its applicable financial statement (AFS, generally prepared under U.S. GAAP or IFRS standards), adjusted in various ways. The potential 15% minimum tax is reduced by the amount of regular corporate income tax and “base erosion and anti-abuse tax” otherwise payable by the corporation for such tax year. Special rules apply for U.S. corporations owned by non-U.S. parent companies. Once a corporation has become subject to the Minimum Tax, there is no clear path for that corporation to cease being subject to the tax in subsequent years, absent an exercise of Treasury discretion.
Treasury has provided initial guidance of interest to M&A dealmakers:
Treasury has indicated it will provide additional guidance on these and other provisions of the IRA during 2023.
2022 continued the trend of increasing national security-related regulatory procedures and concerns for dealmakers.
Comprehensive Russia Sanctions. Russia’s February 2022 invasion of Ukraine ushered in unprecedented sanctions from the United States, European Union, United Kingdom, and other allied countries, causing dealmakers to expand their diligence and mitigation plans. Examples of the new sanctions include:
U.S. Foreign Investment Review. In November 2022, the U.S. Department of the Treasury published its first ever CFIUS Enforcement and Penalty Guidelines (“Guidelines”). The Guidelines lay out the following factors in determining whether to impose penalties for CFIUS non-compliance:
The Guidelines are the latest example of increased attention to, and resources for, CFIUS monitoring and enforcement since the enactment of the Foreign Investment Risk Review Modernization Act of 2018, including, among other things, CFIUS’s enhanced efforts to identify and pursue non-notified transactions.
Global Foreign Investment Review. The trend toward greater regulatory scrutiny of foreign direct investment continues globally as well.
Outbound Investment Review. The concept of an outbound investment review mechanism continues to gain traction in Washington. Requirements likely will come in the form of executive action requiring prior notification and review of outbound transactions in certain sectors (such as semiconductor development) to certain destinations. The mechanism may also include required notices of certain outbound capital investments.
“The concept of an outbound investment review mechanism continues to gain traction in Washington.”
Export Controls. 2022 also featured significant updates to U.S. export controls.
In August, Delaware amended its corporate statute to allow corporations to provide in their charters for exculpation of certain senior corporate officers for breaches of the duty of care. Previously, the statute allowed corporations to provide exculpation only for directors. Corporations that wish to provide such exculpation to applicable officers will need to amend their charters, requiring stockholder approval.
As with directors, the statute does not extend to breaches of the duty of loyalty or to “acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law.” Unlike the protections afforded to directors, the statute does not allow officers to be exculpated for stockholder derivative claims brought on behalf of the corporation.
Companies should consider the potential reaction of stockholders before asking for approval of such provisions in their charters. Proxy advisors have indicated they will review such provisions on a case-by-case basis, and in 2022 generally recommended in favor of such proposals, noting, for example, the need for officers to “remain free of the risk of financial ruin as a result of an unintentional misstep.” Assuming more companies implement the amendment, CEOs, CFOs, and other affected officers may see the risk of liability, and claims made, reduced for certain corporate transactions and actions, such as their involvement in preparing proxy statements.
“Companies should consider the potential reaction of stockholders before asking for approval of such provisions in their charters.”
In ConMed, a seller challenged a buyer’s decision not to pay earn-out payments under a stock purchase agreement, despite the agreement’s requirement that the defendant use “commercially best efforts” to maximize payments. The court interpreted “commercially best efforts” as akin to “best efforts,” and concluded that the buyer’s decision to discontinue payments was “commercially reasonable” in light of, among other things, the buyer’s efforts to resolve the underlying safety concerns of the target’s medical product.
Of more general significance to acquisition agreement drafters, the court noted that, while parties use a range of efforts standards, including “best efforts,” “reasonable best efforts,” “reasonable efforts,” “commercially reasonable efforts” and “good faith efforts,” courts “have struggled to discern daylight between” the various standards; in particular, in prior opinions the court had found “’best efforts’ obligations as on par with ‘commercially reasonable efforts’.” The court noted that while courts have interpreted efforts clauses in some merger agreements, such agreements have included a “yardstick” to determine whether a party complied with an efforts clause.
Deal practitioners may consider defining the “yardstick” used to determine whether a party satisfies an efforts clause, particularly in agreements governed by Delaware law.
2022 brought several victories for defendants despite the invocation of the entire fairness standard of review—one of the most rigorous standards applied in the Delaware Court of Chancery. These cases remind dealmakers involved in controller transactions that the application of entire fairness may still allow defense-side victories, and that they can consider paths other than the MFW combination of an “ab initio” special committee and non-waivable disinterested shareholders’ vote.
In one such case, the court concluded that, despite some hiccups in the process with the interested party initiating the deal and identifying special committee advisors, the special committee process was sufficiently robust, even without a stockholder vote, to prevail despite entire fairness review. In reaching its conclusion, the court focused on, among other things, that the majority of the special committee was independent, the special committee engaged independent advisors, the interested party ultimately removed himself from the committee’s deliberations, and the special committee was fully empowered and did, in fact, push back at critical moments. The court also noted favorably that the agreed-upon price was consistent with what the independent financial advisor deemed fair.
We see little to suggest that shareholder activism will diminish in 2023, although several prominent activists lost shareholder votes in 2022. A few trends have emerged:
M&A-focused activism generally falls into two categories: proactive campaigns that put the company into play or promote a break-up, including where the activist makes its own hostile offer, and reactive strategies that oppose an announced deal because the activist prefers a standalone strategy or alternative transaction or seeks to force an enhanced deal (so-called “bumpitrage”). We may see more of the proactive variety given current market conditions, as activists seek to generate opportunities rather than capitalizing on the competitive dynamics (such as potential jumping bidders) of more buoyant equity and M&A markets.
Historically, in an election contest, the company and dissident shareholder distributed separate proxy cards and shareholders voting by proxy were generally unable to vote for a combination of director nominees from the competing slates. With the SEC’s new rule requiring a "universal" proxy card in contested elections, each side will provide a proxy card that includes both sets of nominees and refer shareholders to the other party’s proxy statement for information about the other party’s nominees. This rule change will likely bring important consequences:
“With shareholders able to ‘mix-and-match’ nominees from competing slates, dissidents may be more likely to win minority representation.”
Many companies are amending their bylaws to build in the new rule’s requirements. Some are also reevaluating, and potentially revising, their advance notice bylaws, though activist investors, proxy advisory firms and/or shareholders may challenge such bylaws that they believe are too aggressive. For example, an activist investor recently challenged Masimo’s advance notice bylaws, which require a dissident shareholder to identify (among other things) the names of the activist’s passive limited partners and their families’ investment holdings in the company’s competitors or litigation counterparties, any plans the dissident has to nominate directors to other public company boards in the next 12 months, and the names of any shareholders who have already expressed any support for the dissident’s nominations.
In 2022, the SEC proposed amendments to beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 to accelerate the filing deadlines for Schedules 13D and 13G reports, expand the application of Regulation 13D-G to certain derivative securities and clarify the circumstances under which persons have formed a “group” that is subject to the reporting obligations. While corporations desire some changes to limit what they feel are surprise accumulations of shares, many activists oppose the changes as potentially diminishing their upside opportunity. The amendments are pending and are expected to be considered this fall.
In 2020, the SEC proposed to amend Form 13F to raise the reporting threshold for investment managers from the current $100 million to $3.5 billion, which it estimated would eliminate filings for 90% of current filers. Because companies often learn about an activist through Form 13F filings, the proposed amendment would eliminate a valuable early warning system. The proposed amendments were not mentioned in the SEC’s Fall 2022 Regulatory Flexibility Agenda, signaling that the amendments are not a current priority.
The FTC has proposed to exempt acquisitions from reporting under the HSR Act where the acquirer would not own more than 10% of the company’s stock, regardless of value, and does not have a competitively significant relationship with the company. The proposal would effectively eliminate the $101 million HSR filing threshold that serves as an early warning system for mid-and large-cap issuers. A final rule is expected to be posted in the Federal Register by this June.
Interest in earnouts should continue in the face of 2023’s uncertainties. At the beginning of the pandemic, earnouts grew in popularity in private M&A as a method to bridge valuation gaps and mitigate integration risk in an uncertain economic environment. Early-stage or pre-revenue start-up targets or targets that relied heavily on R&D were particularly impacted by this trend. However, the use of earnouts subsided in 2021 and early 2022 as parties grew accustomed to the issues created by the pandemic. Notwithstanding the recent decline, anticipated economic headwinds in 2023 suggest that earnouts may play a material role in private M&A transactions, particularly in transactions involving early-stage targets.
Revenue and non-financial metrics have become the most common earnout metrics. Revenue-based metrics have emerged as the overall most favored earnout benchmark, though the appropriate metric for any particular deal ultimately is driven by the applicable industry, individual company characteristics and the goals of the parties. In early 2021 and 2020, 41% of earnouts utilized a revenue metric, and only 11% of transactions used an earnings or EBITDA calculation. A trend that has continued, particularly for life sciences companies, is the use of non-financial metrics, which tend to be tied to completion of identified projects or more specific development or approval milestones.
“Notwithstanding the recent decline, anticipated economic headwinds in 2023 suggest that earnouts will continue to play a material role in private M&A transactions....”
Trade-offs in post-closing covenants. Transactions containing an affirmative covenant by the buyer to run the business “consistent with past practice” rose early in the pandemic (to about 21% of 2020 – 1Q2021 deals), although the majority (79% in 2020 – 2021) did not include this covenant at all. Conversely, the use of covenants obligating the buyer to run the acquired company in a manner that would maximize the earnout fell.
Delaware courts read earnout provisions closely. In one recent case, the Delaware Court of Chancery emphasized its reluctance to infer contractual provisions outside of the express language in the agreement. In that case, the court rejected claims of an implied covenant of good faith and fair dealing, which the seller alleged would have obligated the acquiror to act to achieve the earnout milestones, and declined to “rewrite” the agreement to imply provisions that the seller failed to negotiate. In another recent case, as noted above, the court found no difference between “commercially best efforts” and “best efforts,” in supporting its determination that an acquiror was entitled to stop making earnout payments. One takeaway from both cases is that earnout provisions must be drafted carefully to ensure that future interpretation of the provision will be consistent with the parties’ intent at the time of drafting and to reduce the likelihood of a distracting and expensive post-closing dispute.
In response to geo-political tensions, the EU and its member states have strengthened their FDI controls. Since 2020, the EU has set minimum requirements for member states’ FDI screening mechanisms and required coordination of their FDI reviews. Member states must consult with other member states and notify the European Commission of any concerns, increasing the duration of FDI review proceedings.
Some large EU member states, such as France and Germany, overhauled their FDI regimes to significantly increase the scope of acquisitions subject to notification and approval requirements. The UK, as noted above, followed the same trend, establishing a broad FDI regime enabling control of investments into sensitive industries.
“Member states must consult with other member states and notify the European Commission of any concerns, increasing the duration of FDI review proceedings.”
2022 saw the continued rise of the attention given to environmental, social and governance (“ESG”) issues in M&A, particularly with respect to climate and the environment, employment, talent retention, and, increasingly, data. Dealmakers’ concerns are driven by, among other things:
2022 also saw some backlash against ESG investing, particularly in the U.S., on multiple grounds, from allegations of greenwashing to outright bans by certain U.S. states for state pension funds to invest in ESG funds and/or fund managers with an ESG strategy.
ESG-Driven M&A Transactions. Some deals are driven by ESG issues or the desire to improve an ESG reputation. For example, oil and gas companies may divest assets that produce carbon-intensive products, while acquiring assets in areas such as carbon capture, recycling, smart grids, or other clean technologies. Traditional consumer companies may seek to acquire sustainable product lines to capitalize on changing buying patterns and consumer preferences.
“Increasingly, buyers are conducting ESG diligence as part of their standard diligence process, with tailored focuses depending on the acquirors’ ESG priorities and reporting and compliance requirements, as well as target companies’ nature of business and value propositions.”
ESG Due Diligence. Increasingly, buyers are conducting ESG diligence as part of their standard diligence process, with tailored focuses depending on the acquirors’ ESG priorities and reporting and compliance requirements, as well as target companies’ nature of business and value propositions.
ESG Specific Deal Terms. In the M&A context, many ESG issues overlap with and are captured generally by the broad representations and warranties traditionally included in M&A transaction documents. However, representations and protective provisions are increasingly added or expanded to address specific ESG issues that could result in significant litigation, regulatory, or reputational risks. For example, compliance with laws and data privacy representations may be expanded to cover industry standards, best practices or other soft laws, or specific representations may be included on sexual harassment or forced labor where such issue might be prevalent in the jurisdictions where the target operates. Buyers also may request representations regarding current compliance, and covenants to take steps to enable compliance after the acquisition, with the increasing ESG disclosure requirements, as noted above, as well as covenants to take steps towards meeting specific ESG metrics to reduce negative impacts or increase positive impacts (or both).
ESG-Linked Acquisition Financings. For M&A transactions that rely on debt financings, ESG factors may also come into play, as acquirors may tap into sustainable financing products that reward positive ESG metrics with lower cost of capital. For example, in August 2022, the Carlyle Group launched a decarbonization-linked financing program, under which borrowers will receive a pricing benefit based on the achievement of decarbonization targets or other climate-related metrics.
 For a discussion of the SEC’s SPAC rules, please see our client alert, SEC Proposes Sweeping Regulations Regarding SPAC and De-SPAC Transactions that Could Have a Chilling Effect on SPACs and Other Market Participants.
 For further discussion, please see our client alert, FTC Proposes Sweeping Ban of Employee Non-Competes.
 Kodiak Building Partners, LLC v. Adams (Del. Ch. Oct. 6, 2022); for a discussion, please see our client alert, Delaware Court Refuses to Enforce or Blue Pencil Sale of Business Non-compete.
 Blue Mountain Enterprises, LLC. v. Owen, 74 Cal. App. 5th 537 (2022) and Arthur J. Gallagher & Co. v. Petree, 2022 WL 1241232 (E.D. Cal. Apr. 27, 2022).
 Nuvasive, Inc. v. Miles (Del. Ch. 2019).
 Perry v. Floss Bar, Inc., 2021 U.S. Dist. LEXIS 43429 (S.D. N.Y. 2021).
 Depuy Synthes Sales, Inc. v. Howmedica Osteonics Corp., 28 F.4th 956 (9th Cir. 2022).
 For further discussion of the Guidelines, please see our client alert, New CFIUS Enforcement Guidelines Signal Expanded Compliance Focus.
 For a discussion of potential legislation, please see our client alert, Lawmakers Continue Push for Review of Outbound Investments.
 See Delaware General Corporations Law Sec.102(b)(7).
 Menn v. ConMed Corp. (Del. Ch. June 30, 2022).
 In re BGC Partners, Inc. Deriv. Litig. (Del. Ch. Aug. 19, 2022).
 ABA M&A Committee Private Target M&A Deal Points Study (2020 – 1Q2021).
 Pacira Biosciences, Inc. v. Fortis Advisors LLC (Del. Ch. Oct. 25, 2021).
 Menn v. ConMed Corp. (Del. Ch. June 30, 2022).
 For more information regarding the CSRD, please see our client alert, Corporate Sustainability: EU to Expand ESG-Related Reporting Obligations.