In recent years, arbitration has become the preferred method of resolving M&A disputes. While the global market shows steady signs of recovery, arbitration is considered an effective means to resolve disputes involving M&A transactions in a wide range of sectors, such as the financial, healthcare, education, energy and technology sectors.[1]
Disputes in M&A Transactions
M&A disputes may arise out of the main agreement itself or ancillary agreements (e.g., letters of intent, memorandums of understanding, confidentiality agreements, exclusivity agreements, etc.) and generally fall into two categories: pre-closing (or, sometimes, pre-signing), and post-closing.[2]
The signing of the transaction documentation is an important milestone, but it is not the end of the deal. Pre-closing (and pre-signing) disputes may arise when one of the parties (often the buyer) determines that it cannot proceed with the transaction. Parties wishing to withdraw may do so for a variety of reasons, such as:[3]
- a pre-condition has not been met;
- the financing option for acquisition is no longer available;
- the financing option is less attractive;
- the party concludes that prospects will not be met.
Additionally, parties may breach pre-closing obligations or enter into agreements with third parties, breaching exclusivity undertakings. In such cases, the other party can litigate (or seek an injunction) to force the recalcitrant party to complete the transaction. As time is of the essence in pre-closing transactions, it is standard for parties to agree on injunctive relief as remedy for breach in a reasonably short time.[4] In this respect, fast-track arbitration or interim measures are commonly envisaged by sophisticated parties in M&A transactions.
Generally, disputes in the post-closing stage concern representations and warranties. In theory, “representations” are statements for past and existing facts, whereas “warranties” cover future events.[5] Disputes regarding representations and warranties frequently arise due to the vague or ambiguous language of the clauses in question.[6] These types of disputes often involve contractual interpretations, which may be left to arbitral tribunals, rather to accounting experts.
Adjustments to the purchase price may also be disputed after the transaction is closed, for which quantum experts may be needed depending on the complexity of the financial data at stake.[7]
Finally, post-closing disputes typically involve monetary claims, in contrast with pre-closing litigation – in which specific performances are usually sought – although damages may be combined with claims for injunctive relief.[8]
Advantages of Arbitration in M&A Disputes
Arbitration is widely perceived as the preferred method of international disputes. In the context of M&A disputes, the major advantages that arbitration provides, as compared to litigation and other mechanisms, are as follows:[9]
- Flexibility of the proceedings: parties are allowed to organize their proceedings to suit their needs. This is particularly relevant if the parties wish to combine different methods of dispute resolution in addition to arbitration (e.g., fast-track or expedited proceedings for pre-closing disputes; or expert determination for disputes related to post-closing price adjustments and earn-outs). Shorter timeframes may be envisaged, as well as the language and the applicable law to the proceedings.
- Selection of arbitrators with the required expertise: the parties may choose their arbitrators and ensure that they have the necessary knowledge, for instance, of M&A transactions, valuation, accounting and corporate law.
- Neutral forum for transnational disputes: in the context of cross-border disputes, arbitral tribunals are perceived as more neutral than domestic courts.
- Confidentiality: confidentiality is one of the most attractive characteristics of arbitration. This is highly important if parties are entering into disputes involving the disclosure of due diligence reports, business plans, tax and financial valuations and other sensitive issues.
- Enforcement of arbitral awards: it is relatively easy to enforce arbitral awards across national borders under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), which is in force in 168 States. This is not the case for most court judgments.
As mentioned above, time is vitally important in some M&A disputes. In this respect, fast-track arbitrations or expedited procedures are viable options to save time. These mechanisms offer shorter time limits for each procedural step. Many arbitral institutions provide for fast-track or expedited arbitrations, although reserved to small values. Alternatively, parties may adopt an accelerated proceeding by simplifying the procedure and shortening the deadlines for submissions in their arbitration agreement itself.
The Role of Experts in M&A Disputes and Coordination with Arbitration
In addition to arbitration (or litigation), parties may resort to an expert in some cases. The mandate of each expert will depend on the wording of the parties’ agreement, but experts generally play a crucial role in disputes involving price adjustments and earn-outs, in which complex valuation and accounting issues are at stake.[10]
Expert determination may be combined with arbitration. For instance, the parties may agree that the expert will determine disputes concerning a price adjustment, and carve out a broader jurisdiction for arbitrators (including the enforcement of the price that was determined by the expert). Alternatively, parties may opt for multi-tiered provisions, referring one matter to expert determination, but then subject the determination to the arbitral tribunal’s review.
Unlike arbitral tribunals, experts do not have Kompetenz-Kompetenz (i.e., the power to determine their own jurisdiction). As a result, experts cannot issue decisions on challenges to their authority. In such cases, one of the parties will typically start court or arbitral proceedings in order to determine the scope of the expert’s power, which is often a matter of contractual interpretation.[11]
For instance, in the English case Barclays Bank plc v. Nylon Capital LLP, the Court of Appeal had to determine the jurisdiction of an expert under a partnership agreement. The court ultimately understood that the expert did not have the authority to determine the profit allocation under the agreement. In particular, Lord Justice Thomas noted that:[12]
[E]xpert determination is a very different alternative form of dispute resolution to which neither the Arbitration Act 1996 nor any other statutory codes apply. It is clear, however, that in any case where a dispute arises as to the jurisdiction of an expert, a court is the final decision maker as to whether the expert has jurisdiction, even if a clause purports to confer that jurisdiction on the expert in a manner that is final and binding.
Importantly, although experts issue binding and final determinations, only arbitral tribunals issue arbitral awards, which may be enforced worldwide through the New York Convention. In the same vein, expert determinations are not subject to setting aside proceedings, like arbitral awards (although they may be challenged before national courts or arbitral tribunals).
Drafting Arbitration Clauses in M&A Agreements
Given the complexity of M&A transactions, parties usually envisage the following provisions in their arbitration clauses:[13]
- Pre-arbitration mechanisms: in addition to expert determination, parties may opt for mediation or conciliation prior to arbitration. In this case, the dispute resolution clause should make clear whether the pre-arbitration mechanism is mandatory and specify the time limit for it to take place.
- Fast-track arbitration: as explained above, parties may opt for expedited mechanisms in their arbitration clauses for potential pre-closing disputes.
- Consolidation mechanisms: in M&A transactions involving several contracts, parties may refer to arbitration rules allowing the consolidation of connected arbitrations. In such cases, the arbitration clauses in different contracts should be identical or, at least, compatible. Otherwise, multiple arbitrations may need to be initiated before different arbitral tribunals.
- Arbitral institutions: parties are free to opt for ad hoc or institutional arbitrations. However, proceedings administered by renowned institutions have proven to work well in disputes involving complex M&A transactions. The appointment of arbitrators is also typically more straightforward in institutional arbitrations.
- Emergency arbitration: parties may envisage emergency arbitration to deal with provisional measures that cannot wait until the final award due to their urgency. Both fast-track and emergency arbitrations are carried out within short periods, although the outcome of these proceedings are different. Several institutions have included emergency arbitration mechanisms in their arbitration rules on an opt-out basis, allowing emergency arbitrators to be appointed, unless the parties agree otherwise.
[1] H. Frey and D. Müller, Arbitrating M&A Disputes in M. Arroyo (ed.), Arbitration in Switzerland: The Practitioner’s Guide (2018), p. 1116.
[2] J. M. Moses, Drafting M&A Contracts to Minimise the Risk of Disputes in A. Kläsener (ed.), The Guide to M&A Arbitration (Global Arbitration Review 2020), p. 88.
[3] H. Frey and D. Müller, Arbitrating M&A Disputes in M. Arroyo (ed.), Arbitration in Switzerland: The Practitioner’s Guide (2018) p. 1116.
[4] J. M. Moses, Drafting M&A Contracts to Minimise the Risk of Disputes in A. Kläsener (ed.), The Guide to M&A Arbitration (2020), p. 88.
[5] W. Peter and D. Greineder, Conflicts between Expert Determination Clauses and Arbitration Clauses in A. Kläsener (ed.), The Guide to M&A Arbitration (2020), p. 36.
[6] E. Fischer and M. Walbert, The Arbitration Agreement and Arbitrability, Efficient and Expeditious Dispute Resolution in M&A Transactions in C. Klausegger, P. Klein et al. (eds.), The Austrian Yearbook on International Arbitration 2017 (2017), p. 40.
[7] A. Gritsch, S. Riegler and A. Zollner, The Taking of Evidence in A. Kläsener (ed.), The Guide to M&A Arbitration (2020), p. 55.
[8] J. M. Moses, Drafting M&A Contracts to Minimise the Risk of Disputes in A. Kläsener (ed.), The Guide to M&A Arbitration (2020), p. 88.
[9] H. Frey and D. Müller, Arbitrating M&A Disputes in M. Arroyo (ed.), Arbitration in Switzerland: The Practitioner’s Guide (Kluwer Law International 2018), pp. 1134-1136; A. Scagliarini, Italy in A. Kläsener (ed.), The Guide to M&A Arbitration (2020), p. 132.
[10] A. Grantham, K. Schumacher and G. Huitson-Little, The Role of the Quantum Expert in M&A Disputes in A. Kläsener (ed.), The Guide to M&A Arbitration (2020), p. 72.
[11] W. Peter and D. Greineder, Conflicts between Expert Determination Clauses and Arbitration Clauses in A. Kläsener (ed.), The Guide to M&A Arbitration (2020), p. 36.
[12] Barclays Bank Plc v. Nylon Capital LLP [2012] Bus LR 542, para. 23 (emphasis added).
[13] A. Schlaepfer and A. Mazuranic, Drafting Arbitration Clauses in M&A Agreements, in A. Kläsener (ed.), The Guide to M&A Arbitration (2020), pp. 10-14; see also E. Fischer and M. Walbert, The Arbitration Agreement and Arbitrability, Efficient and Expeditious Dispute Resolution in M&A Transactions in C. Klausegger, P. Klein et al. (eds.), The Austrian Yearbook on International Arbitration 2017 (2017), pp. 27-28.
