Disputes After M&A Deals: The Five Most Common Reasons.

 In many cases, M&A transactions are not completed with the execution of the purchase agreement. It is often "buyer's remorse" that actually triggers costly renegotiations.

Disputes After M&A Deals: The Five Most Common Reasons

M&A transactions generally involve large amounts of money. Especially for this reason, there are often disagreements between the parties to the transaction later on. Suddenly, claims from and in connection with the company purchase agreements are being discussed – oftentimes, the real reason for the dispute is buyer's remorse. In the following article, the most common reasons for these post-closing disputes will be examined.

1. The Calculation of The Final Purchase Price

It is usually not possible to determine the exact purchase price of a company when the contract is signed. One reason for this is, for example, that conditions still have to be fulfilled by the parties between the signing and the execution of the purchase agreement, or that a cartel authority has to give its approval. If so, there are two possibilities: Either a basic purchase price is set, which is later modified by a contractual purchase price calculation method, or the parties agree to leave the decision on the final purchase price to an expert arbitrator. Problems then arise because the company is still changing in the phase between the conclusion and the execution of the contract. This can result in a higher purchase price than the buyer expects. Typically, this in turn is accompanied by the accusation that the seller has intentionally caused this increase in the purchase price.

2. Breach of Guarantees

In practice, the legal warranty right is often replaced by an independent contractual warranty regime in the context of M&A transactions. Common warranties of the seller are in particular warranties of the following:

  • annual financial statements of the target company (so-called balance sheet guarantee),
  • the legal existence and status of the target company,
  • legal disputes relating to the operating business,
  • compliance and
  • intellectual property.

Guarantee promises of this kind by the seller about the target state of the company are prone to dispute, since the status quo often deviates from the target state. In this case, there is a breach of warranty. The buyer may be entitled to compensation for damages or removal of the defects.

3. Violation of Pre-Contractual Duties to Inform

In many cases, the buyer tries to make use of a pre-contractual breach of duty on the part of the seller in case of insufficient rights in the company purchase agreement. Particularly relevant in this context are the seller’s duties to inform as part of the collateral contractual obligations (within the meaning of Article 241 (2) German Civil Code).Here, the potential for disputes usually results from the fact that the disclosure of company information is always in a tense relationship between the buyer’s interest in comprehensive information about the company and the seller’s interest in a purchase that is as lucrative as possible. Therefore, the most frequent questions in this context are:

  • What information should the seller really have given?
  • Are the details given intentionally misleading or even false?
  • Was it clear to the seller that the relevant information was essential for the conclusion of the contract by the buyer?

4. Indemnity Bonds

Possible risks of the buyer, which may become known prior to a purchase agreement – for example through due diligence – can be secured by an indemnification clause. A clause of this kind establishes the buyer’s claim not to be burdened with certain risks of the target company. It leaves these with the seller. Classical indemnification clauses in connection with M&A transactions include indemnifications of:

  • tax liabilities,
  • legacies,
  • environmental risks or
  • Reclaims of public aids.

It is problematic that there is no explicit provision in German law for this. This is why it is important to ensure that the wording of the company purchase agreement is as precise and comprehensive as possible.

3. So-Called MAC Clauses

In the period between conclusion and execution of the company purchase agreement, there is a risk of a substantial economic worsening of the target company for the buyer. In order to avoid this risk, the inclusion of so-called Material Adverse Change/Material Adverse Event clauses (in short “MAC clauses”) in the contract has proven to be a successful approach. Similar to the idea of a disturbance of the basis of the contract pursuant to Article 313 of the German Civil Code, these clauses grant the buyer the right to withdraw from the company purchase agreement if an event occurs that has a negative impact on the target company’s value. These clauses are particularly prone to dispute due to the use of undefined legal terms.

Practical Tip

Even “post closure”, M&A transactions hold a high potential for conflict in many respects. This can be prevented by paying special attention to the exact wording of the clauses. If a legal dispute should nevertheless arise, arbitral proceedings dominate in post-M&A disputes. This is mainly due to the shorter duration of proceedings and a better understanding of M&A topics. However, arbitration proceedings are often inefficient – partly because of the unrestricted investigation of facts and the gathering of evidence. Therefore, strategic advice is crucial for success.

A very precise formulation and structuring of company purchase agreements can prevent disputes at a later time.