Limiting discovery through arbitration is not without risk for sellers

By Christopher Letang, Managing Director, Professional Services, SRS Acquiom 

Considerations in Effective M&A Dispute Resolution

Taking the easiest way out is rarely the best decision, and that can be abundantly evident in M&A deal disputes settled through arbitration.

Arbitration may seem like a more efficient and less expensive way to settle M&A transaction disputes than litigation. But for merger parties, choosing arbitration can pose risks, specifically that limitations on discovery in arbitrations may compromise their ability to enforce their rights under the M&A contract, and ultimately prove costly in the long run.

A court-based litigation process can be considerably more difficult and expensive than arbitration, which is one of the main reasons parties in M&A transactions often require that post-closing disputes be settled through private binding arbitration. These days, however, one unexpected reality is the fact that commercial arbitration often proves just as costly and time consuming as litigation. In fact, in a recent study from the College of Commercial Arbitrator’s, “Protocols for Expeditious, Cost-Effective, Commercial Arbitration,” 51% of participants cited “expansion of discovery” as the biggest factor behind the delays and added expenses that frequently keep arbitration from being as quick and cost effective as people would expect.

In SRS’s experience, however, even when arbitration does prove cheaper and faster, one major drawback is the fact that the discovery process can sometimes be too streamlined. For example, one of the biggest advantages a buyer company has in a post-closing dispute proceeding is access to information that the seller parties do not have. Once an acquisition closes, subject to any limited exceptions the parties may negotiate in the M&A contract, all of the books, records and employees of the selling company become part of the buyer. That means that the only way seller parties can access information about anything that occurs after a deal closes –and sometimes even before the closing– is through discovery. And since information held by a buyer can be critical in cases based heavily on facts-and-circumstances, such as a dispute over whether a buyer fulfilled its obligation to use commercially reasonable efforts to achieve post-closing milestones, limiting the discovery process can be the equivalent of making it all but impossible for one of the merger parties to prove its case.

Dispute

Of course, the parties to an arbitration could agree to allow more extensive discovery, but getting such an agreement is not guaranteed, particularly once a dispute has crystallized and it becomes clear which party would benefit from more discovery, and which would benefit from less. In such situations where there is opposition from one party, arbitrators are likely to prevent significant expansion of discovery.

On the other hand, merger parties need to be cautious of not allowing the discovery process to be overly broad in cases where they fear a the other side could use the legal process to wear them down and exhaust the often-limited financial resources at their disposal.

What all this means for merger parties is that it is critical to evaluate each deal on its own terms and to understand that arbitration is not a “one size fits all” solution for every potential dispute. While it is good to control discovery whenever possible, since it is usually the biggest cause of delays and added expenses, it is important to consider all the options to choose the appropriate requirements for each case. Even though arbitration is not as quick and inexpensive as it once was, more often than not it is easier to contain costs with arbitration than under litigation. Nonetheless, in certain situations the pain and costs associated with litigation or an extended discovery process can result in a fairer process for the merger parties.

The views and opinions expressed are those of the author as of the date of their contribution and do not necessarily represent the views of AXA Equitable Life Insurance Company.

Please be advised that this document is not intended as legal or tax advice.  Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.  The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor. 

AXA Equitable Life Insurance Company(NY,NY) does not provide tax or legal advice and is not affiliated with SRS Acquiom.

GE-127078 (06/2017)

"AXA" is the brand name of AXA Equitable Financial Services, LLC and its family of companies, including AXA Equitable Life Insurance Company (NY,NY), MONY Life Insurance Company of America (AZ stock company, administrative office: NY,NY), AXA Advisors, LLC (member FINRA, SIPC), and AXA Distributors, LLC (member SIPC). AXA S.A. is a French holding company for a group of international insurance and financial services companies, including AXA Equitable Financial Services, LLC. The obligations of AXA Equitable Life Insurance Company and MONY Life Insurance Company of America are backed solely by their claims-paying ability.

© 1999-2018 AXA Equitable Life Insurance Company

1290 Avenue of the Americas, New York, NY 10104

Image used for Space here