Post-M&A disputes: Why are arbitrations increasingly chosen by investment funds?

In M&A, completing the transaction does not mean that the risk has been closed. It is only after the time of the transfer of shares that the issues that were previously outside the due diligence dossier: from tax obligations, undisclosed debts, false information to violations of the seller's commitments can begin to emerge.

If in the past M&A disputes were mainly related to the payment of the purchase price, now the scope of disputes has expanded significantly.

For investment funds, post-M&A disputes are therefore not just a story of claiming compensation. What is more important is how to resolve the dispute without continuing to degrade the value of the investment. That is also the reason why the dispute resolution mechanism needs to be calculated right from the beginning of the deal structure.

Post-M&A disputes are becoming more and more complicated

If in the past M&A disputes were mainly related to the payment of the purchase price, now the scope of disputes has expanded significantly.

The most common are still disputes involving the seller's representations and undertakings about the legal, financial, and operational status of the target business (representations and warranties). An undisclosed tax debt, an important contract that is void or a lawsuit that is being concealed can all give rise to a multimillion-dollar claim.

The second group of disputes usually stems from the purchase price adjustment mechanism. In many deals, the final purchase price is determined only after reviewing working capital, debt or financial statements at the time of completion. Even a small difference in the way accounting is recorded can significantly change the value of the payment.

Earn-out terms[1] have also become an increasingly source of lawsuits. When part of the purchase price depends on future business results, the seller often wants to maximize operational efficiency, while the buyer may change its business strategy after the takeover. This difference in goals makes disputes almost inevitable if the contract is not specified enough.

There are also disputes over indemnities, escrow disbursements, material [2] adverse change/material adverse effect (MAC/MAE), the right to appoint board members, the right to veto minority shareholders, the right to divest, the right to drag-along, tag-along, or the implementation of post-transaction shareholder agreements.

What these disputes have in common is that they rarely involve the application of a single legal provision. Most of them require a simultaneous evaluation of financial, accounting, corporate valuation, corporate governance, and international M&A practices. It is this feature that makes arbitration a more attractive option for many investment funds.

For investment funds, the goal is usually much broader. A lawsuit can affect the IPO process, the next fundraising plan, the possibility of divestment, relations with LP (Limited Partners) investors, or the value of the entire portfolio. So, what the investment fund is looking for is not only a favorable judgment but also a dispute resolution mechanism that is flexible enough to minimize the negative impact on the investment.

Security - a very important factor in investment activities

In many M&A deals, the information exchanged during the proceedings may be more valuable than the money in dispute.

It can be a business valuation model, investment strategy, customer data, technology know-how, restructuring plan, fundraising information, or due diligence.

If this information is made public during a court hearing, the commercial value of the business may be significantly affected, even exceeding the damages of the lawsuit itself.

Arbitration does not always imply absolute confidentiality under every legal system or all procedural rules. However, in practice, parties often have more favorable conditions to establish confidentiality obligations for records, evidence, hearings and awards through an agreement or rules of the arbitration institution. It is this ability to control the scope of publicity that is one of the important reasons why many investment funds prioritize arbitration in M&A transactions.

When the dispute resolver understands the transaction

A dispute over an EBITDA adjustment[3] or earn-out mechanism is not always a purely legal dispute.

It may require an understanding of international accounting standards, corporate valuation techniques, investment structures or operating mechanisms of funds.

At arbitration, the parties usually have the right to choose an experienced arbitrator that is suitable for the nature of the transaction, rather than relying entirely on the court's assignment mechanism. In high-value disputes, the arbitral tribunal is usually composed of people who have been involved in the settlement of many international M&A, financial or investment cases.

This is especially important when the contract uses more technical concepts or is influenced by international practice rather than domestic legal regulations.

A mechanism suitable for cross-border transactions

Most of the investment funds operate in many countries such as investors may be from Singapore, the fund is established in the Cayman Islands, the target enterprise is located in Vietnam, and the parent company is in Hong Kong.

In this context, taking the dispute to one country's courts may cause the other party to be concerned about neutrality or raise difficulties in recognizing and enforcing judgments abroad.

Arbitration allows the parties to actively choose the governing law, arbitration venue, procedural language and mechanism for appointing arbitrators. More importantly, international arbitral awards are often more widely recognized and enforced thanks to the mechanism of the 1958 New York Convention to which Vietnam and more than 170 countries and territories are signatories.

For investment funds, the ability to enforce effectively in many countries is no less practical than gaining an advantage in an arbitral award.

In addition, unlike many conventional commercial lawsuits, post-M&A disputes often involve hundreds of thousands of pages of documents, many valuation experts, auditors, and witnesses in many countries. Arbitration allows the parties to design procedures that are appropriate to the nature of the case, from the method of evidence collection, the schedule of proceedings, the number of hearings, to the use of independent experts.

This flexibility is especially valuable when disputes need to be resolved quickly so as not to slow down the process of restructuring, raising capital or divestment of international investment funds.

Source: Frontier Consulting

But refereeing is not always the optimal option

Despite its many advantages, arbitration is not the solution to all post-M&A disputes.

Arbitration costs, especially in international cases, can be substantial due to the inclusion of arbitration fees, arbitrator remuneration, attorneys' and expert costs, and other procedural costs.

The ability to appeal against the arbitral award is also very limited. This is an advantage in terms of finality but at the same time increases the risk if the arbitral tribunal makes errors in the evaluation of evidence or the application of law.

In addition, not all disputes arising after M&A can or should be resolved by arbitration. Certain issues related to the validity of internal corporate decisions, business registration, or requirements falling under the exclusive jurisdiction of state agencies may impose certain limitations on the ability to be resolved by arbitration under applicable law. More importantly, a poorly drafted arbitration clause may create new disputes over the jurisdiction of the arbitral tribunal, depriving the parties of the expected benefits.

Vietnam is facing a new trend

The number of foreign M&A deals in Vietnam continues to increase, and private equity funds are increasingly involved in the market. This means that post-M&A disputes will also become more diverse and complex.

Consulting practice shows that, in many transactions today, the process of negotiating dispute settlement clauses is no longer considered a "standard" part of the contract but has become a strategic negotiation content. The parties spend a lot of time agreeing not only on the dispute settlement mechanism but also on the arbitration venue, the number of arbitrators, the language of the proceedings, the governing law, the mechanism for applying emergency measures and the method of handling disputes related to multiple contracts in the same transaction.

This trend shows that arbitration is no longer merely a "backup plan" when a transaction fails. For many investment funds, this has become part of the risk management strategy right from the deal structuring stage.

Conclusion

There is no dispute resolution mechanism that can eliminate the uncertainty of an M&A deal, but for investment funds, choosing the right mechanism can decide whether a post-transaction disagreement will only be a legal issue to be handled, or become a long-term risk to the investment as a whole.

That is perhaps the most important reason why arbitration is increasingly present in M&A transactions, because after all, what investors need to protect is not just the right to win the lawsuit, but the value they have invested to create and expect to earn when entering the deal.