Advantages of arbitration for resolving disputes in M&A transactions

Mergers and acquisitions are very complex transactions that are sometimes concluded too hastily due to the risk of a competitor coming along with a better offer. For this reason, it is inevitable that disputes between the parties sometimes arise after the closing of the transaction. E.g. for non-compliance with declarations and warranties, insurance coverage of risks… In these cases, initiating arbitration is always less aggressive and quicker than resorting to litigation, which is a process that can take a long time and will force the disputing parties to make provisions for possible adverse results in their accounts during the time it takes to resolve the dispute. Between the first and second instance, in the ordinary courts, we can easily be talking about years. And we know that in today’s fast-moving environment, companies need to act fast and cannot afford to waste time. Because that means money and lost opportunities.

For this reason, arbitration is becoming increasingly popular in the resolution of all types of disputes, including those arising from the sale and purchase of companies. Some sources already suggest that up to 25% of post-M&A disputes already resort to arbitration in Spain.

Advantages of arbitration in M&A disputes

The arbitration institution currently enjoys prestige and recognition because:

As we have seen, it ensures shorter timeframes and prevents disputes from stagnating for fear of litigation.
It grants confidentiality to the parties and makes it possible to avoid publicising the terms of the contract or even the very existence of the dispute. In ordinary justice, on the other hand, judgments are always public.
A specialist arbitration tribunal makes a final decision on the dispute.
It is an amicable procedure that makes it possible to save the relationship between the parties in dispute because initiating arbitration is less aggressive than initiating a lawsuit. Litigation often leads to an irretrievable breakdown of relations. Arbitration is more like seeking a neutral expert opinion to resolve a dispute and the relationship between the parties can be restored.
For investment funds, it provides certainty, reduces the uncertainties of the transaction and ensures that a possible divestment is not penalised by the risk involved in any conflict.
Arbitration is less formally rigid than litigation. Its flexibility allows it to be adapted to the interests of the parties.

When it is best to use the arbitration process

Arbitration is particularly advisable in two types of M&A transactions:

In international transactions. Because it overcomes possible discussions about the jurisdiction to be applied and facilitates the enforcement of the award in different countries. In addition, it allows the natural use of other languages in the process.
In transactions of particular technical complexity. If the subject of the transaction is a company in a particularly complex sector, such as pharmaceuticals or banking, arbitration provides valuable external expertise to resolve the dispute.

Incorporating the arbitration clause into contracts

To facilitate the resolution of possible disputes in an agile and amicable manner, at Confianz we always recommend including the arbitration clause in all contracts that form part of the purchase-sale transaction (shareholders’ agreement, articles of association, investment agreement…).

But the most important thing is always to conduct a thorough pre-assessment to mitigate the risks intrinsic to all M&A transactions. Because sometimes the best way to avoid conflict is to withdraw from the transaction. A favourable award is of no use if the other party does not have sufficient resources to mitigate the damage caused.