Dispute resolution in M&A transactions
Category: Mergers and acquisitions
In cross-border transactions with a Dutch target company and a foreign purchaser, the transaction documentation will very often be governed by Dutch law and will be negotiated by Dutch legal advisers. This very often leads to the inclusion of a so-called “choice of forum” clause vesting jurisdiction over any disputes in relation to the transaction in the Dutch national courts. If it is not well thought out, such a choice of forum can have disastrous consequences in the event of a dispute.
The strategic importance of a choice of forum
In cross-border transactions, enforceability of judgments should be at the top of parties’ (or at least their advisers’) minds when negotiating the transaction documentation. When drafting or negotiating a dispute resolution clause, the parties and their advisers should be thinking about what they will be wanting to do with a judgment in their favour in the event of a dispute.
To take the example of a transaction involving a Dutch and target company and a foreign purchaser: if the purchaser defaults on the payment of part of the purchase price, for example where payment of part of the purchase price is deferred or contingent on the future performance of the target (a so-called earn-out or variable purchase price component), the seller will seek performance through the courts. If the seller is successful and secures a judgment in its favour, it will then have to execute that judgment against the purchaser to collect the judgment debt.
Where, as in this example, the purchaser is a foreign party (with most of its assets likely located outside of the Netherlands), the seller will be faced with the question of whether the judgment that it successfully secured in the Netherlands will be capable of recognition and enforcement in the jurisdiction(s) in which the purchaser’s assets are located. This is where a smart dispute resolution provision can make all the difference.
Enforcement of judgments
The true value of a judgment from the Dutch national courts turns on where the judgment debtor (in our example, the foreign purchaser) or, more importantly, its assets are located.
If the purchaser’s assets are located in the Netherlands, then enforcement will not be difficult at all; a judgment of the Dutch courts will, in most cases, be capable of immediate and automatic enforcement against assets located in the Netherlands.
Outside of the Netherlands, the picture is somewhat more complicated.
If the purchaser’s assets are located in a Member State of the European Union, the European Economic Area, Switzerland or a handful of other countries with which the Netherlands has bilateral or multilateral treaties in relation to the enforcement and recognition of judgments in civil and commercial matters (e.g. the United Kingdom, Mexico, Singapore and Montenegro), then a Dutch judgment can also be relied on with relative ease.
In all other cases, however, the situation becomes considerably more complicated. In the absence of an agreement between the Netherlands and the state in which the judgment debtor’s assets are located, the question of whether a Dutch judgment can be relied on will depend on the local rules of recognition and enforcement of foreign judgments in the jurisdiction in question. In all cases, it will involve the commencement of a fresh set of local proceedings aimed at securing the recognition and enforcement of the Dutch judgment. There are, however, ways to avoid these expensive and slow proceedings.
Arbitration clauses and non-exclusive choices of forum
There are two key alternatives to the exclusive choice of forum clause that is usually included in Dutch M&A transaction documentation, namely arbitration clauses and non-exclusive choices of forum.
A non-exclusive choice of forum clause is an often overlooked alternative to an exclusive choice of forum clause, which is often the default. Under a non-exclusive choice of forum clause, the parties agree that the courts of a certain country (for example the Netherlands) will have jurisdiction, but that parties may, if they wish, also bring proceedings before the courts of any other country that would otherwise have jurisdiction (e.g. the courts of the defendant’s home jurisdiction). If proceedings are commenced in the jurisdiction in which the defendant or its assets are located, this will increase the chances of the judgment resulting from those proceedings being capable of execution against the relevant defendant.
Arbitration is a well-known, but (in the Netherlands) relatively under-used, alternative to a choice of forum in favour of the Dutch national courts. If the M&A transaction documentation contains an arbitration clause, this allows parties to refer disputes arising in relation to the transaction to an arbitral tribunal for resolution instead of having to resort to the national courts. An arbitral tribunal is, in simple terms, like a private court before which the parties can conduct proceedings as if it were a regular court.
There are, however, certain key differences between arbitration and litigation before the national courts. Relevantly, judgments rendered by arbitral tribunals (referred to as “arbitral awards”) are capable of recognition and enforcement much more widely than judgments of national courts (in over 160 countries compared to the 30-odd in which a Dutch court judgment is capable of automatic or near-automatic recognition and enforcement).
The key take-away from this article is that dispute resolution issues should not be treated as boilerplates or afterthoughts in cross-border M&A transaction documentation.
Parties (and their advisers) should, when negotiating the transaction documentation, ensure that the chosen dispute resolution mechanism will result in a judgment or an award that will be capable of enforcement in the jurisdiction in which the other party’s assets are located.