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.
John Wolfs 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 in my practice relate to the fulfilment of guarantees given and attempts to undermine an agreement entered into. I will explain this on the basis of two practical examples.
A common warranty provision in various agreements concerns a non-competition clause, for example a clause in a M&A agreement which prohibits the transferring party from engaging in competitive business activities during a contractually agreed period on forfeit of contractually agreed penalties and compensation for damages suffered. This provision is sometimes infringed by the transferring party. Often not necessarily with the intention of infringing the non-competition clause, but as a mere result of an inappropriate wording of the non-competition clause in the M&A agreement. The parties then argue about the scope of the non-competition clause and what exactly is to be understood by prohibited competitive business activities.
A second example concerns a clause in the final provisions of a contract which stipulates that the parties waive the legal right to annul the contract or to demand its termination. A dispute may then arise as to whether a contracting party can affect the contract by rescinding it only in part. Otherwise, the agreement will remain intact. However, the part of the agreement that is partially dissolved can be a very crucial part of the agreement. For example, the purchase price. Of course, this essential provision may not be allowed to be affected retrospectively.
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?
As regards the second example outlined above, the clause in the final provisions of a contract which stipulates that the parties waive the right to destroy the contract or to demand its termination/recission, the solution is quite simple. This clause should stipulate that the parties waive their legal right to terminate the contract in whole or in part. This would make the contract inviolable, at least from this legal point of view.
With regard to the first example outlined above – but in fact this applies to all clauses in an M&A agreement – my advice is to allow all disciplines involved within the company to participate in the process of a merger and acquisition. Decisions on provisions in an M&A agreement should be made on the basis of input from various business disciplines. Rarely, if ever, a provision in an M&A agreement has consequences for one business discipline only.
What is an understandable and sensible decision from a business economic point of view can be a deadly one from a purely legal point of view. I would also recommend that where partial aspects of the negotiating process have already been agreed in the course of the negotiations, this should always be laid down as such at an interim stage. Finally, my advice in this context is to involve the external lawyer as early as possible in the process of reaching an M&A agreement.
If a post-closing dispute does occur, what best practices should in-house counsel follow to minimise cost/reputational damage?
It is my experience that there are companies that do an inadequate job of managing their reputations in general and the risks to their reputations in particular. They tend to focus their energies on handling the threats to their reputations that have already surfaced in court. This is not risk management, it is crisis management, a reactive approach whose purpose it is to limit the damage. That is of course a natural reaction. But there are now many alternatives to litigation that can resolve long-standing disputes, and even produce win-win solutions to old and bitter fights in court that would otherwise only leave both sides damaged.
To minimise cost and reputational damage I often advise to consider Alternative Dispute Resolution. The most common forms of ADR are arbitration and mediation. At its best, ADR is a ‘joint venture’ between the company and its attorneys, requiring management participation as early and completely as possible. Handled with sufficient skill, all parties can then join in a non-adversarial search of a mutually beneficial outcome. I often advise mediation when reputational damage is to be expected.
Mediation differs greatly from arbitration in that the neutral third party – the mediator – does not impose a solution. The object of mediation is to help the parties resolve their own dispute. The mediator’s functions can vary depending on the wishes of the parties and their attorneys as well as the nature and history of the dispute. In general, arbitration and mediation is much less formal than traditional litigation and often requires much less time and money. Reputational damage can be prevented by subjecting arbitration and mediation to secrecy, which mediation by nature already is in the Netherlands.
Top Tips – Top Ways To Fully Utilise A Disputes Lawyer During The Deal Process
- Involving a disputes lawyer in an M&A benefits both the deal and process. Due to a lack of experience in court, lawyers tend to forget to define or sum up the reasons that have led to including particular wording. As a result, in a Dutch court a judge has to investigate what the reasons for choosing a wording was and what it includes … and what not.
- In order to do so, the Dutch judge may want to question parties or receive statements/emails of the deal making process. It is better to elaborate in the agreement itself why certain (choices for) wordings have been chosen. Hurdles a litigation may easily avoid may be overlooked by an M&A lawyer.
- Finally, use the knowledge of a disputes lawyer in relation to choice of law and especially jurisdiction clauses. Some of these clauses tends to be copied without checking in the particular internet context of a possible court decision or an arbitral award is eligible for execution abroad in another country. As a consequence a court decision or an arbitral award may not be enforceable, thereby posing one party in the uncomfortable position to start another court case or arbitration, now abroad, again.