Материал: Amy C Kläsener

@privlawlib

Drafting M&A Contracts to Minimise the Risk of Disputes

IBP’s business, as discussed below – that would, under the terms of the merger agreement, allow Tyson to avoid buying it. The court ruled that an award of specific performance, requiring the merger to take place, was preferable to an award of damages that could not be quantified easily.10 Whether an arbitral forum would be in a position to issue a final order requiring two major public companies to merge remains to be seen.

It is typical for transaction agreements that provide for arbitration to make clear that preliminary injunctive relief may also be sought in a national court. Agreements generally provide for this because a party seeking injunctive relief will need to move quickly to preserve the benefit of the deal, and parties often feel that only a national court can act with the required speed and certainty to give them effective relief. A simple emergency relief provision might read:

Notwithstanding any provision of this Agreement to the contrary, a party, including a party awaiting a final determination on the merits by the arbitrator, shall be entitled to seek a restraining order or a preliminary injunction in any court of competent jurisdiction to prevent any violation of the provisions of this Agreement.

The rules of major arbitral bodies recognise that parties will often choose to make such requests to courts.11 Therefore, it may be possible to seek an order from a court to preserve the status quo pending the outcome of an arbitration and to do so without prejudicing the availability of the arbitral forum. Nevertheless, the major arbitral bodies have also made significant efforts to change the perception that they cannot grant injunctive relief swiftly enough by adopting procedures for emergency action.12 The result has been an increase in the number of emergency applications. For example, in 2016, the ICC saw 25 applications

10IBP, 789 A.2d at 82-84.

11See, e.g.,American Arbitration Association, Commercial Arbitration Rules and Mediation Procedures, R. 38(h) (Oct. 1, 2013) (‘A request for interim measures addressed by a party to a judicial authority shall not be deemed incompatible with this rule, the agreement to arbitrate or a waiver of the right to arbitrate.’); JAMS, Comprehensive Arbitration Rules & Procedures, R. 24(e) (July 1, 2014) (‘Any recourse by a Party to a court for interim or provisional relief shall not be deemed incompatible with the agreement to arbitrate or a waiver of the right to arbitrate.’); International Chamber of Commerce,Arbitration Rules, art. 29(7) (Mar. 1, 2017) (‘ICC Rules’) (‘Any application for such measures from a competent judicial authority shall not be deemed to be an infringement or a waiver of the arbitration agreement.’); International Centre for Dispute Resolution, International Dispute Resolution Procedures: International Arbitration Rules, art. 6(7) (June 1, 2014) (‘A request for interim measures addressed by a party to a judicial authority shall not be deemed incompatible with this Article 6 or with the agreement to arbitrate or a waiver of the right to arbitrate.’); International Institute for Conflict Prevention and Resolution, Rules for Administered Arbitration of International Disputes, R. 13.2 (Dec. 1, 2014) (‘A request for interim measures by a party to a court shall not be deemed incompatible with the agreement to arbitrate or as a waiver of that agreement.’).

12For example, the ICC rules specifically provide that ‘the arbitral tribunal may, at the request of a party, order any interim or conservatory measure it deems appropriate.’ ICC Rules art. 28(1).The ICC rules also provide that if a party needs interim relief before a tribunal can be appointed (a process that may take weeks), the party may seek the appointment of an emergency arbitrator, whose interim decisions are binding on the parties but may be overruled or modified by the tribunal that will be appointed to resolve the parties’ dispute. Id. art. 29.

90

© 2020 Law Business Research Ltd

@privlawlib

Drafting M&A Contracts to Minimise the Risk of Disputes

for emergency proceedings, compared with only 10 in 2015.13 Choosing an arbitral body whose rules are viewed as enabling parties to act quickly may be an important factor in drafting an M&A agreement where arbitration is the preferred forum.

One expedited option, which some parties are beginning to use in cross-border transactions where at least one party is organised under Delaware law, is arbitration under the Delaware Rapid Arbitration Act.14 This relatively recent statute is designed to offer businesses the same speed and predictability of a national court, but in an arbitral forum that provides greater confidentiality and can render an award that may be more easily enforced overseas. The Act is designed to streamline the arbitration process to the greatest extent possible, while still allowing the parties flexibility over how they wish to handle any dispute. For example, the parties may request the Delaware Court of Chancery to quickly appoint an arbitrator if they have not chosen one themselves; the arbitrator must issue a decision no more than 180 days after being appointed, unless the parties provide otherwise in their agreement; and the arbitral award is automatically deemed confirmed five days after it is issued, unless the parties agree in advance that it may be challenged.15 A simple provision invoking the Act might read, in part, as follows:

The Parties agree that in order to obtain expeditious resolution of all disputes arising out of or relating to this Agreement (including, for the avoidance of doubt, any claim arising out of or related to the substantive or procedural arbitrability of any claim), all such disputes shall be exclusively resolved by final and binding arbitration under the Delaware Rapid Arbitration Act (10 Del. C. § 5801 et seq.) and the Delaware Rapid Arbitration Rules promulgated thereunder by the Supreme Court of the State of Delaware in effect at the time of the date of delivery of the notice of arbitration, except as modified herein.

Arbitration clauses invoking the Delaware Rapid Arbitration Act are usually highly tailored, and may contain detailed provisions concerning the background of the arbitrators, the timing of procedural steps in the arbitration, and the procedure for the gathering of evidence. However, parties should remain aware that the Act is recent and its acceptance in jurisdictions outside Delaware as an appropriate arbitral process is not yet tested.

Provisions relevant to pre-closing relief

Contractual provisions relevant to closing M&A transactions can take many forms, but there are certain standard types of provisions that are worth highlighting as they pose particular risks of dispute, including in the context of an arbitration.

13Javier Rubinstein et al., Strategic Considerations in Selecting Emergency Arbitration, (Oct. 13, 2017), https://www.law360.com/articles/974344/strategic-considerations-in-selecting-emergency-arbitration.

14Del. Code Ann. tit. x, § 5801 et seq.

15For a summary of the Act, see GregoryV.Varallo et al., The Practitioner’s Guide to the Delaware Rapid Arbitration Act (Mar. 2015), http://www.rlf.com/Files/11206_DRAA%20Book%20Final.pdf.

91

© 2020 Law Business Research Ltd

@privlawlib

Drafting M&A Contracts to Minimise the Risk of Disputes

Efforts clauses

A ‘best efforts’, ‘reasonable efforts’ or ‘commercially reasonable efforts’ clause requires counterparties­ in an M&A transaction to take steps to make sure that various conditions to closing are fulfilled. Such conditions could include obtaining shareholder approval or regulatory approval. In cross-border transactions, which may involve differing corporate law or regulatory regimes, the process of getting such approvals may be unfamiliar for one of the counterparties and more drawn out than in a domestic transaction. Anticipating the steps involved and what each party will need to do to get to closing can be important, including what forum will most likely be able to grant enforceable relief.

A simple ‘reasonable best efforts’ clause might read:

The Parties will cooperate with each other and use their respective reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective the transactions contemplated hereby as soon as practicable and to cause the conditions to the Merger to be satisfied.

The parties can change the level of effort required under such clauses to suit their needs. Courts have often found it difficult to determine meaningful differences between terms such as ‘reasonable best efforts’ and ‘commercially reasonable efforts’, and if the parties intend each other to take particular actions, they should consider defining the required conduct as precisely as possible, including the maximum expense that a party may incur in complying with such a condition.16 Courts have, however, deemed provisions requiring that the parties take ‘any and all actions necessary’ to achieve a certain result to be a ‘hell or high water’ standard that goes beyond ‘reasonable best efforts’.17

Material adverse event clauses

A material adverse event clause is also standard.18 Such clauses allow a party to an M&A transaction to walk away if there is a major deterioration in the business of the counterparty. These clauses, as one might imagine, are heavily negotiated as they pose a threat to closing certainty.A very simple definition of an material adverse event clause might be as follows:

16See, e.g., Williams Cos. v. Energy Transfer Equity, L.P., 2016 WL 3576682, at *16 (Del. Ch. June 24, 2016) (under Delaware law, finding that ‘commercially reasonable efforts’ are ‘similar’ to ‘reasonable best efforts’), aff’d,

159 A.3d 264 (Del. 2017); Soroof Trading Dev. Co. v. GE Fuel Cell Sys. LLC, 842 F. Supp. 2d 502, 511 (S.D.N.Y. 2012) (under NewYork law, equating ‘reasonable efforts’ with ‘best efforts’). But see Lou R. Kling et al.,

Negotiated Acquisitions of Companies, Subsidiaries and Divisions § 13.06 (2017) (arguing that ‘best efforts’ imposes more of an obligation on a party than ‘reasonable efforts’, while noting that the terms are imprecise).

17See, e.g., Hexion, 965 A.2d at 756.

18This provision may also be called a material adverse effect or material adverse change clause.

92

© 2020 Law Business Research Ltd

@privlawlib

Drafting M&A Contracts to Minimise the Risk of Disputes

‘Material Adverse Effect’ shall mean any change, effect or circumstance that has a material adverse effect on the business, results of operations or financial condition of the Company, other than any of the following or any effect attributable to changes in general economic or political conditions, or any events, circumstances, changes or effects that affect the industries in which the Company or any of the Company’s subsidiaries operate.

US case law is typically sceptical of efforts to invoke such clauses in the merger context, and a buyer faces a ‘heavy burden’ if it wishes to use such a clause to avoid a merger.19

Representations and warranties

It is also worth remembering that the various representations and warranties parties may make in the merger agreement are conditions to closing itself.As discussed below in connection with post-closing disputes, some of those representations and warranties may lose any force after closing and so the only time to exploit them is pre-closing.

Provisions to protect interests if pre-closing injunctive relief is not practical

Realistically, in cross-border transactions where arbitration is the preferred forum, obtaining injunctive relief may be even harder than in domestic disputes. If there is a truly recalcitrant transaction partner, a court order or arbitral award may not provide the necessary relief. The courts in the domicile of the party may not recognise an injunction issued by a foreign court,20 and it may be difficult or impossible to have a preliminary award by an arbitral tribunal enforced by a court overseas.21 Given the potential risk that one party to a cross-border M&A deal will be able to avoid closing the transaction,the parties may want to consider other tools to protect themselves. Below are some of the typical provisions that may be considered.

19Hexion, 965 A.2d at 738. See generally Luxco, Inc. v. Jim Beam Brands, Co., 2016 WL 3136917 (N.D. Ill. June 6, 2016) (reviewing case law and, applying NewYork law, finding that no material adverse event had taken place).

For a rare example of where a court has found that a material adverse event has taken place, see Pan Am Corp. v. Delta Air Lines, Inc., 175 B.R. 438, 492-93 (S.D.N.Y. 1994) (permitting the airline Delta to withdraw an investment in its failing rival Pan Am in part on account of a triggered material adverse change clause). See also Katz v. NVF Co., 473 N.Y.S.2d 786, 788 (App. Div. 1984) (noting that the potential merger parties had agreed that the proposed acquirer was relieved from its obligation to make an offer for the proposed target ‘because of a

material adverse change in [the target’s] business and financial condition’); Osram Sylvania Inc. v.Townsend Ventures, LLC, 2013 WL 6199554 (Del. Ch. Nov. 19, 2013) (refusing to dismiss a post-closing claim by a buyer against sellers that a material adverse change had taken place before closing, giving rise to a claim for indemnification). In a recent ruling in the Delaware Court of Chancery, the court found that a MAC clause was, in fact, properly invoked to terminate a merger agreement pre-closing. Akorn, Inc. v. Fresenius Kabi AG, C.A. No. 2018-0300-JTL (Del. Ch. Oct. 1, 2018).The decision was subsequently affirmed by Delaware’s Supreme Court.

20 See, e.g., S. Nathan Park, Recognition and Enforcement of Foreign Provisional Orders in the United States:Toward a Practical Solution, 38 U. Pa. J. Int’l L. 999, 1001 (2017) (‘Although it is theoretically possible to obtain a

provisional relief from a U.S. court to aid the main proceedings in a foreign country, such course of action is fraught with uncertainty and delay . . . .’).Another option may be to seek injunctive relief from the courts at the domicile of the recalcitrant rather than at the arbitral seat.The availability of such relief, and efficiency in obtaining it, may vary.

21See, e.g., Peter J.W. Sherwin & Douglas C. Rennie, Interim Relief Under International Arbitration Rules and Guidelines:A Comparative Analysis, 20 Am. Rev. Int’l Arb. 317, 326-27 (2009).

93

© 2020 Law Business Research Ltd

@privlawlib

Drafting M&A Contracts to Minimise the Risk of Disputes

Reverse break-up fees

These provisions provide protection for the target if the transaction does not succeed. A failed transaction can be particularly damaging to a company, interrupting strategic planning and tarnishing value.A sufficiently high reverse break-up fee can provide a necessary check on the desire of a recalcitrant acquirer suffering from ‘buyer’s remorse’ to walk away from a deal, and also certainty of adequate damages if the deal does not close.22

Letters of credit

Negotiating a letter of credit to ensure deal closing may be very important if the counterparty is in a jurisdiction where there are concerns about the ability to enforce the contract in a timely and meaningful way.The letter of credit may provide funding for the acquirer’s purchase, or, if the deal fails, it may be a source of payment for the break-up fee. Letters of credit are usually keenly negotiated and may include provisions that the target company is a third-party beneficiary of the letter of credit and may enforce its terms.

Escrow

For the same reason, parties to a transaction agreement may decide to use escrow arrangements to ensure that the agreed funds are available at the time of closing. Escrows may be particularly important when the buyer is a special purpose vehicle. Escrows are often used to support working capital and other purchase price adjustments and post-closing indemnification obligations, but they may also be used as a source for a break-up fee.

Post-closing M&A disputes: will money damages suffice?

Following deal closing, the possibility of a dispute of course remains. An acquirer may realise that the company or asset it purchased is not exactly what it thought it was. Or, following a merger, one shareholder may feel that its expectations for the performance of the post-closing merged entity are not being met.Typically, post-closing disputes involve claims for monetary damages, but, in the case of mergers involving post-closing shareholder agreements or joint ventures, they can also include claims for injunctive relief. As will be discussed in Part II, unwinding is also available as a remedy in some jurisdictions. Again, practitioners drafting M&A agreements can take steps to anticipate and limit these risks, or at a minimum provide for reasonable means to resolve them expeditiously.A little planning may reduce the possibility of a dispute or materially improve a party’s ability to enforce its expectations.The following reviews the potential issues around some of these provisions – particularly as they may arise in the context of arbitration – which can include limitations on liability related to representations and warranties, working capital true-ups, earn-outs, and governance mechanisms in the context of shareholder agreements following mergers or joint venture agreements.

22A plain break-up fee (as opposed to a reverse break-up fee) is a fee that is paid by the target company to the acquirer in the event that the deal does not go through, for example if the target company enters into a merger agreement but then accepts a higher offer from another buyer.

94

© 2020 Law Business Research Ltd