M&A practitioners must take into account the events surrounding the Russian invasion of Ukraine and the accompanying international unrest when contemplating a proposed transaction. These events will impact M&A transactions both in the short term and the long term. With the situation unfolding and changing day to day, potential buyers and sellers should consult counsel on how the Russia and Ukraine escalation will affect their business today, and how it may affect their business operations going forward. Below is a summary of topics to consider.

Increased Due Diligence

The United States has laid down sweeping and harsh sanctions on Russia in response to Russia’s escalating aggression towards neighboring Ukraine. These sanctions are discussed in our previous post here. Companies must conduct thorough due diligence of any Russia-related transactions to ensure compliance with United States regulations. Companies transacting internationally should also be aware of sanctions and regulations imposed by other nations related to Russia, and companies should continue monitoring for further escalation of trade and transaction restrictions. 

These increased due diligence considerations will be extremely important when it comes to monitoring supply chains, imports, and exports. The United States sanctions, as well as other nations’ sanctions, directly impact imports and exports to and from Russia. In addition, the civil unrest will have great impacts on Ukraine’s businesses so potential buyers and sellers should also thoroughly diligence a target’s connections to Ukraine and neighboring countries. To address due diligence challenges, buyers and sellers may want to consider extending diligence timelines and ensure that due diligence extends to business continuity and operations, insurance, supply chain risk, solvency risk, risks pertaining to material contracts, and changes to applicable national and international laws.

Representations and Warranties

Enhanced representations and warranties regarding Russia, Ukraine, or international unrest may also be needed in M&A transaction agreements to address issues discovered during the due diligence process. Forms of representations and warranties will be industry specific; however, some areas of concern will be items related to the oil and gas industry, supply chain, insurance, customers, and the ability to perform material contracts. Additionally, parties considering representation and warranty insurance should pay close attention to carve-outs related to wartime, war, or international unrest related issues. 

Financing

International unrest from the events unfolding in Ukraine, along with the already present supply chain issues, labor shortages, and inflation will have a direct effect on M&A transactions. As a result of increased uncertainty, buyers relying on financing for transactions will need to have frequent and open dialogue with lenders regarding the impact of international unrest on their ability to secure funds and be prepared to discuss the scope of the target company’s international operations with your lending partners. 

Material Adverse Change

Material Adverse Change (“MAC”) provisions are generally difficult to rely upon as a reason to terminate an M&A transaction. Courts tend to lean toward upholding negotiated transactions. MAC provisions are intended to address unforeseen events which have a material and adverse impact on the target company’s value. War is frequently cited in MAC provisions, and moving forward buyers and sellers should consider adding language as to how this particular international unrest will be treated. For example, the parties may want to consider whether the impacts of the Russian invasion of Ukraine should be specifically excluded or whether there should be a benchmark for target company losses that, if surpassed, would allow a party to rely on the MAC provision.

Governmental Considerations

Global politics and changing international sanctions in light of the international unrest will lead to a number of regulatory considerations when contemplating an M&A transaction. Similar to due diligence considerations, buyers and sellers should consider and prepare for longer transaction timelines in light of regulatory and governmental scrutiny. Certain M&A transactions may face elevated review especially in light of new sanctions regarding imports, exports, and financial institutions related to Russia.

What’s Next?

M&A practitioners should be aware of the changing landscape in light of the Russian invasion of Ukraine and the rising uncertainty overseas. We will continue to monitor the M&A landscape in light of recent events.