Resolving M&A disputes



FW moderates a discussion on M&A dispute resolution between Tim Portwood at Bredin Prat, Robert L. Schnell, Jr at Faegre & Benson LLP, and Dale E. Stephenson at Squire, Sanders & Dempsey LLP.

FW: Have you seen a rise in M&A-related disputes over the last 12-18 months? What key trends would you highlight?

Stephenson: The difficult market conditions presented during the past two and a half years have given rise to significant challenges for newly acquired businesses and assets, and the very business cases upon which some of these acquisitions were made. Not surprisingly, those markets most affected by the economic downturn have seen the greatest spike in post-deal disputes to address unmet business expectations. For example, Central and Eastern Europe have seen a decided uptick in M&A-related disputes, frequently related to valuation and performance-based issues but also involving potential exits, earn-outs and other performance-based deal mechanisms. Another trend is an increase in disputes arising out of the need of new owners to downsize staff and management. In the Middle East and other areas, sovereign debt uncertainties and bank credit issues have also come into play.

Schnell: Difficult economic times produce more disputes and the M&A area is no exception. Buyers disappointed with the results of their acquisitions are particularly likely to look for ways to renegotiate a better transaction in the guise of dispute resolution. The best example of that phenomenon is disputes over working capital adjustments, which are becoming more common.

Portwood: The financial crisis has rung its toll for M&A activity generally. Fewer M&A deals have completed as financing has become harder to find. Those transactions that have occurred have had little dispute type fall-out. We have noticed two trends over the last 12 to 18 months in this climate. First was an increase in disputes over price adjustment clauses in deals that were closed shortly before the financial crisis took hold. This trend died away, however, six months or so into the financial crisis. The typical resolution mechanism in France for this type of dispute is an ad hoc expert procedure before an accountant or accounting firm. The decision of the expert is binding on the parties and is deemed to form part of their agreement on the price. Recourse against the expert’s decision is limited to gross error or fraud. The other trend has been an increase in claims under representations and warranties on deals that were completed before the financial crisis took hold.

FW: Can you provide some insight into the recurring themes driving recent M&A conflicts, such as working capital adjustments, earn-outs, indemnification and price-related disputes? 

Schnell: Recent statistics suggest earn-outs are commonly used perhaps as much as 25 percent of the time. They can be particularly problematic because they often are the result of the fact that the parties have not reached a fundamental understanding on value. The earn-out is used to paper over that unresolved fundamental disagreement and, when the earn-out calculation results in a disappointing payment to the seller, that unresolved disagreement boils to the surface. The new owner’s decisions, which arguably have caused the earn-out shortfall, are all available to be second-guessed. Other items, like working capital adjustments, can be problematic but the scope of the dispute is usually narrower and confined to more objective criteria.

Portwood: Working capital adjustments and price-related disputes depend upon the financial terms of a given transaction, the former being a sub-set of the latter. Disputes of this type fall into two basic categories. The first focuses on the proper interpretation of the contractual terms. The parties find themselves disagreeing over what items are to be included in, for example, the contractual notion of ‘working capital’ such as what is meant by current assets and current liabilities. The second focuses on the actual calculation performed by one or other of the parties when establishing the reference accounts. The first may well be within the jurisdiction of the overall judge of the contract – whether an arbitral tribunal or state court – whilst the second may well be submitted to a financial or accounting expert. The latter type of dispute occurs relatively shortly after the closing the transaction. They are often subject to an ad hoc and relatively short procedure provided for in the SPA. Earn-out and other longer-term price adjustment mechanisms provide for an additional purchase price to be paid based on the future earnings of the target over a stipulated period. Disputes tend to arise when one or other of the parties’ expectations are not met. Indemnification disputes are usually triggered by alleged breaches of representations, warranties, covenants or specific indemnity undertakings given by the seller in the SPA. These types of dispute tend to be fact intensive and rarely raise complex issues of law.

Stephenson: Common drivers of recent post-closing M&A disputes include a couple of primary categories. First, those involving valuation for final ‘true-up’ of the deal, such as the reconciliation of working capital using ‘consistent’ application of agreed accounting principles to move from an initial reference balance to a closing adjustment, or the calculation of earn-out payments and related financial metrics. Since parties can exercise a significant amount of business judgment in determining, for example, the valuation of accounts receivable and inventory reserves, a downturn in the underlying economy may create conflicting viewpoints when trying to reconcile financial statements. And with earn-out provisions, buyers and sellers may have divergent approaches on direct valuation issues with respect to new investments in the business or expenses associated with downsizing. A second recurring theme grows out of the underlying factual bases upon which the purchase price or deal were premised. This trend cuts across sectors and includes private equity transactions as well as industry-driven consolidations or add-ons. As market conditions grew more challenging, buyers were inclined to take a harder look at what they were told about the businesses they purchased. Claimed breaches of representations and warranties have played a significant role in recent and emerging disputes.

FW: In your opinion, how can companies reduce the likelihood of M&A disputes at the outset of a deal? What contractual issues do they need to evaluate? 

Portwood: From the seller’s perspective, the best of all worlds is to sell the company ‘as is’, as often is the case in real estate deals in France, for instance. This only rarely happens, however, in share deals. The trend is to sell on the basis of a long list of representations, warranties, covenants and (where specific risks are identified) specific indemnities – the whole purpose being to apportion risks that have not necessarily been disclosed during the investigative due diligence phase. Fuller disclosure by a seller should result in the price being more realistic and the risk of future successful claims for indemnification being reduced. From the buyer’s perspective, if the purpose is to reduce the risk of having to bring claims for indemnification in the future, ideally the seller should be pushed to make full disclosure of all risks facing the target so that the purchase price can be negotiated accordingly. In such a case, the extent of the seller’s representations and warranties would normally be reduced with specific risks being covered by specific indemnity clauses. 

Stephenson: Full and effective due diligence is always a critical component to avoid problems down the road. It is likewise important for the parties to clearly allocate risk between a seller’s duty to affirmatively disclose and provide associated representations and warranties versus the buyer’s obligation to satisfy itself through pre-closing diligence. Overall, parties should not gloss over key issues or be blinded by their desire to close the deal. A full and appropriate risk matrix which identifies and considers all key risk factors associated with a particular transaction needs to be carefully developed, using a risk-review team that includes members other than those leading the deal. To minimise future valuation problems, parties should agree beforehand precisely how financial statements should be prepared and what trumps if there is a difference between strict adherence to the chosen accounting standard and actual past practice.

Schnell: There is no substitute for careful and precise drafting. Matters left to future clarification or dependence on good will of the counterparty should be avoided at all costs, and the mutual incentive the parties have to get a deal signed should be used to force agreement, pre-closing, on as much as humanly possible. If an earn-out simply has to be part of the deal, the higher up the income stream – revenue versus earnings, for example – and the shorter the measurement period, the better. Lastly, the big risk is what isn’t considered in the deal. Step back and think about what should be in the documents but simply isn’t there.

FW: If a dispute arises, what considerations should companies make on how to resolve them and what preparations to set in motion? 

Schnell: Every dispute gets settled at some point, and sooner is almost always better. An early direct contact between senior-level executives not involved in the dispute is often helpful. So is early mediation, as long as the parties have a sufficient understanding of the facts to have an informed discussion. A mediator will give both sides a fresh perspective and sufficient ‘cover’ for parties who want to settle but are afraid of being second guessed. While that is being done parties need to secure and protect all their paper and electronic materials, including texts and emails. What is destroyed after the dispute arises – even in the ordinary course – will be used against the destroying party.

Stephenson: Since most M&A disputes are subject to arbitration provisions, that process can move along quickly and the early characterisation of a party’s position can significantly affect the entire process and final outcome. It is important to get experienced arbitration counsel involved at the outset to help establish a system that preserves and manages relevant information, fully evaluates strategic options, maintains confidentiality, properly organises files and electronic data, obtains critical information from key employees while they are still available, and provides for substantive legal input in the preparation of early correspondence related to the dispute.

Portwood: This question needs to be looked at from two perspectives. For the buyer, who would usually be the claimant, the first step is to establish the extent of the breach of the covenant, representation or warranty or specific indemnity in the SPA. This should be documented as best as possible with the collection of all relevant contemporaneous documentation and statements of individuals with actual knowledge of the facts of the alleged breach. Second, a full record of the disclosures made and the negotiations behind a given covenant, representation or warranty or specific indemnity researched with all individuals involved requested to participate in this fact finding exercise. Armed with this factual material, an analysis of the contractual terms, including all limitations to indemnification claims should be made. Finally, a tactical decision should be made as to whether the claim is to be made individually or grouped with other potential and similar claims under the SPA. From the perspective of the seller, usually the respondent, a careful record should always have been kept of the dataroom and other disclosures made to the buyer before closing. Upon receipt of a claim, this information should be analysed to assess first whether there are any contractual defences (for example, through a disclosure exemption clause) or any causation arguments. Care should also be taken to be sure that the buyer has complied with all procedural requirements.

FW: Is arbitration suitable for dealing with all aspects of M&A disputes? What complications can arise in multi-party or multi-contract structures? 

Portwood: Price adjustment disputes related to closing accounts – as opposed to earn-out and other similar long-term price clauses – tend not to be well suited to arbitration. The technical nature of the issues that are usually raised, as well as the parties’ wish to have the dispute resolved in a very short period of time, mean that the arbitral process is not as well designed as an ad hoc expertise proceeding. For the other typical types of disputes that tend to arise, including indemnification claims, arbitration is usually an efficient means of resolution, providing for a final and binding mechanism that is not subject to multiple forms of recourse. Often the issues are factual rather than of great legal complexity. Multi-party disputes raise difficulties for arbitration as a means of dispute resolution (as opposed to court litigation) when one or more of the entities or persons involved in the dispute is not a party to the arbitration agreement. Most typically this occurs where groups of companies are involved, although the types of situations are numberless. There is no easy solution when a party to the dispute is not a party to the arbitration agreement, although arbitral tribunals may find as a matter of fact that although not formally a signatory to the SPA, a third party closely associated with and involved in the transaction was intended to be bound by the arbitration agreement. Where all parties to the dispute are also found to be parties to the arbitration agreement, issues such as equality between the parties in the formation of the arbitral tribunal and rights of due process may arise.

Stephenson: Virtually all M&A deals rely on arbitration to resolve disputes arising out of the deal. Some agreements distinguish carve out areas for expert accounting determination to handle valuation issues while leaving broader disputes to general arbitral forums. In situations involving parties where the potential enforcement of a foreign arbitral award may present particular difficulties, it may be advisable to craft an agreement providing for another means of dispute resolution or which takes into account the unique considerations. Multi-party disputes and multi-contract structures can give rise to difficulties in constituting an arbitral tribunal to afford equal participation, although the principal arbitral institutions now have mechanisms in place to effectively handle that scenario. The most difficult problem arises when disputed issues involve parties who have not signed the arbitration agreement.

Schnell: International arbitration is often preferable to resolution in a court because the decisions of an arbitrator tend to be more-easily enforced internationally. But if there are multiple contracts or multiple parties you can have a situation where someone has not agreed to arbitrate and cannot be forced to do so. In that case a party may well decide to sit on the sidelines and watch the others fight, awaiting the outcome without the expense of participation or the risk of an adverse outcome.

FW: What kinds of disputes can arise out of cross-border deals, including situations where both sides are headquartered in the same country but have international operations? 

Stephenson: In many cases, and especially with joint ventures, the parties may structure their relationship through a shareholders agreement governed by English law. However that agreement may not be enforceable in the country where the business is located since the local entity is subject to the law of the host country and its underlying statutes. As a result, a party relying on the shareholders agreement may find itself unable to obtain effective enforcement in the country vis-à-vis its other shareholder who is instead relying on local law to prevent enforcement of the agreement.

Schnell: Cross-border deals give rise to complex issues related to antitrust laws, which differ in terms of application and timing in various jurisdictions. What to file, with whom and when can all come into play—although mostly those matters are resolved in the course of the deal construction. Foreign Corrupt Practices Act (FCPA) issues are also a major factor in cross-border transactions. Due diligence and attention to red flags in the FCPA area are key matters, and it may well be that a buyer is held to an even higher standard when it is already arguably familiar with how business can be done in the target’s country from its own business dealings there.

Portwood: Cross-border deals are typically characterised by the need to cater for two or more company law, tax law and accounting regimes in addition to any other specific legal regimes applicable to the industry sector of the particular transaction. Transfers of shares and changes of control may require specific formalities to be accomplished, corporate and tax filings to be made, payments to be made, time periods to be observed for each entity sold and so on. All of these aspects will have to be carefully catered for often with the assistance of local counsel, failing which the purchaser may not, on the closing date, receive everything that it had bargained for.

FW: Can you outline some of the practical difficulties of resolving M&A disputes in emerging countries? 

Schnell: The legal systems in emerging countries are often less robust in terms of discovery pre-hearing, and even in terms of what is required at a hearing. We recently had an experience in China where a party attended a hearing and argued his case opposing our client’s claim, but could not be required to make information or testimony available at the hearing. Since proving wrongdoing in the context of an M&A deal often involves looking at information in the exclusive possession of the counterparty, that sort of one-way participation can make matters especially difficult for a foreign claimant.

Portwood: The less sophisticated the legal regime in which a target company operates, the more difficult it is for the seller and the buyer to provide contractually for the sharing of the risks associated with the ownership of the target before and after the closing of the transaction. The due diligence process is rendered more difficult simply because transactions tend to be less carefully recorded, accounting systems and principles tend to be less sophisticated and the regime generally tends to be more susceptible to manipulation of one sort or another. In other words, the parties face a more challenging task of gathering the data on the basis of which they can negotiate the sharing of risks.

Stephenson: In Saudi Arabia, for example, there are numerous hurdles and pitfalls associated with the use of international arbitration to resolve commercial disputes. While Saudi Arabia is a party to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards, the Kingdom has not enacted any domestic implementing regulations and has broadly invoked the ‘public policy’ exception in previous cases. It also has the reputation of being highly sceptical towards applying non-Saudi governing law. Thus, it is entirely possible that a complex dispute may proceed through the significant business distraction, time, and expense of international arbitration only to find that the entire case will be subject to local de novo judicial review and subsequent appeal in the Saudi courts, and that all or a significant part of the arbitral award may not be enforced for reasons that are a surprise to the foreign party – for instance, prohibitions on consequential damages, liquidated damages, some types of indemnification, injunctive relief, adjustment of monetary values to reflect interest or the award of costs to a prevailing party. The local determination of whether an award violates any of the Islamic law principles as applied in Saudi Arabia is conducted in Arabic and determined subjectively by the presiding Judge, without the benefit of any judicial precedent. This review must comply with all other procedural requirements imposed by Saudi courts, and can take years to complete through all appeals.

Tim Portwood is a partner at Bredin Prat, and a French qualified English barrister. He specialises in international arbitration and international litigation. His practice also includes cross-border M&A transactions, joint ventures and private equity transactions. Born in the United Kingdom, Mr Portwood graduated from Cambridge University. He was admitted to the Bar of England and Wales in 1988 and to the Paris Bar in 1998. Mr Portwood can be contacted on + 33 1 44 35 35 35 or by email:

Robert L. Schnell, Jr. is a partner at Faegre & Benson LLP and co-chair of the firm’s securities and financial markets litigation group. He focuses his practice primarily on the resolution of complex commercial disputes, many of which have involved investment bankers, brokers/dealers or banks. Mr Schnell has been named a leader in the field of commercial litigation by Chambers USA. He can be contacted on +1 612 766 7225 or by email:

Dale Stephenson is a partner at Squire, Sanders & Dempsey (US) LLP working in the Riyadh office of Squire Sanders’ associated independent network firm EK Partners & Al-Enezee Legal Counsel. He has a wide range of experience in corporate business disputes, complex regulatory matters, litigation, and international dispute resolution. Mr Stephenson has also has assisted in the training of governmental officials and other interested parties with respect to international law, government restructuring and regulatory development issues. He can be contacted on +966 1 276 7372 or by email:

© Financier Worldwide



Tim Portwood

Bredin Prat


Robert L. Schnell, Jr

Faegre & Benson LLP


Dale E. Stephenson

Squire, Sanders & Dempsey LLP

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