M&A Litigation: A Lawyer’s Guide to Resolving Disputes

Lawyer's Guide

M&A litigation continues to be filed in high volumes. Shareholder litigation typically involves assertions of fiduciary duties, such as a duty of care and loyalty, in connection with acquisitions of public companies.

Other types of M&A litigation often involve “poison pill” provisions intended to thwart a hostile takeover, purchase price adjustments, books and records demands, appraisal rights, and stockholder derivative suits. 

Pre-closing Disputes

The principal category of M&A litigation involves disputes that arise before a transaction closes. Pre-closing disputes can be initiated by either the buyer or seller. Sellers can litigate to change a deal or to avoid it altogether, while buyers may pursue declaratory judgments allowing them to terminate the transaction or enforce specific performance. These cases are often time-sensitive and involve expedited proceedings.

M&A litigation also frequently involves post-closing disputes. These can include claims related to the purchase price adjustment provisions in an acquisition agreement (i.e., differences between how a business or asset is valued currently versus at closing), claims relating to earnout payments, and the resolution of target termination fee disputes, which are triggered by breakup fees in acquisition agreements. Shareholder litigation is a frequently encountered challenge in public company mergers and acquisitions, attributed to the widespread use of poison pill provisions and other takeover defenses. However, this category of M&A litigation can be effectively resolved through a settlement with the help of a highly competent corporate lawyer from Linden Law Partners.

Post-closing Disputes

Many disputes between buyers and sellers arise after the closing of a deal. A common dispute involves disagreements on the purchase price adjustment provisions often included in the transactions. These adjustments are based on the difference between the buyer’s and seller’s outlook of the target’s future financial performance.

These disputes are typically settled through payment of monetary damages. However, other forms of relief can be sought. For example, many M&A deals include contingent fees (or “earnouts”) to compensate the seller if specific performance goals are unmet.

M&A litigation is a significant concern for public companies and private equity, sovereign wealth funds, and other institutional investors actively seeking opportunities and having considerable investment portfolios. Understanding the most common M&A dispute topics and solutions to avoid them can help businesses achieve their transaction goals and minimize the impact of M&A disputes on their financial results. 

Arbitration

Arbitration is a helpful dispute resolution mechanism for M&A disputes because it typically offers a more efficient and cost-effective process than litigating in court. The parties can tailor the arbitration process and rules to suit the dispute and its issues. For example, arbitration rules generally permit discovery (though a tribunal may allow discovery only on the parties’ agreement or at its discretion).

It can also be more convenient to convene an arbitration hearing in a location other than a courtroom. Additionally, arbitration allows the parties to choose an arbitrator with expertise relevant to the underlying dispute. For instance, an arbitrator with knowledge of accounting principles is more likely to understand technical M&A disputes like completion accounts.

Additionally, arbitration awards are usually more readily enforceable than court judgments under the New York Convention and international enforcement regimes. However, it is vital to consider the enforceability of an award before agreeing to arbitration. Otherwise, a potentially expensive arbitration proceeding could be rendered moot by non-enforcement of the award in another jurisdiction.

Injunctions

M&A litigation often involves various federal and state law issues, including securities, antitrust, and fiduciary duty laws. The litigation typically seeks to enjoin the transaction or impose damages.

Injunctions are frequently sought to prevent a party from committing an illegal act likely to cause irreparable harm to the company and its shareholders. The irreparable harm often arises from a loss of employment or the deprivation of a financial opportunity.

Today, that practice has dramatically diminished – a development that practitioners and scholars should welcome. In its place, investors should be able to protect their interests through voting rather than having courts decide the outcome of M&A events on their behalf.

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