Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Harry Payton discussed The Art of Deal Making: Using External Expertise Effectively as part of the Disputes chapter.
What are the most common post-closing disputes in your jurisdiction? (e.g. breaches of representations and warranties, price adjustment issues, tax covenants or fraud.) Do you have any relevant case law to highlight this?
The most common post-closing disputes sometimes vary with the economy. In a good economy, post-closing disputes are over substantive matters, warranties and representations. This is because the parties are truly seeking to get their benefits from the bargain. In a bad economy, the typical post-closing dispute is over payment. This often leads into spurious defences such as “the product is not as represented to us.”
In recent legal lore, fraud claims seem to be more common than they were a decade ago. This stems from the more liberal view of the bench as to what constitutes fraud. In Florida, there is no duty on a buyer of something other than real estate to perform due diligence. A buyer can rely on the representations of the counterparty so long as the buyer does not know the representation is false or its falsity is obvious. The requirement of “justifiable reliance” has been eliminated in Florida as an element of the buyer’s proof of fraud. There is another aspect of fraud that is frequently found among the pleadings in commercial litigation and that is promissory fraud. Fraud typically cannot be predicated upon a future event.
The classic definition of fraud is a false statement of existing material fact, knowingly made with intent to deceive, reliance by the representee proximately resulting in damages. Promissory fraud is a promise to do something in the future with no intent to perform that promise when it was made. As one can see, it is relatively easy to plead promissory fraud: Mr. Jones promised Mr. Gordon that he (Jones) would (do something) on a given date in the future. At the time Mr. Jones made the promise, he had no intent to perform it. That is a statement of promissory fraud that will carry all the way to trial.
How would you help in-house counsel shape an M&A agreement to minimise any of the potential disputes mentioned above or aid enforcement proceedings?
One of the effective ways to minimize disputes or aid in the enforcement is to have an experienced commercial litigator review the contract before it goes final. Experienced litigators are sensitive to terms, provisions and concepts that may likely be the subject of dispute. This is particularly true in instances where the parties are in a unique industry or the transaction is unique. Most commonly we see provisions understandable to the drafters and parties, but not to the public at large. Regarding those provisions, I tell the drafter to write as though he wants an eleventh grader to understand what is being said. Many times that flushes out the arcane language or provision and results in simplifying the contract.
To avoid the fraud claim regarding representations and warranties, or to minimize the filing of such a claim, the business manager and the experienced commercial litigator should have a dialogue concerning the importance of each representation and warranty, how a default can occur and how the risk can be minimized. Reps and warranties are the minefield in a commercial contract.
One way to avoid litigation is to provide arbitration as the exclusive remedy of the parties with a well thought out agreement for arbitration applying the rules of evidence, applying the appropriate organic law, limiting discovery so that arbitration does not become another forum for litigation and requiring mediation of any dispute before arbitration. If care is taken and attention to detail is paid, the resolution of disputes before they get out of hand is well worth the time it takes and the cost of drafting a comprehensive dispute resolution provision. I am a proponent of carefully crafted, detailed provisions for ADR in preference to institutional formats.
If a post-closing dispute does occur, what best practices should in-house counsel follow to minimise cost/reputational damage?
In the event of a post-closing dispute, in-house counsel should immediately obtain the commitment of the division manager to a full and prompt investigation of the dispute, identifying all persons who have information and informing all custodians of electronic and hard copy data of an internal litigation hold. Acquire and assemble all relevant documentation and make a back-up copy that is secured. Promptly establish the objective: whether to seek an early resolution; admit liability and defend on the issue of damages; defer and deflect for as long as possible; or other objective. Is the approach to dispute resolution the iron fist in a velvet glove, reflecting the character of a good citizen, or win at all costs and bury the opposition? Counsel must have management buy-in at the most appropriate senior level of the course to pursue. The culture of the organization will be influential in determining the overall strategy to employ when a post-closing dispute arises.
Designate one employee, be they in-house counsel or a manager, to coordinate with outside counsel; to coordinate events; to research facts; respond to discovery; determine the availability of witnesses and the like—be the “boots on the ground.”
With the foregoing information, outside counsel should prepare a litigation budget for non-cookie cutter litigation (the “one offs”), with the understanding that at best its accuracy is less than 50%.
The benefits of preparing an early budget are that it requires planning and identifies issues, witnesses and documents. In the area of reputational damage, it is imperative to get on that story immediately and pull out all stops to investigate.
Top Tips – Top Ways To Fully Utilise A Disputes Lawyer During The Deal Process
- Teach the lawyer your business before the dispute arises. That way counsel can frame the dispute more precisely when it occurs (Most lawyers I have talked to will not charge their client for an introduction to the business.).
- Have outside counsel review a draft of the agreement( s) midway in the drafting process and again before closing.
- Consider early mediation, even before a complaint is filed or a demand for arbitration is received. Provide for early mediation even before arbitration and write it in the deal documents.
- Consider the pros and cons of arbitration (which may be right for some but not all disputes). For those disputes that are considered arbitrable, direct counsel to develop a detailed and creative use of arbitration limiting witnesses, limiting discovery (number of depositions and controlling production of ESI). Write a detailed plan of arbitration and do not simply adopt an institutional arbitration agreement.