(5 min read)
Any practitioner active in Middle East and North African mergers and acquisitions needs to plan for continuing geopolitical and economic uncertainty. Legal documents cannot eliminate all commercial risk, but carefully drafted conditions precedent, objective material adverse change triggers, tailored pricing mechanisms and targeted indemnities can help allocate and mitigate risk appropriately. Buyers should test post-conflict financial performance against forecasts and consider completion accounts, earn-outs and alternative investment structures. Sellers can improve execution prospects by preparing robust information, explaining mitigating actions taken, considering vendor financing and presenting a clean transaction package. The central message is specificity: triggers, calculation methods and payment consequences should be clear before signing.
As a M&A practitioner who has been active in the Middle East for almost 20 years, my opinion is that the current environment arising from the Iran-conflict is the most challenging for investment activity in the MENA region since the Global Financial Crisis of 2008 and the COVID epidemic of 2020. This is primarily caused by the uncertainty of the impact of the ‘situation’ on GCC economies and beyond. It should be remembered, however, that, ‘nothing ever lasts forever’, and M&A activity continues to be relatively high - with our lawyers presently working on multiple transactions. Notwithstanding, the situation remains fluid as at the time of writing and it is currently impossible to accurately predict when things will return to ‘normal’ or if there will be a ‘new normal’ imposed as part of any long-term peace deal.
The first thing to make clear, wearing my corporate lawyer hat, is that legal documents can never (or incredibly rarely) completely protect a buyer from a ‘bad deal’ (i.e. overpaying for an asset), given the underlying principle of ‘caveat emptor’ (buyer beware) which transfers business performance risk from a seller to a buyer post completion. Legal documents can, however, enhance the positions of both buyers and sellers and manage the inherent risks/uncertainties currently being faced.
The below mechanisms are examples of those which are commonly included in legal documents to protect buyers, and which could be used in the current circumstances to get deals ‘over the line’. The below list is primarily written from the perspective of a buyer, but the position can be reversed for a seller which does not wish to assume additional contractual risk. Our experience is that, in the current market, sellers are willing to accept more buyer-friendly positions than has typically been the case in light of the existing inherent uncertainty.
Please note that each of the below mechanisms are worthy of their own article (or thesis) and therefore only summary details are included.
Mechanisms
Conditions precedent
A condition precedent is a condition which must be satisfied (or waived) for a M&A transaction to be consummated. Traditionally in order to protect their position, buyers have sought to include a MAC condition whereby the occurrence of a material adverse change to the target business would provide the buyer with an option to walk-away from the deal without further liability. Generally, such clauses are, by definition, broadly drafted and this can lead to disputes between the buyer and the seller as to what events qualify as a MAC.
It should be noted that courts have, historically, imposed a relatively high threshold (i.e. there needs to be a significant worsening in the position of the target business) before finding that a MAC has occurred and therefore a more advisable (and certain) approach is for any MAC clause to be drafted as objectively as possible with reference to the metrics most relevant to the underlying transaction in question. For example, if the target business relates to the shipping industry in the Arabian Gulf, the number of ships transiting through the Straits of Hormuz over a certain time period may be a relevant metric to test against. We have also seen the inclusion of specific Iran-focused MAC provisions relating to the situation worsening, such as triggers relating to troops on the ground, etc.
Other potential specific MAC triggers to include which may be relevant to the current situation include:
- Specific financial performance metrics (i.e. a walk-away right if the target business misses specified financial performance targets such as revenue, net profit etc.).
- Senior management team retention (i.e. a walk-away right if members of senior management resign or otherwise leave).
- Contract termination triggers (i.e. a walk-away right if key customer and/or supplier contracts are terminated/delayed/re-priced as a result of current circumstances).
In order to avoid moving from the frying-pan into the fire, it is also important to include processes for calculating the metrics in question. It would be a bad outcome to negotiate relevant conditions for weeks just to disagree on the calculation of the same at the point of enforcement.
Pricing
Historically, pricing in M&A transactions (i.e. the purchase price for a target business) has commonly been calculated by applying a multiple (e.g. 10x) to the financial performance of the target business, based upon the latest available audited accounts. Given that many businesses have their financial year end on 31 December, and it can take several months to finalise the audit process, by definition, this means that pricing is based upon ‘stale’ information. In more usual times, and working on the assumption that the target business continues to perform on a ‘business as usual’ basis, this is not a problem. However, and in light of the timeline explained above, it is extremely unlikely that the latest audited accounts of any target business will reflect changes to financial performance caused by the Iran-conflict (which began on 28 February 2026) and therefore buyers may not be willing to proceed on the usual basis of price calculation.
So, how to deal with what seems to be a fairly intractable issue? There is no perfect answer here but, again, there are mechanisms to mitigate risk. The best solution is for reliable accounts to be prepared showing financial performance post 28 February together with an updated forecast of future financial performance in that context. As an alternative or in addition, a price adjustment mechanism could be included whereby the purchase price for the business would be adjusted to reflect the actual financial performance of the business for a specified period post the beginning of the conflict: the most common methods of doing this being either 1) ‘completion accounts’ where the purchase price is ‘trued-up’ to reflect the actual financial position of the target business as at transaction completion and/or 2) an ‘earn-out’ whereby part of the purchase price is deferred and calculated based upon the future financial performance of the business. Again, the devil is in the detail as to how such financial performance/position is to be calculated and what actions are prohibited/permitted during the calculation period.
Indemnities/Payments
Although not as directly linked, it may also be possible to include specific indemnities or specified payments which apply on the occurrence (or non-occurrence) of certain events in the future. For example, if logistics costs remain high due to limited shipping activity in the Strait for more than a specified period, then compensation would be payable to the buyer by the seller. At the risk of boring the audience, I would again stress the need to be as specific as possible on the triggers, their calculation and the amounts payable as a result.
Warranties
Warranties are often the primary protection a buyer relies upon in a M&A transaction, given that they are contractual statements relating to the target business given at the time of signing (and usually transaction completion also). However, as warranties are by their nature, statements of fact given at the relevant time, they are always backward looking and do not provide protection as regards future events. In addition, warranties are subject to disclosure, meaning that known facts/circumstances are a defence against claims. The effect of this is that provided a seller has disclosed information on events/circumstances arising from the current geopolitical situation, they will be protected from liability. Therefore, buyers should not rely on claims under warranties alone and sellers should ensure that a full disclosure exercise is undertaken to explain the effect of the conflict on their business.
Although outside of the scope of this article, insurance advisers should also be consulted as to whether additional exclusions to W&I (Warranty & Indemnity) insurance will apply in light of the current conflict, if it is intended to put such a policy in place as a recourse mechanism for warranty breaches.
Additional thoughts
Looking at things from outside of the strictly legal perspective, buyers should also consider alternative options to mitigate investment activity risk in the current climate, such as:
- Waiting until there is a sufficient level of certainty on how the situation will resolve itself.
- Targeting MENA businesses which have not been adversely affected by the conflict. This could be because, for example, the revenues of the business in question are largely export driven or they operate in a counter-cyclical sector. Examples include sectors such as defence, AI/tech, data centres, food security and healthcare/pharma.
- Investing on debt-like terms with a ‘guaranteed’ return element and structural priority to equity holders, perhaps backed-up by collateral/third party credit-support.
- Entering into an ‘option’ to invest in the future dependent upon the achievement of certain milestones or the satisfaction of certain conditions by the target business. Again, specificity of milestones/conditions and method of calculation being of utmost importance to avoid future disagreements.
From a seller perspective, the following actions should also be considered to increase the chances of a successful transaction:
- Preparing as much information as possible in relation to the effect of the conflict on underlying performance (both historic and future).
- Being ready to explain any actions put in place or future plans to mitigate the effect of the conflict and quantify the benefit of these. For example, successful rent reduction negotiations to offset higher input costs.
- Being willing to accept more buyer-friendly terms than has been typical.
- Including an element of ‘vendor-financing’ in any sale transaction. This could take the form of elements of the purchase price being paid in the future (perhaps conditionally) or the seller maintaining a minority equity stake in the business to provide confidence to the buyer and reduce the buyer’s day 1 cash outflow. This could be particularly relevant in the event that bank-financing becomes more difficult or expensive for the buyer to put in place in order to finance the acquisition.
- Packaging the business so that any transaction is as clean and straightforward as possible. Examples of work that can be undertaken for this purpose include group restructurings (to streamline the transaction structure) and vendor due diligence (to identify and solve issues of potential concern to a buyer).
- Preparing drafts of legal documents which are ‘balanced’ (i.e. neither unduly in favour of the buyer or the seller) and which can be sent to any prospective buyer on short notice.
Next steps
Our M&A team advises buyers and sellers on transaction structuring, conditions precedent, material adverse change provisions, pricing mechanisms, earn-outs, indemnities, warranties, disclosure and deal readiness. Please contact us if you would like to discuss how current regional conditions may affect a proposed acquisition, disposal or investment.
