M&A Arbitration

Reasons for a dispute in M&A transactions & Drafting arbitration clause

Reasons for a dispute in M&A transactions

Like other business transactions, reasons for M&A potential disputes vary with specific deal structure. First, during an M&A transaction, a party may consider unequivalence of performance and counter-performance defective as a result of the buyer’s own incorrect assumptions or inappropriate information (knowingly or unknowingly) provided by the seller. Second, one party is not satisfied with the negotiation result or its business priorities may change during M&A transactions.

Here are major types of disputes during an M&A transaction.

1. 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.

2. 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.

3. 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 important. 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.

4. 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 buyers would use the access to gain knowledge of the company and help the buyer in reducing his information deficit. In the meantime, the seller loses his access to essential sources of information upon closing.

5. Dishonest or dishonourable conduct

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.

Drafting arbitration clause

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, their conduct during the contractual negotiations, during the due diligence process or the satisfaction of the closing conditions.

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 ora 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.

Bui Tien Long (Rudy)