Introduction
The restructuring of companies or assets is achieved through various financial transactions, such as mergers, acquisitions, purchase of assets, or management acquisitions, commonly referred to as Mergers and Acquisitions (“M&A”). This article discusses the disputes that arise during M&A deals resolved before arbitral tribunals.
Disputes in Mergers & Acquisitions
M&A deals involve various stages, and disputes frequently occur post-signing. These disputes often relate to the interpretation or application of the Shareholder Agreement (“SHA”) and Share Purchase Agreement (“SPA”), with some noteworthy claims associated with the pre-signing period.
Pre-Signing Disputes
Disputes at an early stage of the deal before the signing may occur for two reasons. Firstly, infringement of non-disclosure provisions agreed by the parties in a Non-Disclosure Agreement (“NDA”) may trigger pre-signing disputes, and the target company may seek damages by arguing that the possible buyer who decided not to proceed with the deal disclosed their confidential information. Secondly, Letter of Intent (“LoI”) related disputes may occur. Although LoIs do not typically oblige parties to complete the M&A project, 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
M&A disputes in arbitration may stem from SPA related claims and shareholder claims. SPA related disputes usually stem from infringement of conditions precedent and Material Adverse Change (“MAC”) clauses.[3] Non-completion of legal or contractual conditions may trigger conditions precedent infringement allegations before an arbitral tribunal. MAC clauses allow the buyer to terminate the SPA and refuse the closing if a material adverse effect occurs and negatively impacts the target company. Shareholder disputes related to M&A deals often revolve around option rights such as put-option, call-option, right of first refusal, right of first offer, drag along and tag along rights, which might be given independently or in a SHA to the shareholders.
Post-Closing Disputes
Disputes that may arise after closing the deal include representations and warranties related disputes and price disputes. 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]. 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.
Should there be no clarity in governing accounting concepts, inconsistency in methods, procedures and time periods price related disputes may arise[5]. Price adjustment claims trigger complex and technical disputes requiring expert appointment in arbitral proceedings. Other ancillary restraints put forward in SPAs such as non-competition and non-solicitation could also lead to M&A disputes.
Why Arbitration is the Most Favorable Dispute Resolution Method in M&A Disputes?
Requirement in Expertise
M&A deals have their unique characteristics, and it is difficult to successfully resolve these disputes without knowing them. Local courts often lack sufficient knowledge and experience on the specific characteristics of such deals.
Priority to Parties’ Choices
Arbitration proceedings allow the parties to have a say in many issues. The parties may choose the applicable arbitration rules and 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.
Conclusion
In the realm of M&As wide range of agreements between the parties may give rise to distinct arbitration proceedings. Specifically, pre-signing M&A disputes may be triggered by the violation of non-disclosure agreement and letter of intent provisions. At the post-signing pre-closing stage, disputes relating to share purchase agreements and shareholders are common. Finally, post-closing disputes typically revolve around representations and warranties, as well as claims for price adjustments.
Arbitration is the most suitable dispute resolution method for M&A-related conflicts. This is mainly due to the fact that arbitration provides the parties with easier access to the expertise necessary for M&A projects. Moreover, arbitration affords the parties a greater degree of autonomy in several matters, including the choice of applicable arbitration rules, arbitrators, seat, and language of the proceedings. Additionally, arbitration is able to meet the parties’ expectations of confidentiality and expedited proceedings. In particular, the Emergency Arbitrator procedure allows for the imposition of injunctions on disputed shares or company records even prior to the initiation of proceedings.
[1] 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.
[2] 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.
[3] 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).
[4] 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.
[5] 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.