Most transactional attorneys have probably heard of the “deal tax,” the idea that most major mergers and acquisitions transactions prompt litigation. In fact, approximately 82% of deals lead to litigation.
That means that the country’s most sophisticated M&A lawyers largely are unsuccessful in avoiding litigation. If involved from the start of the deal, M&A litigators can help predict, minimize, and quantify risk, all while setting the stage for the efficient and favorable resolution of any dispute.
Perhaps to the benefit of their opponents, companies currently under-appreciate and underutilize litigation counsel as deal team members.
Before a Deal
An ounce of prevention is worth a pound of cure. Collaborating with a litigator in the planning stages could help the business anticipate how the potential transaction might affect the company’s committees, directors, or fiduciary duties by advising on:
- Whether an independent committee should evaluate issues, including conflicts that might taint the transaction process
- If organizational documents allow for the actions required for the transaction
- The effect of the different judicial standards of review (business judgment review, Unocal, Revlon) on potential stockholder and/or derivative litigation
- Managing or reducing the inherent litigation risks
- Potential conflicts where management’s interests may diverge from the corporation’s
- The extent to which directors can be exculpated for any associated conduct.
Tabling such conversations until the middle of the transaction could cause issues down the road.
Think of a situation in which Company A acquired the exclusive right to offer Company B’s technology to customers in Europe. Company A breached the parties’ contract by attempting to commercialize Company B’s technology in Asia, generating $200 million for Company A. Company B wants to sue, but after talking to litigation counsel, it realized that the parties’ agreement has a damages cap of $5 million.
The parties selected that cap because when they entered into the agreement, $5 million was the value of an exclusive license in the relevant region. Had Company B involved a litigator before the transaction was papered, conversations about litigation risk and the scope of damages likely would have led Company B to strike the damages cap from the contract. Failing to involve a litigator from the start may have been a nine-figure mistake.
During a Deal
Once parties begin to negotiate a transaction, it may seem counterintuitive to leverage a litigator to avoid a lawsuit. After all, deal lawyers don’t just gather papers for closing, they help clients avert or minimize risks. And attorneys that frequently litigate contract issues are familiar with the provisions most likely to lead to a lawsuit and are better positioned to advise on issues such as enforceability and interpretation.
Without regularly litigating indemnification issues, it’s reasonable for a person to be ignorant of the type of claim waiver that is too broad to be enforced in the relevant jurisdiction.
In a recent deal, the seller breached the agreement’s non-compete, and the buyer sued. Unfortunately for the buyer, the agreement’s indemnification provision was ambiguously drafted, so the court concluded that—even though the non-compete was material to the deal—the seller was only obligated to indemnify the buyer only for third party claims. The “first-party” claim (buyer sustaining a loss caused by seller) wasn’t subject to indemnification. To protect against similar gaps, transaction counsel should work with litigation counsel.
M&A litigators can also be immediately useful with respect to contractual provisions related to dispute resolution, including defining:
- Available remedies, including categories of damages
- Scope of arbitration
- Choice of law
- Proper forum and venue; Jury waiver;
- Allocation of legal costs and attorney’s fees in the event of a dispute
- Circumstances where specific performance could be awarded as a remedy in the event of breach.
A litigator can help flag and evaluate risk for litigation during the deal, allowing the client to make an informed choice.
After a Deal
Litigators should be involved if a deal appears clearly headed toward litigation.But what is often overlooked is the benefit of litigation counsel who also worked on the actual transaction. Many of the same issues that arose between signing and closing will still be at play. At this point, there is no longer the incentive to get the deal done, which can make litigation more costly and less collaborative.
A deal litigator is useful to spearhead alternative paths to an in-court lawsuit, such as arbitration or mediation.
Mediators can coach both parties through difficult discussions, develop various scenarios to help weigh outcomes, and guide the parties in “pressure-testing” their positions. A deal litigator can help sculpt this process in a way that lightens tensions, preserves business relationships, or works in a specific client’s best interest.
Deal teams can—and should— leverage litigators like they leverage the expertise of lawyers with other specialties. An M&A litigator has the skills and expertise to predict and limit risks, including protracted, expensive litigation. And if a dispute were to arise, a deal litigator, who also was involved in the transaction, is uniquely positioned to resolve the dispute.
On the flipside, the exclusion of litigators from deal teams often results in litigation. Companies should avail themselves of all the available tools at hand.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Oderah Nwaeze is partner at Faegre Drinker and helps clients navigate and resolve complex corporate and commercial disputes.
Renée Dudek is an associate at Faegre Drinker who represents clients in commercial litigation and direct appeals in federal and state courts.
Naomi Duru is an associate at Faegre Drinker and advises clients in a variety of industries throughout the various phases of litigation and dispute resolution.
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