How can parties contractually anticipate the occurrence of a dispute in an M&A transaction and determine how it should be resolved?
Disputes can arise from multiple sources—not only from the main transaction agreement but also from ancillary agreements such as a letter of intent, memorandum of understanding, confidentiality agreement, exclusivity agreement, etc. Moreover, disputes may arise either after the transaction has been finalized or even before the signing of the sale agreement, for instance, if one party decides to withdraw from the deal during negotiations or just before closing.
Regarding the method of dispute settlement, contract drafters and advising parties often seem to favor arbitration as the preferred solution. Arbitration is a formal extrajudicial process where the disputing parties seek a third party to hear their case, examine their arguments, and render a binding decision. Below, we examine some of the key reasons why opting for arbitration may (or may not) be a prudent choice for resolving current or potential disputes (as arbitration can be agreed upon before or at the moment a dispute arises) in the context of M&A transactions.
1. Confidentiality
Unlike court litigation, which is generally public, arbitration proceedings offer a significant advantage in terms of confidentiality. Generally, the larger or more publicly exposed a company is due to its activities, the greater the need to keep the existence and nature of disputes out of the public eye.
Confidentiality plays a crucial role in M&A transactions from the outset, as it helps preserve trust between the parties and ensures a smooth and efficient sale process. In case of disputes, the need for discretion becomes even more critical, as it helps maintain stability within the companies involved and prevents disruptive consequences. The target company’s reputation could also be at stake—for instance, if it were revealed in the course of a seller’s guarantee claim that its assets were not as presented in its financial statements.
Choosing arbitration generally ensures the confidentiality of both the proceedings and the arbitral award. However, as there is no absolute prohibition on parties disclosing the existence of an arbitration dispute to third parties, it is crucial to ensure that the arbitration clause is supplemented by a confidentiality clause to prevent unauthorized disclosure of information.
2. Expertise of arbitrators and forum neutrality
Resolving an M&A dispute requires an in-depth understanding of the transaction’s structure and the complex mechanisms adopted by the parties. These mechanisms, often inspired by common law systems or international business practices, are designed to cater to the needs of global actors who may not be familiar with the domestic laws of the target company’s jurisdiction but prefer to apply standardized contractual techniques. It is common, if not standard, for M&A agreements to be governed by English law or the law of a U.S. state, regardless of the target’s or the parties’ jurisdictions.
State court judges may be reluctant to apply foreign laws they are unfamiliar with or may have only a limited understanding of them. Arbitration, on the other hand, allows parties to select arbitrators with specific expertise or recognized experience in the field, thus mitigating the risk of being judged by a court lacking the necessary specialization. This contributes to a perception of fairness and ensures that the dispute is adjudicated by qualified professionals.
Moreover, arbitration is often viewed as a more neutral forum than domestic courts, particularly in cross-border disputes. Litigating before a state court may give an advantage to the party domiciled or headquartered in that jurisdiction, which can create an imbalance or perceived bias. Arbitration can mitigate this concern by allowing the tribunal to be composed of arbitrators of different nationalities, enhancing the perception of impartiality and neutrality.
However, these advantages must not overshadow the risks of a lack of independence that may affect certain arbitrators, particularly when they have had specific ties with one of the parties or its counsel in the past. These considerations should lead the parties to pay particular attention to the identity of all arbitrators called upon to sit on the arbitral tribunal.
Certain court decisions suggest that the parties’ duty to investigate — elevated in this context to a duty of curiosity — may even prevail over the arbitrator’s duty of disclosure with respect to circumstances that could affect their neutrality or independence.
3. Speed of proceedings
Arbitration awards are typically rendered in a single instance, with no right of appeal, significantly reducing the time required to resolve a dispute. Additionally, arbitration avoids the procedural formalities and written submissions that often prolong litigation in state courts, where procedural tactics can cause unnecessary delays.
In M&A transactions, the parties have a clear interest in avoiding the delays associated with traditional court proceedings, as prolonged litigation can obstruct or even paralyze the target company’s operations, potentially undermining the very purpose of the transaction.
Arbitration enables a quicker resolution of disputes by setting shorter deadlines for exchanges between parties, limiting the number of submissions, and selecting arbitrators with sufficient availability—unlike national courts, which often face chronic case backlogs.
4. Enforcement of arbitral awards and limited avenues for appeal
An arbitral award has the same binding force as a court judgment. If the losing party does not voluntarily comply, the prevailing party can seek enforcement through legal channels. More importantly, on an international scale, the enforcement of arbitral awards is facilitated by the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, ratified by 172 countries. This means that, unlike a court judgment, which may require extensive review before recognition in another jurisdiction, an arbitral award generally only requires an exequatur procedure to be formally recognized and enforced.
Appeals against an arbitral award are generally excluded except in limited circumstances explicitly provided by law, such as the absence of reasoning in the award, arbitrator bias, or violations of due process. Even where such grounds exist, the conditions for successfully challenging an award are stringent.
5. Cost considerations
One of the main drawbacks of arbitration is its high cost, particularly when compared to litigation before national courts, where the losing party is typically only required to pay a modest contribution towards the opposing party’s legal costs. It being a private settlement method, it is not illegitimate that parties must bear the full costs of the proceedings, including arbitrators’ fees, administrative fees of the arbitration institution (if applicable), venue rental, translation costs, and travel expenses. Such costs could even be perceived as being equivalent to expert fees that should be incurred in a national court system to compensate for the lack of specialization of the judge called to resolve the case.
Be it as it may, the financial resources required to initiate the proceedings can sometimes represent a significant challenge for the party seeking recognition of its rights. In the best-case scenario, the cost of the proceedings— which can reach several hundred thousand euros merely for the initial filing with the most renowned arbitration institutions (such as the one operating under the aegis of the International Chamber of Commerce in Paris or the London Chamber of Arbitration)— may serve as a deterrent against pursuing litigation and instead encourage the parties to consider a negotiated settlement. Opting for a national institution, such as CEPANI in Belgium, or submitting the dispute to ad hoc arbitration, where the proceedings are not administered by any arbitration institution, presents a viable alternative in this context.
Finally, in the event that initiating arbitration proceedings becomes unavoidable, an impecunious party still has the option of seeking a third-party funder to cover the costs of arbitration. Known as third-party funding (TPF in specialized terminology), certain financing solutions—beyond the scope of this note—have been developed by specialized entities or companies. Their mission is to facilitate access to arbitration by offering to pre-finance the costs of the proceedings to varying degrees in exchange for a share of the financial gains awarded through a favorable arbitral decision. However, only disputes with a sufficiently high financial stake and strong prospects of success are generally considered eligible for such funding arrangements.
Conclusion
Arbitration as a method of dispute settlement offers several advantages in M&A transactions, including confidentiality of proceedings, expertise, neutrality and efficiency of the arbitrators and last but not least the enforceability of arbitral awards. However, its high cost remains a significant drawback. The decision to opt for arbitration should be carefully weighed on a case-by-case basis against the specific needs of the considered transaction, the parties’ financial resources, and the likelihood of a dispute arising.