Материал: Amy C Kläsener

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United Kingdom

Francis Greenway and Duncan Speller1

Frequency of M&A disputes

Despite a slowdown in activity from the second half of 2018 caused by actual and anticipated geopolitical, economic and regulatory challenges, global M&A has enjoyed one of the strongest and longest periods of growth in history. Announced transaction volumes in 2018 reached US$4.1 trillion, the third-highest year to date for M&A volumes, driven in large part by increased numbers of megadeals worth more than US$10 billion. Although 2019 volumes and values have decreased somewhat, the first half of the year still passed US$2 trillion – a figure, again, driven by a healthy share of megadeals.There are also signs that deal activity may well recover: capital remains available and cheap, and many sectors are restructuring to cope better with uncertainty, respond to activist investors and focus on core assets and operations.2 Elevated deal volumes and values increase the likelihood of high-stakes disputes and highlight the importance of selecting the right governing law and dispute resolution provisions.

The available data suggests that M&A disputes are becoming increasingly frequent. AIG, one of the world’s largest insurance providers, has published its fourth annual study of claims made under policies for warranty and indemnity (W&I) insurance, covering M&A deals with an aggregate value of more than US$1 trillion.3 The study concludes that 20 per cent of deals insured by AIG result in a claim notification. Claim sizes also appear to be increasing, with the proportion of claims over US$10 million having nearly doubled year on year (from 8 per cent to 15 per cent), a trend AIG says it is seeing ‘all over the globe’. Claim frequency remains highest for the largest and most complex deals, with

1 Francis Greenway is a counsel and Duncan Speller is a partner at Wilmer Cutler Pickering Hale and Dorr LLP.

2See https://www.ft.com/content/68aa3d40-e2ce-11e9-b112-9624ec9edc59 and https://www.jpmorgan. com/jpmpdf/1320746694177.pdf.

3https://www.aig.com/content/dam/aig/america-canada/us/documents/business/management-liability/ aig-manda-claimsintelligence-2019-w-and-i.pdf.

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the 2019 data indicating that 26 per cent of deals valued between US$500 million and US$1 billion resulted in a claim notification. In terms of subject matter, AIG’s study finds that a target’s financial statements give rise to the highest proportion of notifications, followed by tax, compliance with law and material contracts.

AIG’s analysis is borne out by a steady stream of M&A-related cases governed by English law over the past four or five years. There has been a succession of high-profile, publicly reported M&A disputes in the English courts,4 and there also appears to be a growing tendency for M&A disputes to be resolved under English law in international arbitration (particularly for cross-border deals).5 With the heightened deal activity and large deal sizes we are seeing, there is every reason to believe that it will continue to be a busy time for M&A disputes.

English law remains popular with parties involved in cross-border M&A transactions,­ even where neither the parties nor the transaction has a connection to the United Kingdom. English law continues to enjoy a strong reputation for (among other things): being business-friendly; upholding party autonomy and freedom of contract; being supported by well-developed, efficient judicial and arbitral institutions; and being accessible to parties from other common law jurisdictions. English law generally seeks to hold parties to the agreed terms of their bargain, particularly where those parties are sophisticated and have the benefit of professional advice. The specific terms of the contract agreed by the parties are therefore of critical importance when seeking to determine the extent of any rights and obligations that exist between them.What may seem like minor nuances in the wording of the contract can have a significant effect in practice.

In contrast to some other jurisdictions, English law does not generally have an overarching duty of good faith in the negotiation or performance of a contract (although terms can be implied into a contract in some circumstances).This makes it all the more important that the contract of sale expressly and unambiguously sets out the intention of the parties.What was said in the course of pre-contractual negotiations (including the subjective understanding of the parties as to what was intended) is generally inadmissible as evidence of how a contract should be interpreted under English law.6 Where pre-contractual

4See, for example, Starbev GP Limited v. Interbrew Central European Holdings BV [2014] EWHC 1311 (Comm); Shafi v. Rutherford [2014] EWCA Civ 1186; Heritage Oil and Gas Ltd & Anor v.Tullow Uganda Ltd [2014] EWCA Civ 1048; Ageas (UK) Limited v. Kwik-Fit (GB) Limited & Anor [2014] EWHC 2178 (QB); Treatt Plc v. Barratt & Others [2015] EWCA Civ 116; Ipsos SA v. Dentsu Aegis Network Ltd [2015] EWHC 1171 (Comm); Cavendish Square Holding BV v.Talal El Makdessi [2015] UKSC 67; Hut Group Ltd v. Nobahar-Cookson [2016] EWCA Civ 128; Zayo Group International Ltd v.Ainger [2017] EWHC 2542 (Comm);TeamY&R Holdings Hong Kong Ltd v. Ghossoub [2017] EWHC 2401 (Comm); Wood v. Capita Insurance Services Ltd [2017]

UKSC 24; Kitcatt v. MMS UK Holdings Ltd [2017] EWHC 675 (Comm); Teoco UK Ltd v.Aircom Jersey 4 Ltd [2018] EWCA Civ 23; Tesco UK Ltd v.Aircom Jersey 4 Ltd & Anor [2018] EWCA Civ 23; Al-Hasawi v. Nottingham Forest Football Club Ltd [2018] EWHC 2884 (Ch).

5For example,Tunde Ogunseitan, counsel at the ICC International Court of Arbitration, has said that, in 2015, M&A disputes ‘accounted for 13.6 per cent of new cases and, in 2016, 17.7 per cent’. See https://globalarbitrationreview.com/article/1142209/the-sexy-world-of-m-a-arbitration.

6Other than in limited circumstances, such as for claims for rectification of a contract or where a collateral contract can be identified (although this possibility may be excluded by the terms of the primary contract).

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statements are false and have induced a party to enter into a contract, they may give rise to liability for non-contractual claims for misrepresentation; liability for such claims can, however, be limited or excluded by suitably drafted contractual provisions.7

It is therefore essential that parties obtain proper advice on the governing law when documenting their agreement and make sure that they have allocated risk as comprehensively and effectively as possible.8

Form of dispute resolution

Both litigation and arbitration are popular dispute resolution choices in English-law M&A contracts and, in our experience, are frequently selected. Parties are, however, more likely to select arbitration when there is a greater international aspect to the deal.Where neither party has any connection to the United Kingdom, it is common to find dispute resolution provisions selecting English law alongside an arbitral seat other than England in a neutral jurisdiction (e.g., Hong Kong, Singapore or Switzerland). Practical advantages of international arbitration include confidentiality and the relative ease of enforcing arbitral awards across national borders under the NewYork Convention.

Expert determination is sometimes selected in English-law M&A contracts to resolve disputes involving disagreements on focused, technical questions that require specific expertise. Such disputes most often relate to accounting issues in post-completion price adjustment mechanisms that determine how those mechanisms work in practice.

Tiered dispute resolution provisions that provide for structured negotiations between the parties before arbitration can be commenced are also sometimes used. Other forms of alternative dispute resolution, such as early neutral evaluation, are more rarely selected by parties to M&A contracts.

Grounds for M&A arbitrations

‘M&A arbitration’ encompasses deal structures of all shapes and sizes, traverses industry sectors and has generated numerous high-value disputes of real factual and legal complexity.The nature of the relief sought by claimants and the legal grounds for obtaining it will vary from case to case and depend to a large extent on the terms, structure and commercial background of the transaction in question.

In general, however, an M&A transaction has several distinct phases, each of which can give rise to potential disputes.

The first is the contracting phase, in which the seller shares information about the target business with the buyer, and the parties negotiate the economic and legal terms of the transaction and allocate risk between themselves.Their agreement is documented in a contract, usually carefully negotiated with the help of advisers.9

7Apart from fraudulent misrepresentation, as discussed in ‘Fraud and failure to disclose’, below.

8Through warranties, other contractual protections or other means (such as warranty and indemnity insurance).

9To (among other things) agree that the business will be sold at completion, put in place warranty and indemnity protection, limit the parties’ liability, agree conditions precedent to completion and formulate a mechanism for the calculation and adjustment of the purchase price.

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The next phase comes between the signing of the contract and completion, in which conditions precedent to completion must be satisfied.10 During this period, buyers typically want to ensure that the business they agreed to buy does not lose value and continues to be run properly.11 The contract therefore often contains express covenants as to how the target business will be conducted between signing and completion. Such covenants typically include a requirement that the target’s business be conducted in the ordinary course, and require the seller to obtain the buyer’s consent for certain corporate actions that might lead to value leakage from the target or the assumption of excess risk.12

Finally, the buyer pays the seller an agreed sum (specified in the contract) at completion, takes control of the business and implements any integration plans. The parties’ contract will commonly provide for subsequent adjustments to be made to the sum paid at completion to reflect changes in value that have occurred since the economics of the deal were defined at the time of contracting.13

Typically (though not invariably) disputes arise after completion, once the buyer has taken control of the target and discovers issues impairing the target business for which the seller should bear liability.The types of claims that are most commonly encountered, along with their relative frequency are:

•Claims for breaches of contractual terms relating to warranties and indemnities. Such claims arise very frequently in English law arbitrations.They are usually based on there being a fact, matter or circumstance, not disclosed to the buyer, that affects the value of the acquired business.14 AIG’s study of claims under W&I insurance policies for global M&A deals suggests that the largest categories of breach relate to the accuracy of the target’s financial statements, tax liabilities, compliance with law and material contracts.15 Those findings are consistent with what we tend to see in English-law arbitrations.

10These vary from case to case, but generally include obtaining corporate and regulatory approvals.

11This is achieved by negotiating appropriate protections in the parties’ contract, such as covenants from the seller, material adverse change clauses and granting rights of access and information to the buyer so that it can monitor the business during this period.

12Such actions can be wide-ranging, but usually include the payment of dividends by the target to the seller, asset sales above a certain threshold and the agreement, amendment or termination of material contracts by the target.

13Adjustments can be made by reference to financial metrics (which vary, but can include net assets, net debt or working capital) in ‘completion accounts’ that reflect the updated financial position of the business at completion, or by reference to an earn-out mechanism whereby additional amounts become payable if the business outperforms certain thresholds or is sold on by the buyer for an amount above a defined threshold. An alternative to these adjustment mechanics is the ‘locked box’ structure, which seeks to crystallise the price and prevent purchase price adjustments by reference to financial data relied on at the time of contracting.

14These can include inaccuracies in the financial data provided by the seller (upon which the buyer based its calculation of the purchase price), the existence of litigation, the loss of material customers, compliance with laws and numerous other specific issues affecting any aspect of the target’s operations for which warranty or other contractual protections are negotiated.

15https://www.aig.com/content/dam/aig/america-canada/us/documents/business/management-liability/ aig-manda-claimsintelligence-2019-w-and-i.pdf.

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•Claims against the seller for misrepresentation.16 These claims are also very common in English law arbitrations,although tend to be slightly less frequent than claims for breaches of contractual terms because parties sometimes exclude liability for non-fraudulent misrepresentation in their contracts.When such claims are made, they are often brought in parallel to claims for breaches of contract.A claim for misrepresentation is based on false statements, usually made during pre-contractual negotiations, that induced the buyer to purchase the target business.

•Claims for breaches by the seller of its contractual obligations to run the business appropriately in the period between contracting and completion.These claims are also relatively common in arbitration.Any failure to comply with those provisions can lead to value erosion in the business for which a buyer can seek compensation.

•Disputes also frequently arise where parties take a different approach to applying price adjustment mechanisms in the post-completion period. Although these can result in arbitration, in our experience such disputes are most commonly referred to expert determination and are therefore encountered less frequently than claims for breaches of other contractual terms.17

•Disputes arising out of a failure to complete.These are rarer in our experience,18 and subsequent arbitrations (and court proceedings) are less common under English law.

There are of course plenty of exceptions to these general categories. Disputes may arise in relation to a variety of issues at any stage of the process, and the precise nature of the legal grounds will come down to the specific terms and relevant commercial context.19

Fraud and failure to disclose

In our experience, it is becoming increasingly common to see claims for fraud in M&A disputes. In many M&A contracts, the parties will have negotiated a cap on the parties’ liability for breaches of warranties.They may also have sought to exclude liability for misrepresentation by using a suitably worded entire agreement clause. Under English law, however, a party cannot exclude liability for fraud (as a matter of public policy)20 and it is common for

16Generally, such claims are for damages for negligent misrepresentation under Section 2(1) of the Misrepresentation Act 1967 but can also be made at common law under the principle in Hedley Byrne & Co Ltd v. Heller and Partners Ltd [1964] AC 465. Claims for fraudulent misrepresentation are also becoming more common and are discussed further in ‘Fraud and failure to disclose’, below.

17However, a determination by the expert is not always the end of the matter.Although courts and tribunals lack jurisdiction to overturn the expert’s determination on the substance, disappointed parties do occasionally try to challenge the expert’s decision by commencing proceedings in the courts or under an arbitration agreement on the grounds that the expert exceeded the scope of his or her instructions under the contract or misdirected himself or herself as to the task to perform.

18Which could arise, for example, from an alleged failure to satisfy conditions precedent or alleged repudiation of the contract by one party, giving the other the right to walk away.

19For example, disputes can arise where parties breach confidentiality or exclusivity agreements entered into as part of the contracting phase.

20HIH Casualty General Insurance v. Chase Manhattan [2003] UKHL 6 at [16], [76], [121], [122].

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