M&A lawyers are very eager and habitual of finely drafting and tuning each clause of the M&A agreements to achieve most optimal position for their parties.
However, not very infrequently, dispute resolution clauses are treated as boilerplate provisions in the agreement. There is much value found in the tailoring dispute resolutions clauses depending on the subject matter of each deal. The mix and match of various resolution mechanism for disputes arising out of different parts of the agreements can be an ideal situation. The options of such mechanisms range from creation of escrow accounts to constitution of arbitral tribunal consisting of experienced practitioners. The foremost task to dispute resolution is anticipation of disputes and hence, drafting efficient and effective dispute resolution clauses.
It is not possible to anticipate all likely disputes. The lawyers might not be able to include a dispute resolution addressing all disputes that may arise. In some cases, non-signatories to the agreement might also initiate an action against the merger or acquisition deal. Thus, it is important to consider varying form of dispute resolution mechanisms that can take course in pre or post-closing phase of M&A. The following dispute resolution mechanisms can be considered by the parties to either incorporate in the agreement or to resort to in case there is no dispute resolution clause in the agreement that addresses the given dispute:
1. Collaborative law: Parties to M&A disputes usually resort to traditional methods of dispute resolution, like litigation or arbitration. However, collaborative law has the potential to act as an effective dispute resolution process. The fundamentals underlying collaborative law process place reliance on parties negotiating in good faith to reach an amicable solution. This process is similar to mediation excluding the third party neutral. However, the parties have a choice to engage a trained facilitator that can help avoid an impasse. The process, in comparison to litigation, costs less financial and emotional resources. The parties can have greater control over the process and outcome and minimize any damage on the business relationship amongst them. Collaborative law process has proved to work well in family law matters, breakup of mergers and acquisitions can be seen as dispute in the economic family. However, as mentioned before the process has good faith of parties at its core. Thus, it is important to ensure that the dispute is such that can be resolved in good faith by parties. For instance, if the dispute concerns itself with breach of warranty or representations has an inevitable conclusion of awarding damages to one party, then collaborative law process can be useful. Lawyers and representatives of the parties can cordially arrive at a resolution, if all parties are willing to act in good faith. On the other hand, collaborative law process might be Anil choice in some kinds of disputes for instance if the dispute is in regards to a fraud claim then the character of a party is already questioned in such cases it will not be possible to ensure the standard of good faith from all parties. It might also happen that the party not acting in good faith takes advantage of other parties. Thus, it is important to pick and choose the clauses, disputes arising out of which can be dealt through collaborative law process.
2. Litigation: Litigation is the most traditional method of dispute resolution. It sure is most accessible and less confusing to initiate. However, it is a lengthy and expensive process. This method is resorted most in case of transactions involving public companies, where the shareholders are not satisfied with the actions of the management. The claims of oppression and mismanagement and prejudicial conduct find its way through litigation. The actions by regulatory authorities also end up in litigation sometimes. Litigation also allows third parties and other stakeholders to object to the arrangement. Failure or breakdown of pre-decided dispute resolution mechanisms might result in parties presenting themselves in front of the court. It is advisable that firm’s and arrangement’s public document mention the forum that will exercise jurisdiction over the disputes involving the firms.
3. Arbitration: Arbitration has rather become the rule than an exception in M&A transactions. Arbitration gives the parties to choose such arbitrators that are qualified enough and have experience in the industry of the transaction. This expertise helps in analyzing the fairness of the complicated valuations and industry tactics. This dispute resolution mechanism also provides an added sense of “non-publicity” and confidentiality which is not assured in litigation. Arbitration also provides the flexibility of legal proceedings being conducted in any language. It has a general advantage of being cheaper than litigation, more often than not. Since a neutral seat of arbitration can be chosen by the parties, it removes the apprehension in the minds of a foreign party, that the domestic court might not favor them. It is still a controversial position in India if non-signatories to the agreement can be bound to the arbitration clause in case of disputes arising from the agreement.
The following factors, inter alia, should be considered before deciding upon a dispute resolution mechanism:
a. the need for speed
b. the need for confidentiality
c. the need for precedents
d. the efficacy in counter claims
e. parties to the dispute (whether there are third parties involved that have key interest in the deal)
f. the need to decide upon a jurisdiction or select adjudicator
g. whether the nature of the transaction is international, if yes, which mechanism can help to enforce decisions internationally
h. kinds of relief that can be offered in different dispute resolution mechanisms
Now, moving on the anticipated disputes. The best way of resolution is extensive and comprehensive drafting of dispute resolution clauses. It helps in minimizing uncertainty and gives a procedural clarity to all parties involved. Listed below are some tips and suggestions while drafting the Dispute resolution clauses in M&A agreements:
· Forum and governing law Selection: It is of the utmost importance for the parties to specify the governing law or institutional rules in case the parties decide upon arbitration as the desired dispute resolution mechanism. The international nature of transactions and arbitration makes it essential for the agreement to expressly dictate how the arbitral tribunal shall be constituted, where it shall be seated and what rules shall apply on the process and award. In case the desired dispute resolution mechanism is Litigation, it is advisable to mention the specific forum that will have jurisdiction over the dispute, in case the disputes arising out of the agreement fall under various jurisdictions.
· Avoid single stop solutions: Usually, the agreements that contain dispute resolution clauses provide for the choice of applicable law or forum or an arbitration clause. Irrespective of the chosen form of resolution, be it litigation or arbitration, the dispute resolution clause addresses all the disputes that arise from the agreement. It is almost dubious to assume one-size-fits-all rule could apply in all disputes arising out of the agreement. Disputes arising out of different clause of the agreement will vary in character and will require different kinds of resolutions to maximize effectiveness. The shapes, sizes and the degree of impact of the dispute on the shareholder’s value should be factored in while determining the apt dispute resolution mechanisms for different kinds of clauses. It is advisable for the parties to identify disputes that are likely to arise from the agreement and then draft and assign the dispute resolutions provisions to each kind of identified dispute. The dispute resolution clauses should be simple to understand, clearly marked for kinds of disputes and give procedural clarity on what steps to follow in case of a dispute. We understand that it adds cost in the pre-closing phase, but its prospective benefits in the post-closing period will be higher than such increased cost. Nevertheless, it is essential that the parties weigh the efficiency and benefits of multiple dispute resolution clauses against a uniform and all-inclusive dispute resolution clause. Only if the benefits of the former outweigh the costs of the latter, should the parties opt for multiple dispute resolution clauses.
· Fast track arbitration clauses: Arbitration is usually the preferred mode for dispute resolutions, since it allows a reasonable sense of privacy and specialized resolution in moderate cost. However, with increasing complexity in commercial arbitration, the average time to settle international commercial disputes has gone up to 18-24 months. This kind of timeline for dispute resolution is not favorable, especially in pre-transaction phase. Such delays might result in the firms not realizing the projected synergies or worse yet, breaking the deal altogether. To avoid such scenarios “Fast-track Arbitration clauses” should be considered by the parties. These clauses should be tailor made to the agreement to include strict procedures and timelines. Tailor made clauses can render to the need of the parties and be drafted in a way that can provide for sufficiently fast resolution. International institutional rules that provide for expedited arbitration can also be referred for such clauses to avoid the limits of poor drafting, or unwelcome loopholes. For this purpose, Article 30 of the ICC Arbitration rules 2017, Article 5 of the SIAC Arbitration Rules, 2015 and International Expedited Procedures of the ICDR Arbitration Rules, 2014 can be perused. Extending the logic advanced in the previous point, it will not be wise to encompass all disputes under the fast-track procedure. When the transaction is underway it will be sensible to submit the disputes that stand in the way of making or breaking the deal to fast-track procedure. But if the dispute arises in the post-closing phase, it would be prudent to not rush through the resolution, so all the parties get enough time to prepare their case and be amenable to the prospects. The drafters of the fast-track dispute resolution clauses must also ensure that their want of an expedite procedure does not outweigh the fairness of the procedure. Each party must be allowed a reasonable chance to present their side and the adjudicator must be given reasonable time to arrive at a conclusion. If these issues are not given due consideration, it might endanger the enforceability of the award. If the clauses are drafted well enough, they can assist the parties in handling time-sensitive issues effectively.
All being said, disputes are inevitable. Nothing works better at minimizing them than a thorough due diligence of all aspects of the target company and the transaction. We hope we don’t see you in court!
