A. Initial situation
Since 24 February 2022, Russia has been attacking targets throughout the territory of Ukraine without a formal declaration of war. After the Russian armed forces failed at the beginning of the war to permanently occupy the capital Kyiv and parts of Ukraine further west, the fighting is currently concentrated in eastern Ukraine. It is unclear what Russia’s current war aims are based on the course of hostilities to date, as these have been associated with significant losses for the Russian armed forces and the original goals have not been achieved. In view of the course of negotiations to end the war so far, it is likely that hostilities will continue for some time.
In response to the war of aggression, which Russia continues to describe as a “special military operation”, the Western community of states has initiated massive economic sanctions in addition to arms deliveries, and sanctions up to and including a far-reaching embargo on raw materials are in the offing.
The sanctions and public pressure in the West have led to a massive exodus of Western companies from Russia, which is not limited to sanctioned sectors. Production in Ukraine is currently substantially affected by the hostilities and a further collapse of production is to be feared. In addition, there has been a massive exodus from Ukraine, which also has an impact on local production capacities. At the same time, the war is causing restrictions on air and sea travel. As a result, global supply chains, which were already strained by the effects of the Covid-19 pandemic, have once again come under severe pressure.
The war in Ukraine is hitting a market environment that is increasingly characterised by inflationary tendencies and an associated turnaround in interest rates. At the same time, the market for corporate transactions is relatively stable and remains characterised by investment pressure on the buyer side and the resulting high company valuations and seller-friendly contractual arrangements. In this market environment, a far-reaching shift of liability risks from the warranty and indemnity regime of the transaction documentation from the seller to W&I insurers has been taking place for some time.
As a result, the extent to which the effects of the Ukraine war can be covered using W&I insurance solutions is relevant if these risks are assigned to the seller within the warranty catalogue and corresponding warranties are to be the subject of an insurance solution.
B. Impact of the Ukraine war on M&A transactions in general
The warranty regime of the transaction documentation leads to an allocation of risks to the seller to the extent of the seller’s representations unless exclusions of liability under the respective warranty regime apply. The representations are made as of a specific date – usually the date of signing and the date of execution of the transaction documentation – and are subject to certain exclusions of liability.
The impact of the Ukraine war on individual M&A transactions is therefore first influenced by the progress of the transaction, i.e. whether signing and/or execution had already taken place at the start of the hostilities. In addition, the nature of the effects is of paramount importance for assessing whether the risks are generally covered by a standard market warranty regime and whether the seller can exempt itself from liability in this respect under the contractual warranty regime.
C. Transaction progress as a starting point for the analysis of warranty-related risks and response options
Insofar as transactions were signed and completed before the start of the Ukraine war, effects under the warranty promises are rather unlikely, as the time reference points of the assurances are before the start of the hostilities.
If transactions had already been signed at the start of the hostilities but not yet completed, the situation is more complex. If, on the other hand, the parties want to stick to the transaction, the question for the seller is whether he is liable for the effects of the Ukraine war under the warranties relating to the date of completion and how he can exclude such liability as far as possible within the fixed contractual framework. Frequently, however, buyers will probably not want to stick to the transaction due to the changed environment and will try to get out of the transaction. In this respect, the circumstances of the individual case will be decisive, but it does not seem impossible – especially if a MAC / MAE mechanism is agreed as part of the transaction documentation – that the buyer will be able to terminate (or at least adjust) the transaction documentation.
The impact of the Ukraine war is fully felt if the transaction has neither been signed nor completed. In such a case, however, the parties have the option of addressing the relevant effects through the warranty regime and the due diligence process.
D. Differentiation into direct and indirect effects of the war in Ukraine
The manifold effects of the Ukraine war on the legal and factual circumstances of target entities are not always likely to be fully grasped and are, by their nature, rather dynamic. Nevertheless, a general distinction can be made between direct and indirect effects, whereby the boundaries are often likely to be blurred. However, the identification of specific effects of the Ukraine crisis within the warranty regime is likely to be easier the more directly the connection to the acts of war and the reactions to them is.
This distinction is relevant above all because a sufficiently clear description of the concrete effects and risks forms the basis for proper treatment within the framework of transaction documentation and the transaction process.
Diffuse general risks, for example, can by their nature only be covered to a limited extent by contractual provisions at the level of the warranty regime and the disclosure and due diligence process, while clearly defined risks are in principle amenable to regulation by the parties within the warranty regime (and potentially to an exemption for known risks). In addition, this concerns in particular the disclosure of warranty-relevant facts with a correlating disclaimer, which presupposes that the relevant circumstances of a disclosure are accessible in accordance with the disclosure standard of the transaction documentation, i.e. in any case not merely identifiable in a completely abstract manner.