Arbitrating M&A Disputes How The Arbitration Landscape Has Changed And Where Technology Might Take It Next

Introduction

Few Latin phrases are remembered better by law graduates than caveat emptor, meaning "buyer beware". It is the principle that the buyer alone is responsible for checking the quality and suitability of goods before a purchase is made. Sophisticated M&A lawyers have long since mitigated this buyer risk through expansive due diligence exercises and tight contractual controls. In particular, M&A deals feature often heavily negotiated representations and warranties, designed to provide a purchaser with a cause of action against the seller in case of skeletons in the closet. Post-acquisition price adjustment mechanisms are another means for the parties to revisit the equilibrium of the transaction after the deal has closed. This article examines the growth of arbitration as a forum for resolving disputes that arise from these contractual mitigants of risk, before considering the impact of legal technology in this area.

Getting what you pay for and paying for what you get

Representations and warranties are simply statements contained in the contractual transaction documents and made by the seller to promise that certain facts are true, usually pertaining to the target business and in particular its financial and operational health. A common example is that: "The company is not involved in any litigation". Where after closing, the statement turns out to be false, the buyer has a contractual cause of action, usually to recover monetary damages.

As corporate lawyers have sought to minimize buyer risk, so representations and warranties have become increasingly expansive, designed to provide belt and braces protection to a buyer, and plug gaps (known and unknown) in the buyer's due diligence exercise.

Lawyers on the other side look to protect the seller by including within the sale and purchase agreements terms designed to exclude, reduce or carefully delimit the seller's liability, including for example through the use of disclaimers or exclusions, contractual limitation periods and de minimis and de maximis thresholds for claims.

Price adjustment mechanisms are another important means for the buyer to ensure that it only pays for what it gets and that the seller gets fair value for what it sells. Earn-out provisions, for example, subject the purchase price to adjustment post-closing based on some future metric, normally turnover or profit performance.

Risk mitigation means disputes

Of course disputes can arise at all stages of an M&A transaction, including before the deal is signed and between signing and closing. At the pre-signing stage, these disputes commonly relate to alleged breaches of whatever agreements have been put in place at the nascent stage of the deal: memoranda of understanding, letters of intent and confidentiality agreements, for example.

In between signing and closing, it is common for disputes to arise over the non-fulfilment of conditions precedent or other contingent obligations set out in the agreement, requiring procurement of certain outcomes, for example, relevant authority...