Staying out of court: Avoiding litigation in M&A 20 January 2015 Baker & McKenzie Habib Al Mulla is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.
Introduction and Agenda Part 1 - Potential dispute scenarios Part 2 - Drafting effective arbitration clauses 2
Part 1. Potential dispute scenarios
Potential Dispute Scenarios 1. Authority to enter into the SPA 2. Warranties and Disclosure 3. Post Signing / Pre-Completion 4. Closing Conditions 5. Closing Formalities / Obligations 6. Earn Outs 7. Post Completion Price Adjustments 4
1. Authority to enter into the SPA The Seller is a Dubai LLC. At Completion, the Seller provides a copy of a shareholders resolution resolving to enter into the SPA which has been signed by the two shareholders of the Seller, one is an individual and the other is an Abu Dhabi LLC. How could a dispute arise? 5
2. Warranties and disclosure After completion the Target receives a notice of claim from a financial adviser retained by the Target before the Buyer's involvement, to source potential purchasers for the Target, with a success fee based on the acquisition price. Sellers did not disclose the agreement and argue that the financial advisers did not introduce the Buyer and are not entitled to the fee in accordance with the terms agreed with the financial adviser. How could such a dispute be avoided? 6
3. Post signing but pre-completion disputes After signing but before completion the Target s main warehouse burns down. The Sellers disclose it to the Buyers. It would be a breach of warranty when the warranties are repeated at completion. Does the Buyer have to close the deal? 7
4. Closing conditions The Parties shall appear before the relevant competent UAE governmental authorities to sign all such agreements, documents, forms and applications as are necessary by the relevant UAE governmental authorities to effectuate the transfer of full legal title to the Property to the Target. How could this clause be improved? 8
5. Closing formalities / obligations The Buyer and the Seller shall appear before the notary public in Dubai to sign the share transfer agreement and the amendment to the memorandum of association and as soon as reasonably practicable thereafter the Buyer shall obtain the updated commercial licence from the Dubai Economic Department. Why might a dispute arise under this clause? 9
6. Earn outs To be considered very carefully 10
7. Post-completion price adjustments The Buyer and the Seller agree on a post-completion pricing adjustment to be made according to the NAV of the business on the completion date, which is to be determined post-completion upon receipt of the valuation report from the valuer. However, the Seller refuses to pay the additional money due pursuant to the valuation report on the grounds that it disagrees with the valuation methodology adopted by the valuer. 11
Part 2. Drafting effective arbitration clauses
Case study 1 Company A incorporated in Dubai enters into an agreement with Company B incorporated in Delhi for the supply of goods in the UAE. The agreement contains the following governing law and dispute resolution clause: All disputes arising out of this contract shall be referred to arbitration. What elements are missing? 13
Case study 1 (cont.d) Suggested alternative wording: This Agreement shall be governed, construed and enforced in accordance with UAE laws. All disputes shall be finally settled by arbitration in [Dubai or Delhi or neutral venue] in accordance with UNCITRAL Arbitration rules. The number of Arbitrators shall be three and each Party shall choose its own Arbitrator with each Arbitrator then choosing a third Arbitrator. The default appointing authority shall be the Secretary- General of the Permanent Court of Arbitration at The Hague. If within 30 days after the receipt of a party s notification of the appointment of an arbitrator the other party has not notified the first party of the arbitrator it has appointed, the first party may request the appointing authority to appoint the second arbitrator. If within 30 days after the appointment of the second arbitrator the two arbitrators have not agreed on the choice of the presiding arbitrator, the presiding arbitrator shall be appointed by the appointing authority. 14
Case study 2 Company A incorporated in Saudi Arabia entered into a distribution agreement with Company B incorporated in the UK for performance of services in various jurisdictions. The agreement contains the following governing law and dispute resolution clause: This Agreement shall be governed by and construed in accordance with English Law. Any dispute arising out of or in connection with this Agreement shall be settled by arbitration in Dubai in accordance with the DIFC-LCIA Arbitration Rules. What is the appropriate seat for the arbitration? 15
Case study 3 Company A incorporated in New York entered into an agreement with Company B incorporated in the DIFC for the provision of financial services. The agreement contains the following governing law and dispute resolution clause: This Contract shall be governed by and construed in accordance with US law. All disputes arising out of or in connection with the present Contract shall be finally settled by arbitration in the DIFC under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules. How would the choice of law impact on enforcement in the UAE? 16
Case study 4 Company A incorporated in Germany entered into a financial lease agreement with Company B incorporated in Dubai. The agreement contains the following governing law and dispute resolution clause: This Contract shall be construed and governed by English law. In the event of a dispute arising out of or in connection with this Contract, including any question regarding its existence, validity or termination, the Parties shall first seek to amicably settle their dispute. If the dispute is not settled amicably, the Parties shall seek settlement by mediation. If the dispute is not settled by mediation, it shall be finally settled by arbitration in accordance with the provisions set forth in the Dubai International Arbitration Centre (DIAC) Rules by one or more arbitrator's appointed in accordance with the said Rules. This clause is useless. Why? 17
Case study 4 (cont.d) Suggested alternative wording: In the event of a dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, the Parties shall first seek to amicably settle their dispute. If the dispute is not settled amicably within 30 days upon receipt of a notice of dispute, the Parties shall seek settlement by mediation. If the dispute is not settled by mediation within a further 30 days, it shall be finally settled by arbitration in Dubai in accordance with the provisions set forth in the Dubai International Arbitration Centre (DIAC) Rules by one or more arbitrator's appointed in accordance with the said Rules. 18
Case study 4 (cont.d) The arbitral tribunal shall, in its absolute discretion, have the power to make an award on costs, (including but not limited to all Parties' costs and expenses such as legal fees and expenses, expert fees and expenses), determining and allocating these between the Parties as it deems appropriate". 19
Questions?