Post-merger disputes: a resolution revolution?
No one wants to think about the possibility of a dispute arising out of a transaction. Especially pre-closing when all you want to do is get the deal done. Yet the process for how any dispute – should one arise – will be resolved should not be forgotten and deserves close attention for your next deal. Effort spent on getting that right will result in a significant saving of time (and costs) further down the line.
As reported in the CMS European M&A Study 2023, post-M&A disputes are not just the domain of national courts. Indeed, the report finds a general increase in the popularity of arbitration as a method of dispute resolution in an M&A context, although there are also clear regional preferences for courts or arbitration. In this article we explore this geographic variation and changes to the disputes landscape through the lens of two jurisdictions: Germany and the UK.
Germany
Arbitration has become a popular method in Germany for resolving disputes that arise in the wake of M&A transactions. Resolving these disputes through litigation in state courts can be expensive, time-consuming, and uncertain. As such, parties often opt for arbitration as a more efficient and cost-effective way to resolve these disputes. In Germany, the German Arbitration Institute (DIS) is the predominant arbitral institution, particularly for domestic disputes, and is also widely used for post-M&A arbitrations. Other popular arbitration rules include the ICC Rules, Swiss Rules and Rules of the Vienna International Arbitral Centre.
The CMS European M&A Study 2023 evidences the popularity of the use of arbitration clauses in M&A transactions in German-speaking countries. With the use of such clauses in 49% of the evaluated transactions in 2022, German-speaking countries have the second-highest usage in Europe behind only the CEE region. Between 2010 and 2021 arbitration clauses were used in 38% of all evaluated transactions in German-speaking countries. Furthermore, German-speaking countries are the only European region in which the use of arbitration clauses increased in 2022 (from 38% in 2021 to 49% in 2022), while other regions with a strong preference for arbitration clauses saw a decrease in the same year (CEE from 75% in 2021 to 72% in 2022; Southern Europe from 45% in 2021 to 38% in 2022).
These findings show that the use of arbitration clauses in transactions remains popular in German-speaking countries. However, there is an initiative seeking to compete with the heavy use of arbitration in transactions: the German government produced a draft bill in April 2023, which provides for the establishment of Commercial Courts (i.e. specialised state courts for corporate and commercial disputes, including post M&A disputes). The draft foresees the possibility of conducting the entire proceedings in English and giving judgment in the English language. The Commercial Courts are to be staffed with judges experienced in corporate disputes and fluent in the English language. A similar commercial court was already established in Stuttgart and Mannheim two years ago. Currently, however, the judgments of this court are delivered in the German language.
Further initiatives include the concentration of jurisdiction for post M&A disputes before state courts in the German state of North Rhine Westphalia, at the Dusseldorf Regional Court, if the amount in dispute is above EUR 500,000. The purpose of this concentration is to build up specialisation and corresponding efficiency among the experienced judges acting in these matters.
Generally, it remains to be seen whether the initiatives by the German legislators and government will lead to a change in the use of arbitration for post M&A disputes in Germany. For disputes over cross-border transactions, it seems doubtful that arbitration will lose its significance.
United Kingdom
Arbitration in M&A disputes does not quite enjoy the same popularity in the UK compared to Germany: only 8% of agreements included an arbitration clause in 2022, which was a slight increase over 2021 (7% of agreements).
The overall preference for court-based dispute resolution in the UK is likely driven by the English courts’ pre-eminent role in resolving international disputes. In this regard, as noted above it is significant that the German government is proposing to create its own local equivalent of the English Commercial Court. This has already happened in Paris and the Netherlands. Successive reforms over a long period of time have aimed to ensure that the English courts – and, in particular, the Commercial Court – retain their international competitiveness as an attractive forum for resolving disputes. For example, the “Business and Property Courts” initiative in 2017 saw a number of the specialist jurisdictions of the High Court of England & Wales brought within a single umbrella of business specialist courts across England and Wales.
However, the courts’ historical popularity should not be seen as overshadowing arbitration. Indeed, there is a clear trend of cases in which English courts have made clear that support the parties’ agreements to resolve their disputes by arbitration by upholding arbitral awards and respecting the decisions made by arbitral tribunals. Intervention by the courts is even less common. As an example, challenges to awards on the basis of serious irregularity have a high bar of demonstrating that one of a specified number of irregularities in the Arbitration Act 1996 has caused (or will cause) substantial injustice to the applicant. The case-law on this point is clear: the court will not intervene simply because it might have done things differently. This helps to ensure certainty of outcome, which is crucial to an efficient arbitration process.
In an M&A context, well-informed counterparties and their advisors should consider all the permutations for dispute resolution and adapt those options as appropriate for any particular transaction. The confidentiality and party-driven processes of arbitration as well as the potential to enforce an award internationally more easily can be highly desirable in some contexts while other processes (such as an expert determination) can be an effective method for resolving technical disputes where the law or facts are otherwise not in dispute.
Conclusion
The findings of this year’s CMS European M&A Study do not suggest a seismic shift in party preferences when it comes to resolving their disputes. However, given that nearly half of all deals in German-speaking countries include an arbitration clause, representing nearly three-quarters of all deals in Central and Eastern Europe, this prevalence means arbitration will play an increasingly important role in deals having a European nexus. While English courts continue to play a dominant role in resolving domestic disputes in the UK, we anticipate that the popularity of arbitration for international disputes will continue to grow as parties appreciate the potential advantages of having their disputes resolved in this way.
