Part 3: A Series Exploring Issues in Arbitration and Litigation
Beyond resource and conflict matters that may surprise M&A deal parties as they embark on an arbitration proceeding, additional factors need to be considered to determine how to structure the dispute resolution provisions in an acquisition agreement. The right to appeal, cost considerations, and the role of arbitrators can all contribute to unexpected results for participants on both sides of an M&A transaction.
How each of these factors cuts from a party’s perspective may very well depend on whether they won or lost. With that said, we still advise parties to carefully assess each issue to determine if the potential consequences are acceptable when finalizing the acquisition agreement.
- Right to Appeal. When deal participants agree to binding arbitration, they usually give up the right to the appeal process that is available to the parties in a court proceeding. For the side that wins, no appeal is an attractive benefit. For the losing side, even if the decision seems grossly unfair, they will have little or no ability to challenge the decision. Therefore, it is paramount that deal parties consider if they can live with the possibility of not being able to appeal a decision with which they disagree.
- Cost. In addition to the lawyers and experts that expect payment in connection with a proceeding, the arbitrators also expect to be paid, and their fees can contribute to escalated costs. Depending on how the arbitration is structured, the cost can be higher than expected. For instance, hiring a high profile arbitrator, requiring a panel of three arbitrators, or dealing with highly technical issues that demand research by the arbitrators can cause an arbitrator’s fees to add up quickly. Accounting arbitration done by a major accounting firm can also be very expensive compared to other types of arbitration. In SRS Acquiom’s experience, we’ve seen arbitration costs amount to hundreds of thousands of dollars. Furthermore, to benefit the winning party, many arbitration agreements provide for shifting of the arbitration fees onto the losing party. Put together, this is a part of the cost equation that the parties will want to consider as they finalize their deal.
- Law vs. Equity. A perception exists that courts and arbitrators take different approaches when it comes to making decisions. The assumption is that arbitrators are more likely to try to do “the right thing,” whereas courts hew more closely to “the law.” Whether the stereotype is true or not, parties should consider the potential impact of this perception when deciphering the issues relevant to their deal.
While many people may think that arbitration can be a “one size fits all” solution for M&A contract negotiation, the reality is not so simple. 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.
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View the second article in the series, “Watch out for Conflict Issues in Accounting Arbitrations“