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M&A Arbitration: should we employ tactics to avoid potential disputes
Drafting arbitration agreement clause in specific kinds of transactions requires tactics and skill sets to avoid potential disputes. M&A transaction is no exception, which involves the parties' conduct prior to the transaction (sales synopsis, bidding process, etc.), their conduct during the contractual negotiations, during the due diligence process (e.g. data room index or examination of said index) or during the satisfaction of the closing conditions.
Reasons for a dispute
Like other business transactions, reasons for M&A potential disputes vary with specific deal structure. First, during an M&A transaction, if a party considers the equivalence of performance and counter-performance defective. The grounds for this result from erroneous assumptions or expectations in relation to the subject of the transaction caused by either the buyer's own incorrect assumptions or inappropriate information (knowingly or unknowingly) provided by the seller. Second, one party is simply disappointed by the negotiation result achieved or its business priorities may have changed during M&A transactions.
Major types of disputes during an M&A transaction
Adjustment of the equivalence of performance and counter-performance
These disputes primarily sought shall include:
- guarantees and warranties;
- purchase price adjustments; or
- variable purchase price components.
Unilateral termination of the negotiations, violation of confidentiality agreement
These disputes are rarely the subject of arbitration proceedings, since an arbitration agreement is usually not in effect at the stage of negotiation.
Realisation of conditions
In case one party attempts to walk away from the contract prior to closing or refuses to close the transaction, the interpretation of the closing conditions will be of essence. It has been frustrating to the parties involved to overlook realisation of such a condition due to lack of evidence on the side of the seller.
Event of deficits
After closing, the buyer will be granted unrestricted access to the target company, its documents and employees for the very first time. The buys would use the access to gain knowledge of the company and help the buyer in reducing his information deficit. It is important to ascertain the state of affairs of the company at closing in order to determine any deficit and establish when the deficit arose, so as to be able to allocate and prove the responsibility for any such deficit at a later date (“post-closing due diligence”). In the meantime, the seller loses his access to essential sources of information upon closing. As a protective measure, the seller should therefore equip himself with essential documentation (while respecting any confidentiality obligations), for example in the context of “seller's due diligence” (which may also be referred to as “pre-closing due diligence”).
Dishonest or dishonourable conduct
Disrupted equivalence is done by one party. In such a case, balance sheets or other relevant data such as forecasts, inventories, contracts or similar are often manipulated. In avoiding the discovery of such manipulations, the other party may turn to the target company's management for assistance. In addition, precautions against the discovery and tracing of the manipulation and deceit should be undertaken, for instance the destruction of incriminating documents, the restriction of the due diligence process prior to the formation of the contract and deliberate misrepresentations to the buyer.
Employing skillfully-tailored tactics to avoid potential disputes in M&A transactions is strongly advised. Note that the following elements may affect the employed tactics:
- national or international context;
- language of the agreement, the parties involved and potential witnesses;
- scope of the buyer's protective mechanisms;
- assessment and adjustment of the purchase price;
- target company's industry sector and, where relevant, industry-specific manipulation possibilities;
- number of the contractual parties and other parties involved, as well as other potential parties to the dispute; or
- duration of the stages which are scheduled by the parties in the transaction.