M&A Vocabulary – Understanding the Experts: “Arbitration or Arbitration Clauses in M&A Transactions”

Dispute Resolution in M&A Transactions

Even a well-prepared and documented M&A transaction can reach a point where the parties have different views regarding the process or content of the transaction, and an amicable settlement regarding the points in dispute can no longer be reached. Here, it is important that the transaction and the corresponding contracts are provided with a suitable dispute resolution or dispute settlement mechanism.

The points of contention that can arise during an M&A transaction are diverse:

• Purchase price adjustment,
• Non-fulfillment of so-called “closing conditions,” i.e., the requirements for completing the transaction, or
• Claims arising from any warranty rights.

What is an Arbitration Clause?

In principle and in most jurisdictions, the parties to an M&A transaction are free to choose a dispute resolution mechanism—or not. Failing to make a choice is not recommended—especially in cross-border transactions—as in this case, general legal regulations of private international law apply, which are not always predictable for the parties involved.

If the parties reach an agreement regarding dispute resolution, the settlement can take place via a referral to ordinary courts or to an arbitration tribunal—a private decision-making body (often using its own procedural rules) whose identity and composition are contractually agreed upon by the parties. The fact that the parties voluntarily submit to the arbitral award is also contractually agreed.

Advantages and Disadvantages of an Arbitration Clause

Arbitration proceedings are popular because they give those involved the opportunity to design the dispute resolution process (including the identity of the arbitrators) according to their own needs. In addition, unlike court proceedings, the proceedings are not public, which means, on the one hand, that any business secrets do not become public and, on the other hand, that no negative PR effects can occur during the proceedings. Usually, the duration of proceedings in an arbitration court is shorter compared to ordinary jurisdiction.

Whether arbitration is cheaper than court proceedings depends on the chosen provider of the arbitration and also on the country in which the proceedings are conducted. Specialized legal support will be necessary or at least advisable in both cases.

Although parties in most legal systems can freely agree on an arbitration process suitable for them, it always remains embedded in the respective legal system: this can mean that recourse to ordinary jurisdiction remains possible despite a valid arbitration clause. For example, courts in some countries always declare themselves competent at the request of a party (who no longer wants to adhere to an arbitration clause) if preliminary legal protection—i.e., an urgent decision—is requested and the applicant is threatened with irreparable damage. In such cases, it is important to carefully check whether an arbitration clause will also have the desired effect.

Components of an Arbitration Clause

There are components that should ideally be listed in an arbitration clause or that should be considered when drafting such a clause:

• Express agreement to recognize the arbitral award
• Choice of law regarding the underlying contract, i.e., according to which substantive law the arbitration tribunal decides
• Identity of the arbitration tribunal and applicable procedural rules
• Seat of the arbitration tribunal
• Any preliminary mediation
• Selection and number of arbitrators.

Cross-Border Transactions

In the case of transactions spanning several countries, it should be carefully checked whether enforcement orders obtained can actually be enforced against the other party in a place where the party has assets. Otherwise, an enforcement order is effective but has no value.

This is particularly relevant if an enforcement order is to be enforced in a country where it was not obtained (e.g., because the corresponding clause of the transaction contract stipulates this), where the losing party has its registered office or assets. In principle, this is only possible if the state in whose territory enforcement takes place also has a legal mechanism for the recognition and enforcement of such foreign titles. Depending on the country, such procedures are possible, complex, or simply not permitted.

The so-called New York Convention offers an international mechanism for the enforcement of arbitral awards. Here, too, it is important to check which solution will best meet the requirements of the parties in a specific situation.

Summary

Dealing with dispute resolution or dispute settlement mechanisms is part of the conscientious preparation of every M&A transaction. Arbitration clauses are often a good choice here, as the parties can flexibly agree on mechanisms according to their needs to decide a dispute in connection with the transaction.

Arbitration decisions are also often easier to enforce internationally than court judgments. As is so often the case, however, the devil is in the details. Therefore: one size does not fit all. What will have the desired effect in an individual case must be carefully examined.

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