M&A Disputes

Following a period of geopolitical instability and economic uncertainty, while M&A activity has come back, it has brought with it an uptick in disputes between parties looking to get out of bad deals or, at the less extreme end of the spectrum, parties seeking to use litigation to redress mismatches between their expectations and the financial reality of the deals they have done. In addition to the resurgence in traditional M&A disputes, we anticipate disagreements crystallising in disputes in frontier areas such as the treatment and valuation of AI and digital assets, the impact of ESG commitments, targets or disclaimers on contractual obligations, the consequences of unwelcome intervention of shareholder activism, and the impact of regulatory action.

To better anticipate what the year could bring, corporates should proactively assess what risks their portfolios carry (or could carry). This is a timely reminder of the key principles that apply to such disputes – in particular, when they are most likely to arise, and if they do, how you can quickly get to the bottom of what the contract says (expressly or by implication).

Heightened risk?

The stage of the transaction plays a critical role in the nature and likelihood of a dispute.

• Are you storing up problems? Deals done quickly with high materiality thresholds applied for due diligence can present significant challenges during the life of the contract. Are the warranties, representations and indemnities fit for purpose? Is the risk appropriately calibrated in any limitation of liability framework?
• Mischief between signing and completion: What are the brakes to completion? Disputes on the satisfaction of conditions precedent, endeavours clauses and material adverse changes or effects are on the rise. Have deteriorating financial health of a target or material changes to the business (including from litigation risk or regulatory intervention) or changes of control been sufficiently catered for?
• Recovery to compensate for bad deals: Claims for misrepresentation, warranty and indemnity claims, early termination or earn-out and completion account skirmishes could present value opportunities to businesses under significant financial strain.

Litigation funding and alternative fee structures are likely to continue to facilitate the threat and commencement of claims, as up-front legal costs and/or costs exposure can be offset by potential claimants.

What does the contract say?

Clear and unambiguous drafting avoids litigation. When drafting the contract or considering the prospects of a potential dispute, it is worth bearing in mind how a court or tribunal will approach any dispute on contractual interpretation. It is an objective exercise of how a reasonable person would interpret the meaning of the contract (looking at the factors below), rather than what the parties subjectively intended.

• The natural and ordinary meaning of the clause (which is the starting point and is usually given primacy).
• Any other relevant provisions of the contract.
• The overall purpose of the clause and the contract.
• The facts and circumstances known or assumed by the parties at the time of entry into the contract.
• Commercial common sense.

When an ambiguity arises, corporates should consider whether this presents a risk or, on the flipside, an opportunity. For example, is there “factual matrix” evidence (i.e. contemporaneous material which shows the surrounding circumstances or commercial purpose) which helps to steer the interpretation in your favour? There is often, however, a tension between admissible factual matrix evidence on the one hand, and inadmissible evidence of the parties’ subjective intentions and aspirations, or of what was said or agreed in pre-contractual negotiations, on the other.

What additional duties might be owed?

To avoid any unpleasant surprises, it is worth considering whether additional duties should be expressly provided for or carved out.

• What would a duty of good faith add to the express provisions of the contract?
• Conversely, should express provision be made to exclude or limit any duty to act in good faith?
• Even if there is no express good faith term in the contract, a court or tribunal might imply such a duty in certain circumstances – such as:
  
  
  • Where the so-called “Braganza” duty applies (i.e. where there is a genuine discretion under a contract, that discretion must be exercised in good faith).
  • Where the contract is “relational” (i.e. involves a long-term relationship and a considerable degree of commitment from both parties). This is particularly relevant for certain types of arrangements such as joint ventures, franchising and distribution agreements, and Private Finance Initiative (PFI) contracts.

These considerations arose recently in Phones 4U Ltd v EE Ltd [2023] EWHC 2826 (Ch). In this case, the judge held that the relevant agreement (whilst having some features of a relational contract) was not relational, and in any event, this did not matter because no general duty of good faith was to be implied and there was no breach of good faith by EE on the facts of the case.

Depending on your position and the dispute you are facing, the duty might be used as either a sword (for example, to force your counterparty to do something or to build a claim against them) or a shield (for example, to justify your own conduct). When drafting the contract and agreeing the terms, it is important to think about the ways in which a duty of good faith (whether express or implied) might play out in future and be used either by you or against you.

Other risk areas

Some other important considerations include:

• ensuring that the dispute resolution clauses are clear and consistent across the suite of contracts, to avoid disputes on the applicable law, dispute resolution mechanism or any escalation steps;
• giving careful consideration to clauses relating to damages, including liquidated damages and limitation of liability clauses (remembering that liquidated damages must be set at a reasonable level and must not be punitive);
• keeping in mind that tortious liability (for example, negligence, fraud and economic torts such as inducing or procuring breach of contract) can also arise instead of or in parallel to contractual claims; and
• recognising that a dispute may not solely arise between the buyer and seller (for example, directors and shareholders may threaten claims against directors and officers, lenders may seek to challenge the deal on various bases including misrepresentation, and in public M&A class actions may arise from the contents of offering documents).

Looking forward

If you are looking to bring a claim against, or are facing a claim from, a counterparty, there are several practical considerations to work through:

• Have you (or your counterparty) complied with any contractually mandated dispute resolution steps?
• If you are looking to serve notice of the claim on your counterparty, have you complied with all requirements under the contract (including with respect to form, service details and time limits)?
• Do you need to implement document holds and consider broader document preservation policies?
• Are you ensuring that discussions (and any related document preparations) are limited and covered by legal privilege?
• If you are looking to start court proceedings, have you complied with any applicable Pre-Action Protocols?
• Can you take the wind out of the sails of a potential dispute by relying on the limitation of liability provisions in the contract?

In any event, when a dispute arises, it is important for corporates and their advisers to get on top of the key facts and allegations quickly. On the claimant-side, you will want to be confident in your story from the get-go and apply as much pressure as possible. On the defendant side, you will want to look for deficiencies and weaknesses in your counterparty’s claim (looking at both substantive defences and any procedural mechanisms which may be used to undermine or stall the claim).