Post-closing disputes arise in about 56% of M&A transactions according to a recent study by Shareholder Representative Services (SRS). Nearly all of these disputes involve issues related to purchase price, earn-outs, indemnity, misrepresentations or breach of warranties. The high probability for post-closing disputes highlights the critical need for efficient dispute resolution of M&A disputes.
Private mediation is a solution. It works in the space between the parties resolving a dispute on their own and the parties escalating the dispute to a lawsuit. It’s an informal and flexible process by which parties work with a third party neutral to facilitate settlement. Unlike court-mandated mediation, it’s a consensual negotiation that can occur before a lawsuit is filed. Unlike arbitration, which is often used to resolve M&A accounting disputes, mediation focuses on settlement and is particularly suited for resolving disputes that have non-quantitative components.
Surprisingly, while mediation is understood to be a highly effective form of dispute resolution, it is not commonly found in M&A agreements. There are several plausible explanations. First, “boilerplate” dispute clauses are recycled in many transaction documents. Second, parties expect that direct negotiation will resolve most conflicts and if that fails, they assume that mediation will naturally be available. Third, buyers and sellers are not accustomed to having third party intermediaries and there are few mediators with corporate and business skill set required to effectively guide a business settlement.
Private Mediation Versus Direct Negotiation
Direct negotiation is understandably the preferred course in resolving M&A disputes. However, direct negotiation may not resolve every M&A dispute. Concerns over mismanagement or misrepresentations frequently hinder direct negotiations. Too often personalities get in the way. In an earn-out dispute, for example, a seller may claim that mismanagement or poor business decisions by the acquirer resulted in a lower earn-out calculation. Similarly an acquirer may claim that the seller minimized expenses or overstated revenue to inflate a calculation for short-term gain.
Here, mediation has numerous benefits over direct negotiation. A mediator can facilitate a managed dialogue where the dispute is viewed against the backdrop of party expectations and interests, practical considerations, and opportunities for mutual benefit. Mediation provides some dignity to what may otherwise be an unruly or uncomfortable direct negotiation or a hostile litigation. It provides a business process for resolving the dispute, saves the time and effort needed for back-and-forth correspondence, consolidates all issues, and helps preserve constructive business relations.
Boilerplate M&A Clauses Should be Revised to Include Mediation
Many corporate lawyers simply “copy and paste” the dispute resolution clause used in previous deals. Generally, these clauses provide an escalation procedure involving direct negotiation, followed by evaluation by an accounting firm, arbitration, or litigation. Usually, mediation is not specified when it should be.
Such dispute resolution clauses may prove to be costly, especially when the issue is multifaceted and complex, for example, as in an earn-out scenario involving non-quantitative issues.
Where arbitration or litigation proceedings could take months or years to reach conclusion, mediation could resolve a dispute in a matter of days or less. On average, litigation of M&A disputes costs upwards of 50% of the funds held in escrow. In opting for mediation, the parties would avoid wasting financial resources and would be more likely to reach a deal quickly.
Mediation Should Be Considered Even Where There is No Mediation Clause
Some corporate lawyers don’t include a mediation clause in M&A documentation because they presume mediation will still be available if a dispute arises. The advantage of including a mediation provision up front is that no matter how contentious the business relationship becomes, the parties are obliged to pursue mediation.
Mediation remains available to the parties at any time, including before, during or after an arbitration or litigation. Buyers, sellers and their representatives should consider mediation as an alternative even where there is no express clause in the transaction documentation requiring mediation.
In that case, the parties must reach an agreement on whether to mediate, how to administer the mediation and how to select the mediator. Proposed mediators or ADR institutions may assist in that process. It is usually worth the effort to agree to mediate because the likelihood of settlement is high and can save significant time and cost.
In private mediation, the parties are in control of the process and the outcome. A skilled business mediator can help facilitate a quick and efficient resolution in a M&A dispute. Mediation avoids highly adversarial, drawn-out litigation that will be unnecessarily costly to all parties regardless of which side will ultimately prevail.
It’s important to select a mediator who has a corporate law background, business experience and the mediation skills necessary to help provide for a practical resolution of the dispute.