Effective Dispute Resolution

Structuring an effective approach to the dispute resolution provisions in an acquisition agreement requires an awareness of the risks and benefits of the various alternatives.

  • 19% of deals in 2020 include an alternative dispute resolution provision, typically as binding arbitration*
  • 90% of deals in 2020 include some sort of post-closing purchase price adjustment (PPA)*

Arbitration Risks:

  • Discovery: Too streamlined with limitations on discovery
  • PPA Disputes: Unless vetted in advance, conflicts may be present that disqualify the independent accounting firm assigned in the merger agreement
  1. —Establishing independence can be difficult and finding a replacement can be costly and time consuming
No Right to Appeal: Arbitration decisions are final Cost: Can be an expensive process if a high-profile arbitrator/panel is hired, or if extensive research is required

Litigation Risks:

  • Cost: Typically, more expensive than arbitration
  • Process: Typically, a more difficult process

Arbitration Benefits:

  • Process: Typically, more efficient than litigation
  • Cost: Typically, less expensive than litigation
  • Shift Expenses: Many arbitration agreements provide for shifting of the arbitration fees onto the losing party
  • Private: Proceedings and information disclosed remain private

Litigation Benefits:

  • Discovery: There will be a fulsome and complete discovery process that covers all potential issues
  • Right to Appeal: Is available if a mistake was made
  • Cost: In some cases, it may be less expensive
  • Public: The dispute is public for outsiders to see, \which may push the parties to find a resolution

“Arbitration and litigation both have an important place in the world of dispute resolution. M&A deal parties should consider the full range of issues to determine the best means to resolve any potential disputes that may arise.”

M&A Tip: Flush Out Conflicts

Flush out any potential conflicts before a proposed arbitrator is named in the M&A agreement. A conflict check may be run quickly. If confidentiality is a concern, name an arbitrator between signing and closing.

M&A Tip: Include a Covenant

Add a covenant that neither side will take any action after closing that will create a conflict with the agreed upon accounting firm prior to the resolution of the working capital adjustment.

M&A Tip: Use Accounting Arbitration Wisely

For agreements that provide for accounting arbitration, consider building in guardrails to avoid the accounting arbitrator being asked to opine on what are truly legal (and not accounting) issues.

*Source: 2021 M&A Deal Terms Study

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