Preparing for Litigation Before the Ink Dries
Getting key contract details right can help the resolution process and reduce costs if matters go awry in an M&A deal
No matter the size of a transaction, a contract with a trustworthy and faithful partner can, as the saying goes, be written on the back of a cocktail napkin. When the unexpected arises, the parties will work cooperatively to solve problems consistent with their initial expectations. But a deal with someone whose nature is to be adversarial will inevitably lead to disputes, no matter how carefully and thoroughly the relevant agreement is drafted. And sometimes, of course, you only discover the true nature of whom you’re dealing with when problems emerge. For that reason, having an eye on the possibility of disputes, and eventual litigation, is important even when parties to an M&A transaction are more focused on adding two and two together to create something greater than four.
Business parties rarely want to see transaction issues wind up in litigation and, in the midst of negotiating an M&A deal, it’s usually hard to foresee what disputes will later arise. But having a litigator’s early perspective on the things of consequence if a dispute arises can help avoid the matter winding up in court in the first place. Alternatively, if that’s where a matter ends up, getting key contract details right can also help to control the speed, efficiency or cost of the dispute resolution process.
Approach to the Definitive Agreement
Litigators often read contracts from back to front. That is, litigators start with the so-called “miscellaneous” provisions, which often appear in the last sections of an M&A purchase agreement, because those provisions define – perhaps far more than one might expect – what kind of dispute the parties may have and who may have the advantage. Neither optimism nor confidence should lull clients into minimizing these provisions that can determine the order of battle if a legal war ensues.
Choice of Forum
The most obvious such provision is the choice- of-forum clause, which defines where the parties’ dispute will be heard and by whom. Choosing one side’s home turf is rarely a good idea for the other side. Still, choosing a neutral jurisdiction may have its own disadvantages and may not impact both sides equally. For example, litigating in Delaware courts, a forum frequently chosen because many companies in M&A deals are organized under Delaware law, can be very expensive, because parties from outside Delaware will need local counsel to appear alongside their usual counsel, and Delaware corporate litigators typically charge much higher rates than practically anywhere else.
On the other hand, Delaware’s courts are very accustomed to handling disputes over acquisition matters and at managing their dockets to serve the needs of the parties – for example, by fast- tracking cases that might otherwise hold up a deal, or slow-tracking more complicated cases rife with evidentiary and legal issues that may require additional time for the parties and their counsel to work through. Such adaptability by a court may be highly desirable. It just comes with a high price tag that may ultimately affect how willing – or able – one side or the other is to shoulder the expense of mounting a fight.
While certain M&A-related disputes – such as resolving post-closing purchase price adjustments – are frequently dealt with by arbitration, this approach to dispute resolution may offer the parties a better alternative to a courtroom in the appropriate situation.
However, arbitration is a mixed bag. Though often touted as faster and cheaper than litigation, arbitration can be anything but. Arbitration proceedings in the U.S. share many of the procedural characteristics and costs of litigation, including written discovery, document production, depositions and even pre-hearing motions practice. (International arbitrations, by contrast, differ markedly from U.S. litigation.) And because the rules are few and subject to the discretion of the arbitrators, the due-process protections of compulsory process are limited if one side decides to stonewall, which tends to favor the side with the most ready access to information needed to prove its case.
Choice of governing law will also affect the scope of a dispute. State contract laws throughout the U.S. are broadly similar but differences exist that may prove good or bad for one side or the other in litigation over an M&A deal. A customary clause in acquisition agreements disclaims reliance on any representations outside the four corners of the written agreement. If enforced literally, this effectively bars claims for fraud based on anything disclosed or said during due diligence or negotiations unless it winds up as an express representation in the purchase contract. The law of some states, such as Delaware, enforces these clauses literally. Other states allow fraud claims based on misrepresentations (or omissions that are misleading) outside the deal documents, notwithstanding the disclaimer of reliance.
Still others enforce the disclaimer clause to the extent it specifically identifies materials on which reliance is disclaimed. A seller trying to narrow the range of potential claims would prefer to have one of these states govern the contract, while a buyer looking for an opening to raise new issues would prefer another. When choosing among the possible states whose law could govern the contract, the party who believes it is more likely to assert or defend a misrepresentation claim will want to bear in mind this issue.
By the time an M&A deal that is headed to litigation lands on a litigator’s desk, many of the most important tactical decisions have already been made. Considering these issues from a litigator’s perspective on the front end, while negotiating the deal or making decisions about representations-and-warranties insurance, can help businesspeople arrange the field and set the terms of engagement to their advantage before the battle has been joined. And bear in mind: if you’re not thinking strategically along these lines while the deal is still being negotiated, is your future opponent?