Referral of post-M&A disputes to arbitration set to continue

Unpredictable market conditions, geopolitical instability and the lingering impacts of the Covid-19 pandemic have led to a wave of post-merger and acquisition (M&A) disputes, which continue to be on the rise.

Despite these economic and political uncertainties and following the stable decline experienced over the past two years, M&A activity is expected to improve in 2024. However, a rise in M&A deals may result in an even further influx of post-closing disputes. It is therefore essential for legal practitioners and contracting parties to take pre-emptive measures, identify risks, consider all dispute resolution methods available and opt for processes that would be most appropriate to the transaction at hand.

Recent statistics published by several international arbitration institutions support this assertion. For instance, in 2022, the third most common types of claims brought before the London Court of International Arbitration were shareholder, share purchase and joint venture disputes.

In the Stockholm Chamber of Commerce, business acquisitions were the second most common type of dispute referred to arbitration. They comprised 24.4% of all cases commenced in 2022, up from 13.2% in 2018.

In Asia, corporate disputes more generally represented 17.7% of all cases brought before the Hong Kong International Arbitration Centre and 15% of cases brought before the Singapore International Arbitration Centre (18-page PDF / 7.2MB).

Top causes of post-M&A disputes

Due to the complex nature of mergers and acquisitions, a broad range of issues could give rise to post-M&A disputes. However, based on Pinsent Masons’ analysis, the top three breaches leading to post M&A disputes relate to representations and warranties, earn out clauses and integration. It is therefore crucial for businesses to scrutinise these nuances at the negotiation and due diligence stages of the transaction.

Representations and warranties

On conclusion of a merger or acquisition, it is widely common for a party to later discover that they were the subject of a misrepresentation. This claim may arise if a party has made a false or misleading statement or a material omission at the negotiation stage of the transaction, which induced the other party to enter into the contract. Proving misrepresentation can be detrimental to the transaction, as the affected party may claim rescission of the contract and additional damages to compensate for the losses suffered.  

Earn out clauses

These clauses guarantee that the buyer will provide additional compensation to the seller, in addition to the purchase price, if the buyer reaches certain financial targets. Disputes most commonly arise where the buyer has taken intentional steps to avoid reaching such targets, and thereby avoid remunerating the seller.   

Integration and synergy disputes

These types of disputes most commonly arise in acquisitions. These claims are brought when the target and the acquiring company fail to synergise or adjust operations in accordance with the terms of the contract. 

Advantages of arbitration in an M&A context

In a growing number of post M&A cases, arbitration has been seen as a more appropriate forum as compared to litigation. Some of its characteristics that may be particularly beneficial include: 

• privacy – arbitration proceedings are conducted in private, which would enable the parties to protect highly sensitive information and reputation.
• autonomy – the parties are free to choose the governing law, language and seat of the arbitration. This may be especially beneficial in international M&A transactions, where the parties are based in different jurisdictions and legal systems.  
• expertise – the parties may select an arbitrator with expertise in M&A transactions or their relevant industry. This can help ensure that the arbitration is conducted efficiently, and that the award presents a commercially viable solution, in light of all the technicalities.  
• finality – the grounds on which an arbitral award may be challenged are limited, and thus the parties can reach resolution and closure faster, as compared to litigation. This is especially beneficial in instances where urgent resolution is needed, such as where the dispute has halted operations or restricted the parties’ ability to manage the business effectively.
• enforcement – the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to which 172 countries are signatory, enables mutual enforcement of awards rendered within such countries. Therefore, enforcing the award and monetising the claim may be easier and much more efficient if the case was resolved via arbitration as compared to litigation.