Agefi Luxembourg - septembre 2024

Septembre 2024 39 AGEFI Luxembourg Droit / Emploi By Annie ELFASSI, Partner Dispute Resolution & Elodie DUCHÊNE, Partner Corporate M&A, Baker &McKenzie Luxembourg 2 021was a record-breaking reco- very inMerger andAcquisition (M&A) activity. The global total value of all deals reached an all-time high of USD5.9 trillion (1) . However, the past fewyear have been challenging forM&A, with several circums- tances (geopolitical instability, remaining impacts of the Covid-19 pandemic, infla- tion still high) that contri- buted to slowdown the M&Aactivity (2) . This also led to a growingwave of postM&Adisputes.Many of themhave been resolvedby arbitration. In this article, we will analyze some of the potential benefits of arbitration to settle post M&A transac- tions (1) and summarize themajor types of disputes coming before the arbitral tribunals (2). WhyArbitration ? M&Atransactionsusuallyinvolvecomplexlegaland businessprocedures.Duetothiscomplexity,arbitra- tion has been seen as more appropriate forum as compared to litigation. In this part, we will discuss some of themain characteristics that may be benefi- cial for postM&Adisputes. Confidentiality and privacy Parties to anM&A transactionmay prefer the confi- dentiality andprivacy that the arbitral process offers to resolve their disputes. Confidentiality reduces the riskofaggravatingparties’disputeandlimitsthecol- lateral damage of a dispute. However, while confi- dentiality is considered as a duty in arbitration proceedings, this duty is not absolute (3) . For instance, parties shall comply with confidentiality in Luxem- bourg unless otherwise prescribed by law (4) . Conse- quently, Parties dealing with sensitive financial and commercial material will be well-advised to include confidentialityprovision in their arbitrationclause to ensure a high degree of confidentiality andprivacy. Ease of enforcement As arbitral awards benefit from the protection of the New York Convention on the Recognition and En- forcementofForeignArbitralAwards(the“ Conven- tion ”) (5) , as well as arbitration-friendly legislation in manycountries,theywillbeeasiertoenforceinafor- eignstate.UndertheConvention,therecognitionand enforcement of an award is an expeditive procedure with limited and exhaustive grounds for denying recognitiontoanarbitralaward.TheConventionhas currently 172 contracting parties which may be a unique advantagewhen it may not be known to the parties where enforcement will need to take place. This feature is particularly attractive in cross-border M&A transactionswithmulti-national parties. Selection of the arbitrators Another essential characteristic of international arbi- tration is toprovide a competent, expert dispute res- olution process. The parties may select an arbitrator with an extensive experience of M&A transactions whichallowhim/her tounderstand thedetailedand technicalissueswhichmayarise.Thiswillhelptoen- sure the arbitration is conducted efficiently and limit theriskofanunexpectedoutcomeorincorrectresult. Flexibility Theparties are generally able to shape and influence the arbitration procedure, the timetable for the pro- ceedings and the approach to evidence in away that they cannot in domestic courts. Parties can also en- quire about the capacity and future commitments of tribunal members before they are appointed, to en- sure that their availability will not be an obstacle to effectivecasemanagement.Fromourexperience,the average length inpostM&Adisputes for small arbi- trations (i.e. the damages sough are less than USD 5 million)is20monthswhereasitis30monthsforlarge arbitration cases where the damages claimed are in excess of USD5million. This can be important since parties donotwant towait years tofindoutwhether they can retrieve their funds kept in an escrow ac- count anduse them. Better formultiple parties M&A transactions often involve not a single agree- ment between two parties, but a chain of transaction documents between multiple parties. This may in- clude the buyer, the seller, the target company, other shareholders, subsidiaries and guarantors. Toavoid the riskofmultipleparallel proceedings re- lating to the same facts, arbitral institution rules pro- vide clear provisions on consolidationand joinder of third parties. By incorporating those rules into their arbitration agreement, parties will normally have consented inadvance to thepossibilityof the consol- idationofproceedingsandthejoinderofthirdparties in disputes arising under compatible arbitration agreement.ThismaybeusefulforM&Atransactions involving numerous transaction documents. What is being arbitrated In this part, we will discuss the typical points of dis- pute inM&A transactions. WarrantyClaims Claimsforbreachofwarrantiesareprobablythemost commonpost-M&Adisputes referred to arbitration. Of over a hundred post-M&A cases studied, 47% were warranty claims. InM&A transactions, the ne- gotiation of warranties is a critical process, as they provide amechanism for the buyer to recover losses if the warranties are breached. The specific terms of these warranties, including any limitations on their scopeandduration,areoftenheavilynegotiatedand can therefore often be the object of a dispute. Awarrantyisastatementoffactastotheexistingpo- sitionofthetargetcompany.Forinstance,asellerwill grant warranties on the lack of encumbrances in rem onthecompany’ssharesorthelackofcircumstances indicating that the company is insolvent. InanM&A context, the purpose of the warranties is to provide the buyer with a mechanism for retrospective price adjustment if any of thosewarranties are untrue. If, after the closingof a transaction, the buyer discov- ersthatawarrantywasuntrue,andprovidedthatthe seller has not fairly detailedwhy thewarranty is un- true, the buyer may bring a claim against the seller for breachof thatwarranty. Thebuyerwill seek tobe compensated in such away tobe put in the position it would have been in if the informationwarranted were true. In other words, the compensation will be calculated by reference to the difference in the market value of the target at the time of completion if the warranty was true and the true value of the target company given the actual position (6) . The most common warranty claims arise out of (i) the financial statements warranty (often raised more than 12 months post-policy inception) (7) , (ii) the accuracy of informationwarranty (8) and (iii) the material contract warranty (9) . Afinancial statementswarranty is a representation made by the seller that the financial statements of the target are true, accurate, and complete in allma- terial respects. This warranty typically covers the balance sheet, income statement, cash flow state- ment, and notes to the financial statements. Such warranty assures the buyer that the financial infor- mation provided by the seller reflects the com- pany’s actual financial condition inaccordancewith the relevant accounting principles. An accuracy of information warranty is broader thanafinancial statementswarranty. It relates to the veracity and completeness of a wide range of data and informationprovidedby the seller to the buyer. This can include information about the company’s business operations, assets, liabilities, customer and supplier relationships, intellectual property, compli- ancewith laws, andmuchmore. Thepurposeof this warranty is to confirm that the information upon which the buyer is basing its decision to purchase the target is accurate. It is a safeguard against the risk of the buyer discoveringpost-acquisition that it has made its investment based on incorrect or in- complete information. A material contract warranty is a statement by the seller that all contracts material to the business have been disclosed to the buyer and are in full force and effect. Material contracts are those that are essential totheoperationandprofitabilityofthebusiness,such asleases,supplyagreements,customercontracts,and licensing agreements. Thewarranty serves to assure the buyer that the company’s key business relation- ships are stable andwill continue post-acquisition. This warranty typically includes that: - The contracts are valid, binding, and en- forceable inaccordancewith their terms. - The company is not in breach of any material terms of these contracts. - No event has occurred that would constitute a breach or default under anymaterial contract. - There are no disputes or renegotia- tions ongoingwith respect to anyma- terial contracts. It is noteworthy that the likelihood of success in warranty claims is roughly one in two. The success rate is even lowerwhen the arbi- tral tribunal grants to the buyersmore than 50%of their claim. The main hurdle for the buyers in warranty claims is to be able to provide sufficient evidence to sup- port their assertion that the seller has breached the warranty givenunder a share purchase agreement. Indemnity Claims Other frequent claims raised inpostM&Adisputes are indemnity claims. 28% of the cases studied in- cluded an indemnity claim. An indemnity is a promise from the seller to compensate the buyer in respect of known or identified risks, such as tax risks, GDPR, employment law or environmental law risks (10) . The indemnity therefore provides the buyer with a tool to protect itself from the failure by the target company to comply with those risks. Indemnity claims are farmore often successful than warranty claims. In over 75 of the cases studied, the buyer is successful. Even better, the buyer is able to obtain more than 50% of its claim in 50% of the cases. This higher success rate of indemnity claims is explainedby several factors. First, there is usually no obligation on the part of the buyer suffering the damages to minimize them (11) . Second, the seller does not have tohave caused thedamage, theman- ifestation of the defined damage is generally suffi- cient (12) . Last, the damage arising is compensated and does not have to be quantified (13) . Therefore, while in a warranty claim the claimant shall show the warranty is untrue and the value of the target company at completion was lower than the value if the warranty were true, an indemnity claimsolely requires the claimant to evidence that it has suffered a loss due to the other party’s failure to protect it froman identified risk (14) . Fraudulentmisrepresentation It is common that on conclusion of aM&A transac- tion, apartydiscover that itwas the subject of amis- representation. Out of over a hundred cases stud- ied, misrepresentation is the third most frequent cause of action in post M&A dispute, representing 29% of claims filed. In an M&A deal, the seller will make statements of past or existing facts relating to the target company. The purpose of such statements is to guarantee the accuracy of the information provided by the seller aboutthefinancialandoperationalstatusofthetarget company as at the date of the closing. However, due totightnegotiationprocessand/orlightduediligence conduct, the information may be inaccurate. It may also occur that the seller made false or misleading statementoromittedamaterialfactduringthenego- tiation to obtain a higher price. These factors may lead the seller failing to provide all thenecessary information, and therefore, can lead thebuyer tobringamisrepresentationclaim. Inboth scenarios, the buyer will seek to recoup costs, argu- ing that an accurate picture of the business has al- tered their initial purchase amount. 20%of misrepresentation claims filed are success- ful. This surprisingly high rate may be explained by the fact that a party will bring such claims if they have sufficient evidence to show the misrep- resentation. In conclusion, the current economic unpredictabil- ity is likely to lead to a significant rise in postM&A disputes since parties may look to exit deals, delay completion or renegotiate share purchase agree- ments. Arbitration is a good option to choose for the settlement of such potential disputes provided the arbitration clause is well-drafted. Its confiden- tiality, flexibility and efficiency are perfectly suited to such disputes. 1)Anna Baird, FTI Group, A record-breaking year inM&A , July 15, 2022. 2) Financier Worldwide Magazine, International M&A trends : 2024 a year of recovery , July 2024. 3) Court of Appeal John Forster Emmott v Michael Wilson & Partners Ltd [2008] EWCA Civ 184. 4) Article 1231-5 of the Luxembourg NewCode of Civil Pro- cedure. 5) The New York Convention on the Recognition and En- forcement of ForeignArbitral Awards, 10 June 1958. 6) James Worrall, Protecting buyers’ value in M&A : Part 1 - Warranty claims , July 8, 2020. 7) More than 20 financial statements warranty claim out of 100 cases studied. 8) Almost 15 accuracy of information warranty claims out of 100 cases studied. 9) Less than 5 material contracts warranty claims out of 100 cases studied. 10) Michael Wekezer, Indemnity v. Warranty under Common Law . 11) Baker &Mckenzie Luxembourg Newsletter, Indemnifica- tion clauses , October 2022. 12) Idem. 13) Idem. 14) Baker &Mckenzie Luxembourg Newsletter, Indemnifica- tion clauses and Representations and warranties , October 2022. Post-M&ADisputes: Is arbitration themost appropriate forum? ϙ PROGRAMME 8h30-9h00 : Accueil (café) 9h00-9h15 : Mot de Bienvenue et introduction Franz Clément , ResearchAssociate, LISER Christian Descoups, Président de Pétrusse asbl 9h15-10h00 : Les évolutions du travail après la pandémie : perspectives juri- diques : de la soft law européenne aux hard laws nationales M e Pierre-Olivier Koubi-Flotte , Professeur de droit à l’EMD, École de Management, Avocat au Barreau de Marseille 10h00-10h15 : Pause-café 10h15-11h00 : Télétravail et digitalisation : implications sur les compétences digitales et le bien-être à partir des enseigne- ments tirés de la période COVID Laetitia Hauret et Ludivine Martin, LISER 11h00-11h45 : The evolution of work-family policies and its impact on employment. Focus on Luxembourg Marie Valentova, LISER 11h50-13h30 : Déjeuner-buffet 13h30-14h15 : L’asphyxie du travail vivant GeoffroyBrunson, chargé de cours à l’Université de Lille etmaître-assistant à laHaute ÉcoleRobert Schuman 14h15-15h15: Gestiondesressourceshumaines:retoursurl’ex- périence de terrain de décideurs - Table ronde GabrielThiercelin ,directeurdelafilialeluxembourgeoise d’une grande société de conseil informatique Général Pierre Gillet qui a commandé des unités sur le terrain et la force d’action rapide européenne à Lille RogerCayzelle ,présidentdel’InstitutdelaGrandeRégion 15h15-15h45 : Débat et questions-réponses, synthèse par Roger Cayzelle 15h45-16h00 : Conclusions de la journée de séminaire par Franz Clément , LISER 16h00 : Verre de l’amitié Séminaire Quel avenir pour le travail en 2024 et après ? LIEU : LISER (Luxembourg Institute of Socio-Economic Research), Esch-Belval (salle de conférence au 1 er étage de laMaisondes Sciences humaines) 11, Porte des Sciences, Esch-sur-Alzette Vendredi 4 octobre 2024 Inscription auprès de Christian Descoups : christian.descoups@gmail.com Participationauxfrais :100€,àversersurlecomptedePétrusse ASBL,IBANLU750019195583094000,BIC :BCEELULL Partenaires :