M&A (Mergers and Acquisitions) Litigations: Common Disputes and Resolutions

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Whether you're buying or selling a business, litigations can adversely affect your progress, finances, time, and other resources. Mergers and acquisitions can pose complex legal and financial issues even after years of closing the deal, which is why you must proactively mitigate any possible risks before they become a challenge.

Most potential disputes that may lead you into a lawsuit border on legal and contractual issues, valuation concerns, shareholder and management issues, and regulatory concerns. All these can be avoided through thorough due diligence by all parties involved.

What are the Common Disputes in Mergers and Acquisitions?

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The most common issues that can arise for both buyers and sellers in an M&A can range from statements of fact to regulatory and management concerns. Below are some potential issues you must prepare for in a merger or acquisition to avoid litigation:

1. Purchase price adjustments

Disagreements may occur regarding the determination and calculation of the final purchase price. Issues can arise when there are discrepancies in financial statements, working capital adjustments, earn-out provisions, or valuation methodologies.

2. Breach of representations and warranties

The buyer may claim that the seller has provided inaccurate or incomplete information during the due diligence process, breaching the representations and warranties in the purchase agreement. This can lead to disputes over financial disclosures, legal compliance, intellectual property rights, or other aspects of the target company's business.

3. Earn-out disputes

Earn-out provisions are often included in M&A agreements to link a portion of the purchase price to the future performance of the acquired company. Disputes may arise if there are disagreements about the achievement of performance targets, the calculation of earn-out payments, or the actions taken by the buyer that allegedly hindered the earn-out.

4. Post-closing disputes

Disputes can arise regarding adjustments to the purchase price or other financial terms after closing the transaction. These adjustments may be related to working capital, indebtedness, tax matters, or other financial metrics.

5. Non-compete and non-solicitation provisions

M&A agreements often include non-compete and non-solicitation clauses to protect the buyer's interests. Disputes may arise if the seller violates these provisions by engaging in competitive activities or soliciting employees or customers of the target company.

6. Disagreements over closing conditions

M&A agreements typically include a set of conditions that must be met before the transaction can be completed. Disputes can arise if there are disagreements about whether these conditions have been satisfied or if one party alleges that the other party failed to fulfill its obligations.

7. Post-acquisition disputes

After the completion of the M&A transaction, disputes may arise regarding the integration of the acquired company, the management of post-acquisition operations, or the achievement of post-acquisition synergies. These disputes can be related to cultural clashes, management changes, strategic differences, or other operational issues.

Case Study: In 2005, Sprint acquired a majority stake in Nextel Communications in a $35 billion stock purchase. The merger aimed to create the third-largest telecommunications provider. However, the two companies faced challenges in integrating their networks, merging operations, and aligning marketing strategies. Cultural differences and incompatibility also contributed to the failure of the merger.

8. Shareholder disputes

Shareholders of the target company may challenge the M&A transaction, claiming that it undervalues their shares or that their rights have been violated. These disputes may involve allegations of breach of fiduciary duty, inadequate disclosure, or conflicts of interest.

Some of these disputes may not apply to every M&A transaction but keeping a watchful eye can save you, your business, and your investment from going down the drain.

What are the Adverse Effects of Litigation on Your Business?

No litigation is ever in your best interest, no matter what your attorney tells you. whether you come out victorious or not, It eats into your time, resources, and reputation. Some of the effects of litigation can include:

  • Financial costs and expenses related to legal fees, court proceedings, settlements, or potential damages.
  • Diversion of resources and time away from core business operations, leading to decreased productivity and delayed strategic initiatives.
  • Reputational damage and negative publicity can negatively influence customer trust, impact brand image, and potentially harm business relationships.
  • Uncertainty and disruption to business plans and decision-making processes since the outcome of litigation is often unpredictable and can impact long-term stability.
  • Internal conflicts and divisions among employees, management, and stakeholders can hinder collaboration and morale.
  • Regulatory implications, including increased scrutiny or investigations from regulatory authorities, potentially leading to additional compliance requirements or penalties.
  • Impact on investor confidence, making it more challenging to secure financing or attract potential partners.
  • Potential distraction for key personnel and management, diverting their attention from strategic priorities and day-to-day operations.
  • Potential settlement or damages payments that can strain financial resources and affect profitability.
  • Potential precedents set by court decisions or settlements that may influence future legal matters or industry practices.

The litigation outcome on M&A transactions can take different turns and may vary from business to business but the impact on your business is never friendly. The good news is that you can avoid them by conducting extensive due diligence.

How to Safeguard Your Interests in an M&A While Avoiding Disputes and Litigations

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Before engaging in any M&A deal, you must plan steps to mitigate risks and issues that may arise from the transaction. M&As go beyond just transaction agreements and encompass a broader spectrum of considerations and activities. Here's what you must do:

1. Thorough Due Diligence

Conduct thorough due diligence on the target company to identify any potential risks, liabilities, or issues that may impact the deal. This includes financial, legal, operational, and regulatory aspects.

Scrutinize every detail of the transaction and clearly understand the business targets and potential challenges to help reduce the risks of future disputes.

2. Clear and Detailed Agreements

Ensure the purchase agreement and other related contracts are well-drafted, clear, and comprehensive. Clearly define the rights, obligations, representations, warranties, and remedies of each party. Address potential areas of contention, such as purchase price adjustments, earn-out provisions, intellectual property rights, and non-compete agreements.

3. Transparent Disclosure

Provide accurate and complete information during the due diligence process and disclosure phase. Transparency builds trust and reduces the likelihood of disputes arising from alleged misrepresentations or inadequate information.

4. Consult an Experienced M&A Advisor

Seek expert legal and financial advice throughout the transaction. Experienced professionals can help identify potential pitfalls, negotiate favorable terms, and guide you through legal and financial aspects. Skilled negotiation can help address concerns and find mutually acceptable solutions, reducing the likelihood of disputes.

Professionals can also help you understand the dispute resolution provisions and other available options to resolve disputes that may arise post-transaction. Some of these dispute resolution procedures are created to cover a buyer's financial loss.

5. Clear Communication and Documentation

Maintain clear and open communication with all parties involved. Define the scope and document all discussions, decisions, and agreements in writing to avoid misunderstandings or disputes arising from verbal agreements.

6. Compliance with Regulations and Antitrust Laws

Ensure compliance with applicable laws, regulations, and antitrust requirements. Conduct a thorough analysis of potential regulatory implications and seek necessary approvals to minimize the risk of legal challenges or regulatory intervention.

7. Integration planning

Develop a detailed integration plan to effectively merge the acquired company with your existing operations. Establish clear communication channels, define roles and responsibilities, and address cultural and organizational differences. Smooth integration can reduce post-transaction disputes and enable a successful transition.

8. Maintain an Escrow Account

By depositing funds or assets into the account, a neutral third party holds them until certain conditions or obligations are fulfilled. This provides added security and ensures a proper execution of the deal.

Escrow accounts can hold a percentage of the purchase price, claims for indemnification, or other contingencies outlined in the purchase agreement for around 12 to 24 months to compensate the buyer in case of a loss.

9. Post-closing monitoring and dispute resolution mechanisms

Implement mechanisms to monitor and address potential post-closing disputes promptly. This can include dispute resolution clauses, mediation, or arbitration provisions in the purchase agreement. Establishing a structured process for resolving conflicts can help avoid lengthy and costly litigation.

10. Ongoing legal compliance

Maintain strong corporate governance practices and ensure ongoing compliance with legal and regulatory obligations. This includes adhering to reporting requirements, maintaining accurate records, and addressing any legal or regulatory changes that may impact the business.

11. Insurance coverage

Consider obtaining appropriate insurance coverage. Representations and warranties may help mitigate financial risks associated with potential disputes or litigation. Reps and warranties are statements of fact or assurances regarding the current and future state of the business being acquired or sold.

Representation or warranty provides information, establishes expectations, and allocates risks between the buyer and the seller.

Other forms of insurance you can explore include:

  • Tax Liability Insurance
  • Environmental Liability Insurance
  • Cybersecurity and Data Breach Insurance
  • Key Person Insurance
  • Transaction Liability Insurance
  • Directors and Officers (D&O) Insurance

While these steps can help minimize disputes and litigation, some conflicts may still arise even after deal closure. In such cases, seek early resolution through mediation, arbitration, and negotiations to protect your interest and mitigate the potential negative impact on the business.

Guarantee a Successful M&A Transaction with Expert Legal Help from Calkins Law Firm

Ensure a seamless and successful M&A transaction by partnering with the expert legal team at Calkins Law Firm. With over 100 years of combined extensive experience and understanding of mergers and acquisitions, we provide the guidance needed to scale through the M&A process easily and confidently.

From due diligence to negotiations, contract drafting, and post-closing matters, our dedicated attorneys are committed to safeguarding your interests and maximizing the value of your transaction.

Request a free consultation today and secure the legal support you need for a transformative M&A deal.

Frequently Asked Questions

What steps can be taken to resolve M&A disputes?

When faced with an M&A dispute, several steps can be taken to resolve the issue:

  • Engage in open and transparent communication with the other party to understand their perspective.
  • Attempt negotiations and explore potential solutions through mediation or alternative dispute resolution methods.
  • If negotiation and mediation fail, consider pursuing litigation to protect your rights and seek a resolution through the court system.
  • Consult with experienced M&A litigation attorneys who can guide you through the legal process and advocate for your interests.

How can post-closing purchase price adjustment disputes be addressed?

Post-closing purchase price adjustment disputes can be addressed by referring to the terms outlined in the purchase agreement. Parties can engage in negotiations, utilize dispute resolution mechanisms specified in the agreement, or seek legal recourse through litigation if necessary.

Can indemnification provisions in the purchase agreement help protect against litigation risks?

Yes, indemnification provisions in the purchase agreement can provide a mechanism for allocating risks and potential liabilities between the parties. These provisions outline the responsibilities for compensating the other party in case of specific breaches or events, thereby providing a means to address potential disputes and minimize the risk of litigation.

What are earn-out disputes in M&A transactions?

Earn-out disputes typically arise when there are disagreements regarding the determination and calculation of additional payments based on the performance of the acquired business. These disputes may involve disputes over financial metrics, timing of payments, or disputes related to the achievement of earn-out targets.

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Benjamin Calkins

Benjamin Calkins

Ben Calkins is a well-educated, top-rated, and highly experienced business law attorney.

Ben Calkins is an honors graduate of Harvard College and the University of Michigan Law School. After law school, he clerked for a Federal Judge before joining one of the World’s largest law firms, Squire, Sanders & Dempsey. Mr. Calkins has also worked at, and been a partner in, several of the most prominent “old style law firms” in the World.