The Rise of M&A Arbitration
by Hogan Lovells
Kluwer Arbitration Blog có bài với tựa đề như trên. Ngoài thông tin về số lượng cases mà LCIA và SIAC thụ lý, bài có điểm lại các điều khoản cơ bản của hợp đồng M&A và một số loại tranh chấp thường phát sinh trong mùa Covid.
Phán quyết của trọng tài thường không công khai. Cũng chính vì vậy mà trên blog này Ngữ thường tóm tắt án lệ về tranh chấp M&A của tòa án Mỹ. Theo Ngữ hiểu, trọng tài quốc tế cũng chịu ảnh hưởng của những án lệ này.
According to the statistics issued by various arbitration institutions, (i) shareholders’ agreements, (ii) share purchase agreements and (iii) joint venture agreements represent a substantial part of their caseload. For instance, these agreements represent 14% of the cases administered by the LCIA in 2019. According to the SIAC’s 2019 Annual Report, corporate disputes amounted to 29% of all disputes in 2019, making it the most popular sector. This rise in popularity is understandable given that some of arbitration’s advantages fit particularly well with the structure of M&A transactions. These include confidentiality, the possibility of appointing experts in the field as arbitrators and ease of enforcement.
[The introduction of the ICC injunctive relief rules] is paramount to M&A disputes, as there may be a need for relief on an urgent basis in order to compel or prevent one of the parties from taking action that may have consequences regarding the valuation of the target.
Representations and warranties
A representation is an assertion of a past or existing fact, given by one party to induce another party to enter into an agreement. A warranty is a promise that the assertion of existing facts or future facts are or will be true, along with an implied promise of indemnity if the assertion is false. The distinction is important as it leads to different remedies. Whereas misrepresentation may allow the buyer to rescind the contract and claim damages on the grounds that it entered into the agreement without having had a clear representation of reality, a breach of warranty would allow the buyer to claim damages, but not to rescind the contract. [Ngu Truong: This is just one view regarding the distinction between the two. American courts arguably do not seem to treat them differently in the context of M&A contracts.]
Pre-closing covenants
Pre-closing covenants are frequently invoked grounds for refusing completion of the deal. These covenants regulate the business operations of a target company between the signing of a deal and its closing. They guarantee to the buyer that the seller will continue to operate in the ordinary course of business. During a pandemic, buyers have argued that the cost-cutting measures taken by sellers amount to breaches of these covenants. Conversely, other buyers have argued that the failure to take such measures amounts to a breach.
MAE clauses
Typically, such clauses are found in acquisition agreements and make the absence of a Material Adverse Effect (“MAE”) a condition precedent to completion of the transaction. In other words, one party can refuse to complete the deal if the other party has suffered an MAE between the signing of the agreement and the closing of the acquisition, leading the agreement to be considered null and void. MAE clauses are to be considered among the most popular substantive topics to be addressed in an arbitration dispute.
Earn-out clauses
Business valuation is of paramount importance in M&A transactions. Parties can choose the locked-box mechanism whereby the price is fixed at the date the deal is signed, and is based on past performances of the target company, which remains the same at the date of the closing. However, in the context of the pandemic, buyers will be very reluctant to agree to locked-box mechanisms and will thus rely on earn-out clauses.
An earn-out is a contractual provision stating that the seller will obtain additional compensation in the future if the business achieves certain financial goals. These goals can relate to the EBITDA (Earnings before interest, taxes, depreciation, and amortization), net income or other financial or non-financial metrics. As the mechanism of an earn-out is often complicated when put into practice, this will lead to a rise in disputes.
Typically, disputes relate to the performance indicator that is to be taken into consideration. Another possible contention would be that a buyer has prevented the achievement of the performance target. Indeed, in the latter case there is a certain risk of manipulation from the buyer since the seller no longer has the power to influence the course of the target’s business.