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.
James Conomos 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?
In business transactions, ‘post-closing’ disputes can derail or delay completion of a transaction.
These disputes increase costs by causing delay and often ending in court requiring judicial interpretation to resolve a legal issue. This often results in relationship breakdown and negates the benefit of the transaction in the first place. Delay, cost escalation and in particular uncertainty are the hallmarks of post-closing disputes. They arise not just in M&A transactions but also in respect of other agreements/ transactions.
Common examples of post-closing disputes are:
• Uncertainty or lack of definitions
• Calculation disputes
• Ambiguity of language.
Disputes can be costly if they end up in county and potentially can have had disastrous consequences for the seller, apart from the costs wasted in the proceeding.
Often, ‘post-closing’ disputes are finely balanced, but the damage done to relationships and the costs to the parties does not justify the risks and issues at stake. Greater care needs to be taken initially to properly minimise likely conflict in clear drafting and working hard to resolve any disputes. Also, appointing experts or arbitrators to resolve issues rather than relying on the judicial system might also minimise both costs and time delays.
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?
The task faced by in-house counsel in seeking to avoid post-closing’ disputes is often a function of the complexity of the transaction, calculations and sometimes even data issues.
Trying to avoid these disputes is almost impossible unless there is good will on both sides, which often there is not. A few suggestions for in house counsel are:
a. Ensure agreements contain clear and precise definitions for all key terminology
b. Sometimes, in very complex transactions, including sample calculations to explain how the parties intend to make calculations will avoid or minimise dispute
c. Ensure that all key terms and phrases are clearly defined to avoid uncertainty
d. Don’t be rushed. Preparation is key and taking time to carefully consider consequences is critical. Don’t be afraid to consult with a dispute lawyer, whose focus is often different to that of an in-house counsel in drafting key terms. The time spent in careful drafting and consultation will minimise and reduce or minimise areas of later dispute
e. Avoid reliance on incomplete data whether by buyer or seller. Proper review of financial documentation before a transaction becomes unconditional will avoid disputes as will minimising any oral representations.
The key is preparation and certainty as well as clear drafting to avoid or minimise the impact of any dispute.
If a post-closing dispute does occur, what best practices should in-house counsel follow to minimise cost/reputational damage?
Often in the haste to snare great opportunities when they arise, key details often get overlooked and in-house counsel are left to pick up the pieces. This can result in time-consuming and costly litigation. Litigation also has a funny way of highlighting other deficiencies and nasty surprises when parties are desperate to exit an agreement or vary key terms.
The keys are preparation, certainty and consultation. To avoid or minimise disputes or areas of disagreement, it is critical to consult experienced advisors early in the process. These advisors can guide businesses through due diligence, identify common challenges and minimise uncertainty about the possible consequences of a transaction.
Litigation is costly on many fronts, not just financially. Disputes impact on time, relationships and increase the risk of a poor outcome.
In-house counsel need a strong advisory team to minimise uncertainty and dispute because the costs associated with litigation can dampen even the best deal.
Top Tips – Top Ways To Fully Utilise A Disputes Lawyer During The Deal Process
- In Australia, the role of an in-house counsel is treated no differently from any other lawyer in that broadly speaking, all lawyers have three core ethical duties: to the court, to their client and to obey the law.
- In-house counsel can also be liable for breach of duty as they are considered to be an officer of a company.
- Firstly, a strong advisory team is essential, including access to external dispute lawyers and where necessary other expertise.
- Secondly, careful preparation is essential, including involving external disputes lawyers in good time. Be proactive not reactionary and external disputes lawyers can assist in that respect.
- Thirdly, in-house counsel should consult external disputes lawyers to explore the best mechanism to resolve key issues in agreements including expert determination, arbitration or sometimes court intervention. Having a clear understanding of each mechanism from an external dispute lawyer perspective is critical to drafting an appropriate agreement.