M&A Arbitration
Introduction
Mergers and Acquisitions (“M&A”) are restructuring of companies or assets through various types of financial transactions, such as mergers, acquisitions, purchase of assets, or management acquisitions.
This Newsletter covers M&A disputes being solved before arbitral tribunals.
M&A Related Disputes
M&A deals have various stages where the parties negotiate different terms and sign agreements. Majority of M&A related disputes occur post-signing. They often relate to interpretation or application of Shareholder Agreement (“SHA”) and Share Purchase Agreement (“SPA”). There are also noteworthy claims associated with the pre-signing period.
Pre-Signing Disputes
These disputes occur at an early stage of the deal, before the signing.
Non-Disclosure Agreement (“NDA”) Related Disputes
Infringement of non-disclosure provisions agreed by the Parties in an NDA may trigger pre-signing disputes. In such cases, target company seeks damages by arguing that that possible buyer who decided not to proceed with the deal disclosed their confidential information, benefited from reaching this confidential information with bad faith and infringed the terms of NDA.
Letter of Intent (“LoI”) Related Disputes
LoIs do not typically oblige parties to complete the M&A project. However, if a side of the transaction made the other side believe in the likelihood of a successful transaction in bad faith, this party might be obliged to bear the cost causing the other side such a burden. [1]
Given that the binding nature of LoI provisions vary in each jurisdiction, results of LoI related claims may differ. In jurisdictions accepting the binding nature, infringement of LoI provisions (such as exclusivity and non-disclosure) may have a result of contract infringement. In other jurisdictions, party raising infringement claim may rely on Culpa in Contrahendo and good faith principle.[2]
Post-Signing Pre-Closing Disputes
Some M&A disputes in arbitration stem from SPA related claims, while others relate to shareholder claims.
SPA Related Disputes
Majority of SPA related disputes are stemming from infringement of conditions precedent and Material Adverse Change (“MAC”) clauses.
Non-completion of legal or contractual conditions such as (i) obtaining approvals from official bodies, (ii) registry of necessary matters to the Trade Registry, (iii) conclusion of SHA or escrow agreement and etc. may trigger conditions precedent infringement allegations before an arbitral tribunal.
MAC clauses let buyer to terminate the SPA and refuse the closing if a material adverse effect occurs and negatively impacts the target company, while carve-outs exclude some adverse changes from the scope of MAC.[3] Typically, serious adverse changes with long-term impact on a deal are considered within the scope of MAC.
Shareholder Disputes
Shareholder disputes related with M&A deals often evolve around option rights such as put-option, call-option, right of first refusal, right of first offer, drag along and tag along rights.
These rights might be given independently or in an SHA to the shareholders.
Post-Closing Disputes
Representations and Warranties Related Disputes
After closing, if the representations and warranties turn out to be inaccurate before the expiry of their term, the buyer may ask the seller to compensate for the damage suffered for this reason or to reduce the sale price. Depending on the applicable law, the buyer may also be entitled to terminate the agreement.
The SPAs may include arrangements to limit the seller’s liability to the buyer such as de minimis clauses, basket clauses, liability caps and liability limitation periods.[4]
Although mostly seen at post-closing level, disputes stemming from representations and warranties may also rise pre-closing.
Price Disputes
At the beginning of M&A transactions, parties agree on a provisional price and a price adjustment mechanism to determine the final purchase price at closing, to mitigate negative impact of changes in target company financials until closing.[5]
Should there be no clarity in governing accounting concepts, inconsistency in methods, procedures and time periods price related disputes may arise.
Price adjustment claims trigger complex and technical disputes requiring expert appointment in arbitral proceedings.
Other
There are some ancillary restraints put forward in SPAs such as non-competition (obliging Seller not to compete with the Buyer for a certain period), and non-solicitation (obliging seller not to offer jobs to the buyer’s employees or not to employ them for a certain period). Infringement of these could also lead to other M&A disputes.
Why Arbitration is the Most Favorable Dispute Resolution Method in M&A Disputes?
Expertise Requirement
As explained above, M&A deals have their unique characteristics and it is difficult to successfully resolve these disputes without knowing them. Awareness of M&A deals, their unique terminology and dynamics is important both to understand the dispute and to solve it. Local courts, often lack sufficient knowledge and experience on the specific characteristics of such deals.
The Priority of the Parties’ Choices
Compared to proceedings before national courts, arbitration proceedings allow the parties’ choices on many issues.
Choice of the Applicable Arbitration Rules
The parties may freely decide on the procedural rules applicable to the arbitration proceedings. These rules may be institutional arbitration rules (ICC, LCIA, SCC, ISTAC, ITOTAM, TOBB, etc.) or ad hoc rules (UNCITRAL Arbitration Rules).
Appointment of M&A Experienced Arbitrators
The chosen arbitration rules allow the parties to select a sole arbitrator or arbitral tribunal with expertise in M&A. Since such disputes are usually advocated by party counsels specialized in M&A, there is equality in terms of knowledge and experience between experienced sole arbitrators or arbitral tribunals and party counsels. This ensures time and costs efficiency in the proceedings.
Choice of Seat of Arbitration
The parties are also free to choose the seat of arbitration, which is of great importance in many aspects. It is recommended to choose seat of arbitration in an arbitration-friendly jurisdiction. This stems from the fact that, the seat of arbitration has an impact on the applicable procedural law, whether the arbitral award is a foreign arbitral award, the remedies against the arbitral award, the support of local courts to the arbitration process, and etc.
Choice of Language of Arbitration
Unlike the proceedings before national courts, the parties may determine the language to be used in the arbitration proceedings, to the extent permitted by the applicable law and the chosen arbitration rules. The choice of language has a direct impact on the costs of arbitration in terms of translation costs, recording of the hearing, and etc.
Confidentiality
The confidentiality of both proceedings and hearings is among the most important features of arbitration. Confidentiality may find its source in the chosen arbitration rules and the arbitration agreement. Lex arbitri may also prescribe confidentiality provisions. Thus, unlike proceedings in national courts, the parties can enjoy stronger protection for their trade secrets such as the sale price, payment method and transaction structure.
Fast Trial
It is a fact that arbitral proceedings are much faster than proceedings before national courts. Since M&A disputes often need to be resolved during the course of the shareholding, expedited proceedings are important. It is possible to speed up the proceedings through various case management methods. For example, efficiency can be achieved by dividing the proceedings into two stages (“bifurcation”) as liability and damages.
Emergency Arbitrator
Almost every modern arbitration rule includes Emergency Arbitrator Rules. Depending on the arbitration rules chosen, the parties shall either refer specifically to the Emergency Arbitrator Rules or not have waived from the application of so in the proceedings.
The Emergency Arbitrator Rules allow the parties to seek interim measures from the Emergency Arbitrator on issues related to the dispute before the commencement of arbitration proceedings. This is crucial in M&A disputes. In this way, it is possible to secure the transfer of assets or shares as well as the books and records of the company before the commencement of the dispute.
Conclusion
M&A transactions contain various arrangements between the Parties. Each one provides a different stage for M&A arbitrations.
Pre-signing M&A disputes are triggered by infringement of NDA and LoI provisions. At Post-Signing Pre-Closing level, SPA and shareholder disputes are commonly seen. Post-Closing disputes are associated with representations and warranties as well as price adjustment claims.
Arbitration is the most convenient dispute resolution method for M&A disputes, as it is easier for the parties to access to the expertise required for M&A projects in arbitration. Arbitration prioritizes the will of the parties in many matters such as the choice of applicable arbitration rules, arbitrators, seat and language of the proceedings. Arbitration also fulfills the parties’ expectations of confidentiality and expedited proceedings. The Emergency Arbitrator procedure enables injunctions to be imposed on disputed shares or company records even before the commencement of the proceedings.
- Frey Harald / Müller Dominique: “Chapter 8: Arbitrating M&A Disputes”, Manuel Arroyo (ed), Arbitration in Switzerland: The Practitioner’s Guide (Second Edition), 2018, p. 1129.
- Peter, Henry: “M&A Transactions: Process and Possible Disputes”, Arbitration of merger and acquisition disputes: ASA Swiss Arbitration Association conference of January 21, 2005 in Basel, 2005, p. 10.
- Moses, Jonathan: “Drafting M&A Contracts to Minimise the Risk of Disputes” (https://globalarbitrationreview.com/guide/the-guide-ma-arbitration/4th-edition/article/drafting-ma-contracts-minimise-the-risk-of-disputes, Accessed: 20.02.2023).
- Frey Harald / Müller Dominique: “Chapter 8: Arbitrating M&A Disputes”, Manuel Arroyo (ed), Arbitration in Switzerland: The Practitioner’s Guide (Second Edition), 2018, p. 1125.
- Wolfgang, Peter: “Arbitration Of Mergers And Acquisitions: Purchase Price Adjustment Arbitrations”, Arbitration of merger and acquisition disputes: ASA Swiss Arbitration Association conference of January 21, 2005 in Basel, 2005, p. 59.
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