Trends in M&A Provisions: Alternative Dispute Resolutions ProvisionsJuly 10, 2018 – Publications / Mentions
Reproduced with permission from Bloomberg Law. Copyright ©2018 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bloomberglaw.com
In merger and acquisition (“M&A”) transactions, the definitive purchase agreement (whether asset purchase agreement, stock purchase agreement, or merger agreement) typically contains representations, warranties, and covenants, along with related indemnification obligations. The purchase agreement may also stipulate certain agreed upon non-judicial means for dealing with claims under the agreement (e.g., arbitration or mediation). These alternative dispute resolution (“ADR”) provisions are an important component of a purchase agreement that the parties may utilize prior to seeking redress from the courts or in lieu of judicial proceedings. These provisions also may also tie in to other related provisions within the agreement.
Negotiating Points for ADR Provisions
ADR provisions in M&A purchase agreements tend to raise the following negotiation issues:
- Whether, as a threshold matter, the purchase agreement should include ADR provisions in lieu of, or prior to, judicial recourse;
- To which form of ADR the parties are willing to agree:
- Binding arbitration;
- Mediation; or
- Mediation first, followed by binding arbitration;
- Whether the arbitrator will be specified as the American Arbitration Association (“AAA”), Judicial Arbitration and Mediation Services (“JAMS”), or another named service provider; and
- How expenses associated with the ADR proceedings are to be allocated between buyer and seller.
When drafting and negotiating ADR provisions practitioners must pay careful attention to how the ADR provisions will interact with other provisions in the purchase agreement. This is important because ADR provisions are related to at least three other provisions in an M&A agreement: (1) the “exclusivity of remedies” provision, which states that the indemnification structure and procedures in the purchase agreement are the sole remedy for claims (subject to limited exceptions such as fraud); (2) provisions allowing for specific performance to prevent breaches of covenants (such as non-competition covenants of the seller); and (3) waiver of jury trial provisions.
Trends in ADR Provisions
Every other year since 2005 the American Bar Association (“ABA”) has released its Private Target Mergers and Acquisitions Deal Point Studies (the “ABA studies”). The ABA studies examine purchase agreements of publicly available transactions involving private companies that occurred in the year prior to each study (and in the case of the 2017 study, including the first half of 2017). These transactions range in size but are generally considered as within the “middle market” for M&A transactions; the average transaction value within the 2017 study was $176.3 million.
The analysis of data from the most recent six ABA studies illustrates the extent to which the four ADR-related negotiating concepts described above—whether ADR provisions are included; the form of ADR agreed to; whether a specific arbitrator is identified; and how arbitration expenses are allocated—are covered in private company M&A purchase agreements.