Frequently M&A disputes are resolved by arbitration. This article examines various issues to consider when choosing to arbitrate a dispute that arises out of a M&A transaction and gives some invaluable tips in the context of agreeing the Sale and Purchase Agreement ("SPA") to help ensure that you are best placed should a dispute arise, whether as a buyer or a seller.
Parties frequently involved in M&A transactions know that, even with the best intentions on both sides of a transaction, disputes sometimes arise following the sale of a business. Accounting errors can be made, historic issues in the business may be uncovered as a result of new processes being adopted by the buyer or the parties may disagree regarding how a provision of the SPA should be interpreted.
Arbitration is a popular form of resolving such disputes arising out of M&A transactions. The increasingly international nature of M&A means that the relative ease (compared to court judgments) with which arbitration awards can be enforced around the world is a real advantage. Related to this, parties value the neutrality of the process, namely avoiding either party's domestic courts, and the ability of the parties to select their own umpires, including those with industry expertise. The confidentiality of the process, in most jurisdictions and under most arbitral rules, is another attraction of arbitration, particularly when dealing with sensitive commercial transactions.
Once arbitration has been selected as the method to resolve any disputes, and the relevant seat (venue) and rules of the arbitration agreed, it is not uncommon for a standard arbitration clause to be inserted into the relevant draft SPA without further consideration. However, the choice of arbitration in the context of M&A disputes has its own particular pitfalls and advantages that can be mitigated and exploited, respectively, by sophisticated parties in order to reduce costs, save time, avoid expensive satellite disputes and to enhance their position on the merits of any dispute. This starts with the drafting of the arbitration clause and related provisions in the SPA (such as notice requirements and limitations of liability clauses) and continues during the arbitration process.
Drafting the arbitration clause
Even where parties decide to arbitrate using a recognised set of rules (e.g. LCIA, ICC, UNCITRAL), such rules are very broad in nature and designed to cover all manner of disputes from real estate matters to franchise agreements. This broad framework is one of arbitration's advantages (at least in theory) allowing the parties (or the tribunal, if necessary) the freedom and flexibility to agree procedural matters such as the timetable, whether there is to be oral evidence and whether there should be disclosure (discovery) and, if so, the scope of such disclosure.
Following the sale of a business, the buyer is likely to have most of the relevant information relating to the operations of that business, creating an asymmetry of information in favour of the buyer. In those circumstances, the buyer may want an arbitration clause to contain an express exclusion of any form of disclosure, thus saving time and costs where it is less likely to need to rely on documents held by the seller and reinforcing their advantageous position vis-à-vis the seller. The seller on the other hand, having handed over substantial amounts of information relating to the operation of the business, is likely to want broad disclosure so as not to be disadvantaged should a dispute arise. For sellers from continental Europe, who may not be used to or embrace disclosure, this might require them to reassess their default position on this issue.
There may be certain disputes, such as completion account disputes, that the parties may not want to be arbitrated (at least in the first instance). In those circumstances, those specific matters should be identified and carved out of the arbitration agreement (either entirely or as a first stage) and an alternative method of resolving those disputes should be specified.
Where there are multiple parties (e.g. multiple sellers or guarantors), then the arbitration clause needs to be amended to reflect this. This might include how groups of claimants or respondents should choose any party appointed arbitrator and what should happen if they cannot agree. It might also require the addition of joinder or consolidation language, respectively allowing additional parties to be joined to an arbitration or allowing multiple arbitral proceedings to be consolidated into a single set of proceedings, thus saving time and costs.
The seat (venue) of any arbitration is always an important choice. An arbitration should take place in a jurisdiction where the national courts support arbitration (including granting interim relief in support of the arbitration), but do not interfere in the arbitration or encroach on the arbitral tribunal's jurisdiction. However, in the context of an M&A transaction, the choice of seat and availability of court support may take on even greater importance. For example, an interim injunction may be required to prevent the seller from disposing of the target to a third party between signing and completion or to prevent the poaching of staff or customers after the sale.
Other provisions of the SPA
The choice of arbitration may make it desirable to vary other provisions of the SPA to reflect the practicalities of arbitrating the dispute.
Almost invariably certain claims, such as for breaches of warranties, will be subject to contractual limitation periods. It is common for the SPA to require that potential claims be notified within a certain period, whether by reference to when the buyer becomes aware of the issue or within a set time following completion. It is also common to then have a further time limit, whether by reference to the date of notification of a claim or by reference to the expiry of the notification period, within which a claim needs to be pursued.
It is preferable from a buyer's perspective for any time in which to bring a claim to run from the expiry of the contractual limitation period for notifying claim rather than the date of actual notification. Firstly, this has the advantage of allowing all claims to be brought together and avoids the risk of multiple proceedings. If a claim has to be commenced by reference to when it was first notified, it may lead to situations, especially when claims have to be notified as soon as possible, where claims have to be brought long before the expiry of the contractual limitation period. If other claims then subsequently arise after proceedings have already been brought, then this might lead to separate new proceedings having to be brought. This gives rise to difficulties, especially in an arbitration context, where the consolidation of proceedings is much more difficult than court proceedings. This can lead to significant additional expense and, if different tribunals are constituted, inconsistent awards. Secondly, it avoids the risk of a notice of claim being given inadvertently, thereby unwittingly triggering the time limit for bringing a claim. Thirdly, it allows claims to accumulate thereby reducing the risk of being required to bring a particular claim before there are sufficient claims to meet any minimum threshold value set out in the SPA necessary to pursue a claim.
It is also necessary to ensure that the language requiring any claim to be brought by a certain date properly reflects the fact that any claim will be brought through arbitration. References to claims being required to be "issued" by a certain date, is apt to describe court litigation and can lead to confusion and satellite litigation as to when an arbitration claim is "issued". Likewise, references to proceedings being notified within a certain time carries risks if it is the arbitration institution that is responsible for notifying a respondent of an arbitration being commenced.
The formalities of any notification requirements also require consideration. There may be a potential conflict between the notification requirement under the SPA and the notification requirements under the relevant arbitration rules and/or the law of the seat of the arbitration.
In summary, those who recognise the distinctive nature of arbitration in a M&A context and are able to adapt the terms of their SPA and arbitration agreement accordingly, will put themselves in much better position should a dispute subsequently arise.