Reduce Litigation Risk for Your M&A Deal with Dispute Resolution Clauses

Every M&A deal includes the risk of disputes arising between the buyer and seller during negotiations or after the conclusion of the deal. These disputes can lead to litigation. Litigation is lengthy, costly, and public, and can undermine the benefits otherwise promised by the underlying M&A transaction.

So how do companies involved in mergers and acquisitions reduce the risk of litigation? A risk-mitigating approach to the negotiation of an M&A deal includes the consideration of dispute resolution clauses. Thoughtful, strategic dispute resolution clauses can save time and money, protecting the reputation of your business and the benefits of the deal.

However, not all dispute resolution clauses are created equal. While dispute resolution clauses should be crafted to suit the needs of the underlying transaction, drafting effective clauses requires consideration of the following factors:

1. Maximize the chances of an early business solution

   Clauses that maximize the chance for an early resolution allow decision-makers an opportunity to consider whether a resolution can be reached before engaging in litigation. While no clause can ensure the quick resolution of disputes, a clause that requires people with the power to resolve the dispute to consider resolution early maximizes the likelihood that litigation can be avoided, and the M&A deal can succeed.

2. Make mediation mandatory and efficient

   Although in many jurisdictions, mediation is mandatory, tailored, flexible mediation clauses should be considered. Mediation clauses can include processes for the selection of the mediator and the conduct of the mediation. Structuring these clauses to reflect the needs of the parties to the agreement maximizes the chances of a successful early resolution. The timing of the mediation is also a key consideration. Mediating prior to the full evidentiary disclosure required in litigation can save time and money. A well-crafted mediation clause considers the kind of information that will be required to conduct an effective mediation. Choosing the right mediator, that is, the neutral third person who facilitates discussions to assist parties to reach their own resolution, is also important. A good mediator looks at the arguments, assesses the legal, business, and other risks, and steers parties towards outcomes that reflect these broader considerations.
   

3. Private arbitration
   Effective dispute resolution clauses often include a clause requiring private binding arbitration. Litigation in Canada’s courts is, with very limited exceptions, public, and can result in negative publicity and the public disclosure of business dealings. In contrast, private binding arbitration is typically faster and far less expensive than court, and this dispute resolution procedure is private.
   
   Beyond keeping your company’s activities under wraps, the rules of private arbitration can be tailored to provide further benefits. For example, arbitration clauses can be crafted to eliminate the right of appeal from the arbitrator’s decision. Simply knowing there is no plan B in the event of losing the arbitration can motivate even the most litigious person to consider settling. When it comes to arbitration rules, established arbitration rules are available and can be modified and supplemented to suit specific needs.

Identify and Reduce Litigation Risk

While the majority of M&A transactions go through without a hitch, it is wise to anticipate and address the risk of public, lengthy, and expensive litigation. Strategic dispute resolution clauses can facilitate the efficient and effective resolution of any disputes that may arise.