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.
Saifullah Khan discussed 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 the post-closing phase, contractual representations and warranties represent a major cause of dispute. It is our practice to sell on the basis of a long list of representations, warranties and specific indemnities with the purpose of allocating the risks between the transacting parties, taking into account the level of disclosure in the due diligence process. It has also become regular practice to analyse those risks in detail immediately after
closing and to evaluate potential claims on that basis. Another important type of dispute that arises after closing concerns the
adjustment of the purchase price.
Most common are adjustment mechanisms that seek to account for value changes of the target company between signing and closing. But sometimes adjustments focus on future developments, for example, if the parties are not able to agree on the value of the target, they may provide for some form of earn-out mechanism. This would enable the seller to try to hold the new
owner responsible for decisions potentially causing an earn-out shortfall. More frequent are arguments about the calculation of earn-out parameters (for instance, EBITDA or similar indicators of a company’s performance). In these cases disputes may revolve around the scope and meaning of the price adjustment provision, the application and interpretation of accounting principles and related considerations. Another example is breaches of post-closing covenants. Sellers will often agree, for some period
of time after closing, to refrain from taking certain actions that could harm the business. These may include agreements not to compete with the business, not to solicit or hire employees of the business, not to interfere with customer or supplier relationships, and not to disclose or use any confidential information or trade secrets of the business.
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?
A well-drafted M&A agreement is key to a successful transaction. The agreement represents the culmination of vital commercial and pricing negotiations. The parties aim to create an agreement that clarifies the responsibilities and duties of each side. However, these agreements are often imperfect and open to interpretation and exploitation. Drafting a balanced and workable M&A agreement can be challenging, but rewarding. Parties must ensure that the language included in the agreement is direct. The easiest way to avoid disputes is to be as clear as possible in the language of the agreement.
An M&A agreement if drafted carefully and with attention to minute details can help minimise the occurrence of disputes. The in-house counsel may consider the following matters while shaping an M&A agreement:
• Language used to identify the time-periods, measurement criteria and exceptions should strive to utilise industry- or company- specific historical reporting periods and terminology
• Define terms when the possibility of ambiguity exists
• Specifically state limitations on the buyer’s operation of target exhibits and sample calculations
• Example calculations and worksheet attachments should be
utilised, whenever possible
• Use of calculation templates with detailed instructions will help to eliminate creative alternatives
• Consider excluding certain financial statement line items from the estimation and subsequent true-up contractual exhibits
• Incorporate a detailed, descriptive calculation as an example, along with step-by-step instructions
• State accounting policies to be applied
• Quick-Close Rehearsals: Prepare seller for and rehearse a “quick-close,” limiting traditional hard close procedures to those accounts posing the greatest risk.
If a post-closing dispute does occur, what best practices should in-house counsel follow to minimise cost/reputational damage?
In the case of a post-closing dispute, foremost importance needs to be given to implied covenant of good faith and fair dealing. Where the agreement does not address any matter expressly and affords parties some discretion in performance of duties, neither party must take actions designed to defeat other party’s realisation of fruits of the agreement.
Next, all efforts be made to reconcile the differences whether they relate to price adjustments or otherwise. Negotiation and proper engagement with the other party is key to having a successful dispute resolution. While negotiating, the approach must be to have a level playing field for both parties, negotiations would only be successful when both the parties have achieved their respective goals.
As a matter of best practice, a list of all differences should be prepared before entering into formal negotiations and classify them according to what might be accepted, what might not be or what might be mediated etc.
Preparation of a timeline for negotiation may also be framed, including next steps. The next steps, in the case of unsettled disputes, could be referring the matter for arbitration, appointing/ selecting an arbitrator, taking the matter to the court of appropriate jurisdiction and making of public announcement of the dispute.
The in-house counsel needs to apprise the stakeholders (board or shareholders) of all possible options and an estimate of the likelihood of settlement or otherwise of each matter of dispute.
Top Tips – Top Ways To Fully Utilise A Disputes Lawyer During The Deal Process
• Engagement of commercial, accounting, technical personnel: When a disputes lawyer is engaged, the company’s commercial/accounting
technical team must consult with them, so they are fully conversant with the company’s circumstances, which will help them defend the company during the litigation cycle.
• Due diligence: The lawyer may also be engaged during due diligence, which will help him understand the company’s compliance and risk ecosystem, and to draft appropriate clauses in the agreement.
• Dispute resolution process details in the agreement: The lawyer asks that agreement must include sufficient details about the mechanics of the
dispute resolution process, which allows the parties to focus on resolving the disputed matters.
• Drafting arbitration clauses: Due importance be accorded to plan and draft the arbitration clause(s) in the agreement. Matters that may need
consideration are defining a single forum for all disputes, ensuring enforceability of the arbitration agreement/award, timelines, confidentiality and related costs.