Frequency of M&A disputes
Mergers and acquisitions (M&A) disputes are common in the United States. This is not entirely surprising, as the US accounts for a large percentage of global M&A deals – nearly 60 percent of all global deals (by forecast value) in 2021 took place in the United States.
After record M&A activity in 2021 and the start of 2022, there is a marked increase in M&A disputes in 2022. In addition to a net increase in deal volume, which increases the statistical likelihood of disputes, this increase in disputes is also attributed to high company valuations during the covid-19 pandemic and the increasingly bleak economic outlook. See the article : US Inflation Reduction Law is ‘super aggressive’, Macron tells lawmakers. High valuations increase the likelihood of disappointment; failure to achieve expected performance may also lead to lower earnings payouts. These circumstances often result in earnings disputes and related accounting disputes and claims for damages.
Although M&A activity generally cooled in the second half of 2022 compared to 2021, 2023 is still forecast to see healthy M&A activity. Venture capital and private equity firms currently hold large dry powder stocks, and macroeconomic conditions have created attractive opportunities due to lower company valuations. This sustained activity is expected to lead to a further series of M&A disputes. In addition, more M&A disputes are expected by 2023 given rising fears of a recession along with staggering inflation numbers, unprecedented high interest rates and energy costs, and geopolitical threats.
Form of dispute resolution
Merger and acquisition disputes in the United States are usually resolved through arbitration or litigation. Although the lack of publicly available arbitration records makes it difficult to quantify with precise certainty the percentage of disputes that are resolved in arbitration (compared to court proceedings), the data show that arbitration is becoming less popular as a form of dispute resolution in private companies. M&A transactions in the United States.
This conclusion can be drawn from the American Bar Association’s (ABA) Private Target Mergers and Acquisitions Deal Points Studies, which is published every other year. In the late 2000s, ABA studies found that arbitration provisions were included in about 35 percent of transactions, while in 2021, they found that arbitration provisions were included in only about 7 percent of transactions. However, according to SRS Acquiom’s MarketStandard database, 15 percent of all transactions globally included an arbitration clause, and when a US public buyer was involved, arbitration clauses were used in 18 percent of transactions. To see also : Secretary Antony J. Blinken At a Press Availability – United States Department of State. However, it should be noted that when US financial buyers are involved, no transaction contains arbitration provisions in the MarketStandard SRS Acquiom database. This could reflect the preference of US banking institutions for New York courts.
Regardless of the exact percentage of M&A deals in the United States that include arbitration provisions, this apparent downward trend appears to be in contrast to the increase in M&A arbitrations at arbitral institutions around the world (including Europe and Asia). For example, reports from the London Court of International Arbitration and the Singapore International Arbitration Center seem to indicate an increase in the number of M&A or related disputes. Time will tell if the US returns to greater arbitration to resolve M&A disputes.
Finally, M&A transactions sometimes include other methods of alternative dispute resolution, such as arbitration and mediation provisions. For example, expert judgment is most often used to resolve accounting disputes.
Grounds for M&A arbitrations
Most M&A arbitrations involve post-takeover claims arising from the terms of the purchase agreement (PSA) relating to the transaction. A PSA typically includes provisions setting forth the purchase price and earnings (if any), representations and warranties, and indemnification obligations. Arbitration will be the method of dispute resolution only if the PSA contains an arbitration clause. To see also : 2022 F1 United States Grand Prix Session Times and Preview. The applicable law selected in the PSA will be the substantive law used in the arbitration, most commonly the applicable law of New York and Delaware. New York and Delaware law are generally “contractual,” meaning that the plain meaning of agreements will generally be enforced according to their terms. The legislation of New York and Delaware is also often chosen because of the well-developed case law that decides economic and corporate disputes.
Post-closing purchase price disputes often focus on post-closing purchase price adjustments. For example, PSAs often provide for adjustments to the purchase price based on the target’s actual working capital at closing to ensure that the final purchase price corresponds to the target’s financial condition at the time of closing. These provisions take into account that the financial situation of the company may change between the date the PSA is executed and the date of completion. It may take several months for customers to close on a fully executed PSA if customers are required to obtain regulatory approvals or financing or undergo any additional due diligence. Disputes relating to working capital adjustments may arise from disagreements over the applicability of certain accounting principles or policies, as well as disputes over target receivables, inventories, accounts payable and accruals and contingent liabilities.
Calculation of earnings is another common source of disagreement between parties. Earnings are additional compensation that a seller can earn if the target reaches certain financial milestones in the months or years after closing. An M&A buyer typically engages in extensive due diligence on the target before entering into a binding PSA to identify the target’s strengths and weaknesses and potential synergies. Whether synergies are achieved after closing can have a significant impact on whether earnings milestones are triggered. These disputes therefore focus on the calculation of a company’s financial performance, and since this is generally based on the company’s EBITDA (earnings before interest, taxes, depreciation and amortization), the treatment of certain costs and expenses in this calculation can be a source of dispute. Earnings can also be dependent on or subordinated to other company debts, which can also lead to disputes. Moreover, the company’s performance itself can be the basis for M&A profit arbitrage. For example, the timing of certain expenditures, the failure of the business to operate in the normal course, or general mismanagement by the acquiring company may prevent the target from achieving certain earnings milestones required by the PSA.
Indemnification provisions can be another source of contention. Indemnification obligations generally require the seller to defend, indemnify and indemnify the buyer against various claims, including claims arising from the seller’s breaches of its representations and warranties. However, indemnity obligations may be limited by liability caps and certain threshold amounts that must be met (called baskets) in order for claims to be made, and such claims are often also limited by survival time.
In Berkeley Research Group’s 2022 M&A Disputes Report, North American stakeholders identified breaches of representations and warranties by sellers as a key driver of M&A disputes. Some of the most common representations and warranties ensure the accuracy of the target’s financial statements. According to the ABA Private Target Mergers and Acquisitions Deal Point Studies, buyers demand financial statement presentations in almost all transactions, although the language of representations and warranties is generally highly negotiable. Other customary representations and warranties include assurances about the accuracy of certain regulatory or environmental disclosures.
However, it should be noted that the use of representation and warranty insurance (R&W insurance) has become a mainstay in M&A transactions in the United States, providing insurance coverage for breaches of representations and warranties in PSAs. R&W insurance is most commonly purchased by the buyer and allows the seller to exit the transaction with greater certainty by limiting or eliminating the need for seller indemnity. By eliminating the deposit hold, R&W insurance can make a deal more attractive, increasing the time a buyer has to discover problems with a transaction and allowing parties to more effectively negotiate a transaction agreement. In the event of a breach of representations and warranties, policyholders may turn to their R&W insurance for recovery.
Breaches of representations and warranties
As noted above, a buyer will typically perform extensive due diligence before entering into a binding PSA. That being said, there is generally no affirmative duty of disclosure between a buyer and a seller. This is one of the reasons why representations and warranties are included in PSAs. Common representations and warranties of the seller are that material information related to the business (such as litigation or claims, environmental issues and the status of key customer relationships) has been disclosed. The parties may negotiate knowledge qualifiers regarding representations and warranties, with the seller often attempting to limit its liability for representations or warranties that may not be accurate. For example, the parties may negotiate whether knowledge qualifiers include only actual knowledge of the target or also include knowledge that officers and directors should have had in their official capacity when they exercised due diligence.
Fraud and failure to disclose
Generally, the legal elements of fraud under New York and Delaware law are as follows:
Although there are differences between states, at least under New York and Delaware law, a claim for fraud may be made in a PSA misrepresentation if the above elements are met. In other words, the inclusion of a representation of facts in the PSA does not bar the buyer from claiming for breach of contract under the Act.
Contractual disclaimers or limitations may apply. With respect to non-contractual misrepresentations, the contract may disclaim reliance on any non-contractual representation. However, Delaware courts will not allow parties to a contract to bar or limit an action for fraud against parties who make an intentional misrepresentation in the agreement itself.
Company officers generally will not be individually liable for contractual claims against the company unless the contract specifically requires it. However, if a claim of fraud is made in the filing, the officer could be held liable if he actually knew of the fraud. Delaware courts have held that this liability can potentially extend to a key institutional shareholder (eg, a private equity sponsor) whose nominee directors knew of the fraud, even if the shareholder himself did not.
Burden of proof
A plaintiff must prove his claim, including fraud or breach of contract, by a preponderance of the evidence standard (ie, that it is more likely than not that each element of the claim existed at the time required).
Knowledge sharing
The parent company is not usually credited with knowing its subsidiaries. For this reason, the target’s parent element will generally not be liable for target misstatements or omissions. However, if the subsidiary acts as an agent or alter ego of its parent, or in other special factual circumstances, that knowledge may be attributed to the parent.
The main implications from an arbitration point of view are obvious: the larger the group of persons whose conduct gives rise to liability, the greater the chances of proving a breach of contractual representations and warranties. Moreover, if not only actual knowledge but also knowledge that a reasonably prudent or careful person should have gives rise to contractual liability, the possibility of liability against the seller is greater.
Practical problems can arise when officers and directors of the target company who have confirmed the accuracy of the statements in the PSA remain employed by the buyer after closing, as it is difficult for the buyer to argue that the seller knew or should have known that the statements were incorrect. Another aspect to consider is that knowledge within the target company may be subject to specific confidentiality restrictions and therefore not accessible or useful to either sellers or buyers in an M&A transaction. This is especially true for controlled entities such as banks or other financial institutions subject to statutory (bank) secrecy, as well as companies with strict trade and business secrets or strict contractual confidentiality obligations.
Remedies
New York law recognizes broad powers of arbitrators with respect to remedies. Remedies for breach of contract typically include monetary damages, although attorneys’ fees and consequential damages may also be awarded if the PSA allows. Punitive damages are generally not available in breach of contract actions. Although punitive damages may be obtained as a remedy in fraud cases, the threshold for recovering punitive damages is usually extremely high and requires extremely egregious or “morally culpable” conduct.
For breach of contract claims, “the usual rule is that it is impractical to set aside an effected merger,” and damages will be the typical remedy in arbitration. The parties may obtain certain performance, including compelling the party to complete or terminate the transaction, in accordance with the terms of the PSA.
Measure of damages
M&A agreements often provide for limited or contractual indemnification if the provision is intended to be compensatory rather than punitive. The general rule under New York law is that plaintiffs who bring fraud claims can recover monetary loss resulting from the fraud. Such damages may be measured by (1) the difference between the value of the asset purchased, sold, or exchanged and its purchase price or the value of the asset exchanged for it, and (2) pecuniary damages incurred otherwise than as a result of the recipient’s reliance on reality of representation. In the context of fraudulent inducement, the law restores the parties to the position they were in before entering into the contract.
Availability of tort claims
A party may be held liable to a contractual counterparty for tortious conduct if the tortious conduct involves a breach of a “duty of reasonable care distinct from its contractual obligations, or where it has engaged in tortious conduct separate from its failure to fulfill its contractual obligations. Obligations’. In addition, a claimant may assert a claim for damages if the party fraudulently induced the party to enter into the contract or if the party engaged in non-contractual conduct intended to invalidate the contract. On the other hand, a party who only wants to assert contractual rights cannot file a claim for damages.
Law applicable to tort claims
While contract choice-of-law provisions generally apply to claims for breach of contract, some states will not expand the scope of a choice-of-law provision to include tort claims. New York courts will generally apply choice of law provisions very narrowly and will not construe a choice of law provision to include tort claims unless the contract expressly provides that such tort claims are covered. Other countries, however, will interpret the choice of law clause more broadly to cover claims for damages arising from a contractual relationship.
Special substantive issues
The US Arbitration Act reflects a federal policy favoring arbitration. The law provides for strong, uniform and broad enforcement of arbitration agreements.
Other US legal regimes may apply depending on the nature of the transaction, such as the review process under the Committee on Foreign Investment in the United States. In addition, if either party approaches insolvency or bankruptcy proceedings (voluntary or involuntary), this may affect the ongoing arbitration proceedings.
Special procedural issues
New York law contains a specific provision for judicial enforcement of expert opinions. In the M&A context, specific factual or technical issues, such as purchase price adjustments, are often decided by independent experts rather than arbitration. Pursuant to Rule 76 of the Act and the New York Rules of Civil Practice, a party may bring an action to “expressly enforce an agreement that the question of valuation, appraisal or dispute be determined by a person appointed or to be appointed.” The standard of review for such decisions is broader than that applied to arbitral awards: that is, in order to overturn the decision, a party must demonstrate “palpable error” or failure to follow accepted procedures.
Notes
Is there 50 or 51 states?
United States: 50 states and the District of Columbia. Continental United States: 49 states (including Alaska, excluding Hawaii) located on the North American continent and the District of Columbia.
What will the 52nd country be? If they became a state, the people of Puerto Rico would be given all the rights and representation already afforded to most other US citizens. For answers to all your questions about the current status of Puerto Rico, please see the updated What is Puerto Rico?
What is the 51st American state?
On April 22, 2021, the United States House of Representatives voted 216 to 208 to statehood for Washington, D.C. A similar bill, S. 51, “An Act to provide for the admission of the State of Washington, D.C. into the Union” was previously introduced in the United States Senate.
Are the 50 states actually states?
In the United States, a state is a constituent political unit of which there are 50. Each state bound together in a political union has governmental jurisdiction over a separate and defined geographic territory where it shares its sovereignty with the federal government.
Why are there 52 stars on the American flag?
The 50 stars represent the 50 countries and the 13 stripes represent the 13 original colonies. from The CIA World Factbook.
Is there a 52 star flag? This flag is invented or proposed but not adopted. It may be designated as the official flag of a geographic or other entity and have some visual elements similar to the official logos or flags of that entity, but it is not official and has no official recognition.
Why are there 50 stars on the American flag but 52 states?
When the Stars and Stripes were adopted in 1777, there were 13 states (then colonies), hence the 13-star flag, and as each new state was admitted to the union, a star was added to the flag. The current 50-star flag, confirming Hawaii’s acceptance, was unveiled on July 4, 1960.
Why does America have 52 states?
There were never 52 countries. There are 50 states, the District of Columbia, the seat of government, and the territory of Puerto Rico.
Are there 50 or 52 stars on the American flag?
How many stars and stripes are there on the flag? The 50 stars represent the 50 countries and the 13 stripes represent the 13 original colonies.
Why is the US called America?
America was named after Amerigo Vespucci, the Italian explorer who proposed the then-revolutionary idea that the lands to which Christopher Columbus sailed in 1492 were part of a separate continent.
Is it correct to call the United States America? The United States of America (US or USA), commonly known as the United States (US or USA) or America, is a country located primarily in North America.
When America started to be called America?
On his 1507 map, Waldseemüller named the new lands “America” in recognition of Vespucci’s understanding that a new continent had been discovered after Columbus and subsequent voyages in the late 15th century.
