Litigation risk is a mounting problem for businesses pursuing cross-border M&A, with almost three-quarters of companies (73%) questioned for Herbert Smith Freehills’ new cross-border M&A report Beyond Borders warning that risk is set to increase. The problem is a global one, says John Ogilvie, dispute resolution partner at Herbert Smith Freehills in London, though it often has different manifestations in different regions.
“In the US, it has almost become institutionalised for shareholders to claim that the public information made available prior to the deal did not constitute adequate disclosure, though some judges are now clamping down on these cases. In Europe, we see problems in Germany with shareholders filing suit against merger resolutions adopted at shareholder meetings, and in France, minority shareholdings are a frequent cause of difficulties,” he says. “We also see all sorts of disputes in emerging markets where companies are sometimes prepared to take much more risk than they might have historically because of the growth prospects they see, particularly where they are 'first movers'.”
The nature of disputes can also vary enormously. Ogilvie points to claims under warranties and indemnities, disagreements following management buy-outs over earn-outs and similar arguments about overage payments; cases related to how and when liability caps should be applied, problems connected to post-completion restrictions on sellers, and rows about pre-emption rights.
“One general word of warning I would give is that where disputes are possible, make sure any advice given to the client is privileged and not disclosable should a dispute arise,” Ogilvie adds. “Having the discipline to lock down privilege is very important. Clients should also bear in mind potential disclosure obligations when creating documents concerning issues that may later prove contentious.”
Clearly, this issue will be an important concern to manage. Two-thirds of those companies forecasting an increase in litigation risk (66%) warn that they will be less likely to undertake M&A as a result.