Means of Settlement in M&A Transactions:Does Arbitration Have Competitors?

U.S. Perspective

Fred FucciMay 13, 2010

Dispute Resolution in M&A TransactionsWarsaw, Poland

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Principal Courts handling M&A disputes:

Delaware

New York

California

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Delaware Court of Chancery Almost 60% of publicly traded corporations in the U.S. are

incorporated in Delaware

  Delaware courts chosen as forum in 30% of M&A Transactions*

Delaware Court of Chancery (through Chancellor and four Vice-Chancellors) is highly specialized in corporate law disputes

 Only one level of appeal in Delaware - Appeal is taken directly to

the Delaware Supreme Court, itself composed of judges with long experience in corporate law questions

 If an M&A transaction involves a Delaware corporation, particularly as seller, U.S. M& A lawyers will reflexively insist that Delaware law apply and that the Delaware Court of Chancery have exclusive jurisdiction to resolve disputes

*According to a 2006 study of SEC filings over a six-month period.

New York Courts New York State Supreme Court in Manhattan

considered the most sophisticated commercial State court of first instance in the U.S.

U.S. Federal District Court for the Southern District of New York highly regarded

New York courts chosen as forum in 15% of M&A transactions*

Many U.S. merger agreements are governed by New York law, in which case U.S. M&A lawyers also prefer giving jurisdiction over disputes to New York Courts

*2006 study4

California State and Federal Courts

California courts chosen as forum in 15% of M&A transactions 

Courts have a good reputation for sophistication but have mandatory mediation and are slow

California lawyers will try to direct the parties to naming State and Federal Courts in California as the forum

 

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Reasons for Choosing Arbitration over Court Jurisdiction

Home Court Advantage - If one of the parties is foreign (or an affiliate of a foreign parent) it could well feel uncomfortable with submitting to U.S. Court jurisdiction

General cumbersome and expensive nature of U.S. litigation with its extensive document discovery procedures 

U.S. Court System is in most places completely overwhelmed - Cases take a very long time to get to trial and then there are two further levels of possible appeal (except in Delaware)

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Delaware - 4,142 new cases in Court of Chancery in 2007 (Average of 828 per Chancellor and Vice Chancellor)

New York - Average of 1,078 cases for each of 460 Supreme Court justices and County Court Judges

California  - Average of 4,796 cases for each of 1,972 judges, commissioners and referees

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Ability to name arbitrators who are themselves specialized in the area – having a professional resolve a dispute instead of a judge from the general corps of judges (except for Delaware Chancery Court) or possibly even a jury if the parties have not waived a jury trial in the agreement 

Possible pro-management bias of judges in Delaware

Ability to maintain privacy of the proceedings, which is of greater importance in non-public deals 

Possibility of obtaining injunctive relief or provisional measures either through the tribunal or courts of competent jurisdiction under most rules of arbitration

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Examples

Hostile Tender Offer - 2002 - a dispute arose after the offer relating to whether an investment banker was entitled to a fee on the share price offered

Jury trial in Boston, Mass. on the merits - the judge didn’t understand the case and his instructions to the jury were dead wrong 

Jury didn’t understand the case and found for the investment banker

In post-trail motion, the judge cut back the verdict

Appeal required getting trial transcript which took almost two years 

We appealed - the appeal has still not been decided by the Mass. intermediate level appeal court

After appeal decided, the case could be remanded again to trial level or in theory appealed to the highest court in Mass. 

Post-Closing Dispute - 2006 Private Acquisition

AAA Arbitration Clause

Dispute over whether client entitled to take scheduled withdrawals from escrow fund - accounting issues and also whether a certain amount of progress had been made on a construction project that was under way..

Three arbitrator clause - but the parties were able to agree on a sole arbitrator

Within a matter of a few months, the seller was able to make its complaint, have a response from client, exchange memorials

The case was settled after the memorials and before a hearing - the whole thing was over in less than 6 months 10

Summary

Large public company transactions will almost always be in Delaware or New York courts

Arbitration preferable in middle-market and private transactions

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