Arbitration in merger and acquisition transactions

293 Pages·2017·1.52 MB·English

QUEEN MARY UNIVERSITY OF LONDON
SCHOOL OF INTERNATIONAL ARBITRATION

ARBITRATION IN MERGER AND
ACQUISITION TRANSACTIONS

PROBLEM OF CONSENT IN PARALLEL PROCEEDINGS AND
IN THE TRANSFER OF ARBITRATION AGREEMENTS IN
MERGER AND ACQUISITION ARBITRATION

BY

CAHIT AGAOGLU

THESIS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY
LONDON, 2012

Under the supervision of:
Prof. Loukas A. Mistelis
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ACKNOWLEDGMENTS

This thesis is the product of years of research I conducted in London. In that time, I
have worked with a great number of people whose contribution in assorted ways to
the research and compilation of this thesis deserves special mention. It is a pleasure
to convey my gratitude to them all in my humble acknowledgment.
I would like to record my gratitude to Prof. Loukas A. Mistelis for his supervision,
advice, and guidance from the very early stage of research, in addition to his
extraordinary insight, throughout the work. Above all, he provided me all the
necessary facilities and support in various ways.
I take this opportunity to record my sincere thanks to all members of the School of
International Arbitration for their enduring assistance. It was truly a pleasure to work
with you all.
I would like to acknowledge the financial support of ARKAS Holding, particularly
Önder Türkkanı, CEO of Arkas Holding. The library facilities notably the Institute
for Advanced Legal Studies have been indispensable.
Special thanks go to my friends Emre and Yasin for their support and encouragement
and also for their kind friendships.
I wish to express my sincere appreciation to my family. This thesis would never have
been completed without the encouragement and devotion of my family.
This thesis is dedicated to my family.

Cahit AĞAOĞLU
London
June 2012

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ABSTRACT
ARBITRATION IN MERGER AND ACQUISITION
TRANSACTIONS
PROBLEM OF CONSENT IN PARALLEL PROCEEDINGS AND IN THE
TRANSFER OF ARBITRATION AGREEMENTS IN MERGER AND
ACQUISITION ARBITRATIONS
(Thesis for Doctorate of Philosophy)
Cahit AGAOGLU
Merger and acquisition (M&A) transactions have increased dramatically both in
number and volume around the world in the last decades. Further to these increases,
disputes regarding M&A transactions are often referred to arbitration as a consensual
and private mechanism which is flexible, given the freedom of the parties to select
arbitrators and to adjust the process according to their needs. This study undertakes
to address and examine the long and complex processes in merger and acquisition
transactions in light of the emerging preference for utilising arbitration in disputes
arising therein. Therefore, M&A arbitration faces certain difficulties in coping with
every dispute during the transaction, a number of which the author seeks to
underline. In the thesis, two main problems of arbitration in M&A Transactions have
been covered. Firstly, the problem of consent in consolidation of parallel proceedings
during M&A transactions, and, secondly, parties consent validating arbitration
agreements/clauses in “assignment” or “succession” after M&A transactions have
been completed. The very approach of the thesis proposes whether academic analysis
of the subject matter can be best conducted by separation along the many phases of
the long and complex process of M&A and whether it is fruitful to examine these
phases individually to obtain the greatest insight. Following the dissection of the
different phases of M&A transactions, the nature and operation of arbitration in
possible disputes arising out of different phases of M&A has been studied. It is also
argued that the utilisation of arbitration will and should provide some ideas toward
clarifying the content of consent of parties to a transaction. In demarcating the phases
and critical stages in M&A transactions, perspective of the problems posed by
parallel proceedings is enhanced. Developing on this rich background, argument
develops the idea that the logic of consolidation in arbitration and can have
pragmatic application to different alternative dispute resolution (ADR) clauses too.
The expansive application of consent in M&A arbitration will be tested against those
different ADR methods which do not have a binding effect. On the subject of
consolidation in M&A transactions, it will be argued that it is necessary not only to
focus on the intention of parties, but it is also unavoidable to concentrate on
surrounding relevant facts arising in different phases of M&A transactions, given the
recent doctrinal developments in academia and practice. Diverging views which have
emerged in order to determine consent are explored alongside their respective
theories of consent. The specific importance of consent in the transfer of arbitration
agreements has been examined in respect of assignment and succession. The existing
rules and approaches outlined in many publications will be challenged, and
arguments against their automatic application in M&A transactions will be presented
in favour of an expansive approach paying attention to the fluency of facts, similar to
that employed in consolidation of parallel proceedings. In examining whether current
regulation is suitable given the popular emergence of M&A arbitration, the author
will propose how deficiencies and inconsistencies in the area can be rectified looking
forward in the form of guidelines.
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ABSTRACT .................................................................................................................... 3
ABBREVIATIONS......................................................................................................... 7
INTRODUCTION ........................................................................................................ 13
PART I : THEORETICAL FOUNDATIONS ........................................................... 41
CHAPTER I: CHRONOLOGICAL PHASES OF MERGER AND
ACQUISITION TRANSACTIONS ............................................................................ 42
A) Introduction ......................................................................................................................... 42
1) Negotiation phase ................................................................................................................. 49
a) Preliminary Contacts ........................................................................................................................ 49
b) Letter of Intent .................................................................................................................................... 52
b-1) Delimitations of the notion .............................................................................................................. 55
b-2) Related Instruments ........................................................................................................................ 56
1) Options ...................................................................................................................................... 56
2) Confidentiality Agreements ..................................................................................................... 56
3) Variations in Terminology ....................................................................................................... 57
4) Pre-Contractual Agreements and Promises to Contract ...................................................... 58
5) Bilateral (or Multilateral) and Unilateral Letters of Intent .................................................. 58
b-3) Content ............................................................................................................................................. 59
1) Necessary Clauses ..................................................................................................................... 59
2) Optional Clauses ...................................................................................................................... 59
3) Legal Nature ............................................................................................................................. 60
3.1. Does the Letter of intent amount to a Contract? ........................................................................... 60
3.2. Does the Letter of Intent amount to a Promise to Contract? ....................................................... 63
3.3. Is the Letter of Intent an Offer? ...................................................................................................... 64
b-4) Legal Effects ..................................................................................................................................... 64
b-5) Contractual Interpretation and Completion ................................................................................. 67
c) Due Diligence ....................................................................................................................................... 68
2) Signing Phase (Purchase Agreement) ................................................................................. 70
3) Closing Phase (Completion) ................................................................................................ 71
4) Post-Closing Phase ............................................................................................................... 73
B) Conclusion of Chapter I ..................................................................................................... 74
CHAPTER II : ARBITRATION AND MERGER AND ACQUISITION
TRANSACTIONS ........................................................................................................ 78
A) Introduction ......................................................................................................................... 78
B) Arbitration in Pre-Signing Disputes .................................................................................. 79
1) Conflicts Arising Out of a Letter of Intent........................................................................................ 82
2) Conflicts arising out of Due Diligence ............................................................................................... 83
C) Arbitration in Post-Signing: Disputes Arising From Merger or Purchase
Agreements ................................................................................................................................ 84
1) Violation of Covenants ........................................................................................................................ 87
2) No Material Adverse Changes ........................................................................................................... 88
3) Price Adjustment Arbitration ............................................................................................................ 91
3-a) Reasons for price adjustment clauses............................................................................................. 92
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3-b) Frequently Disputed Issues on Price Adjustments ....................................................................... 93
3-c) Expert Arbitration ........................................................................................................................... 97
4) Representations and Warranties ..................................................................................................... 101
4-a) Breaches of representations and warranties ............................................................................... 106
4-a-a) Duty to investigate ...................................................................................................................... 106
4-a-b) Duty to Object ............................................................................................................................ 106
4-b) Consequences of breaches of Representations and Warranties ................................................ 108
5) Third- Party Claims .......................................................................................................................... 108
6) Claims for Non-performance or Fundamental Error .................................................................. 109
7) Put and Sale Options ....................................................................................................................... 112
D) Particular Aspects of M&A Transactions Related Arbitrations .................................. 114
D-1) Multi-party and Multi-Contract Disputes .................................................................................. 114
D-2) Extension of Arbitration Agreements to Third Parties ............................................................. 115
E) Conclusion of Chapter II .................................................................................................. 116
PART II : CHALLENGES AND PRACTICAL SOLUTIONS ............................. 120
CHAPTER III : COOPERATION AND COORDINATION OF ARBITRAL
PROCEEDINGS IN M&A TRANSACTIONS........................................................ 121
A) Introduction ....................................................................................................................... 121
B) The Scope of Arbitration Clauses in M&A Transactions ............................................. 122
C) Multiple Proceedings and Parallel Proceedings in M&A Transactions ....................... 124
C-1) Terminology .................................................................................................................................. 125
C-1-1) Multi-Contract and “Group of Contracts” Doctrine in M&A Transactions ....................... 126
C-1-2) Parallel Proceedings in M&A Arbitration .............................................................................. 128
C-1-2-1) Parallel Proceeding depending on the same dispute ........................................................... 128
C-1-2-1-1) Mechanism of Lis Pendens in M&A Arbitration ............................................................. 129
1) Buenaventura Case ........................................................................................................ 134
2) Fomento Case ................................................................................................................. 135
C-1-2-1-2) Mechanism of Res Judicata in M&A Arbitration ............................................................ 138
C-1-2-2) Parallel Proceedings depending on related disputes ........................................................... 144
D) Solutions Proposed by Doctrine and Case Law in Different Jurisdictions for Joinder
of Parallel Proceedings ........................................................................................................... 148
E) Advantages and Disadvantages of Consolidation in M&A Arbitration ....................... 153
F) Consolidation in a Single Arbitration .............................................................................. 160
G) Conclusion of Chapter III ................................................................................................ 162
CHAPTER IV : MULTI-STEP PROCESSES IN M&A TRANSACTIONS ....... 167
A) Introduction ....................................................................................................................... 167
B) Background ....................................................................................................................... 168
C) Different ADR Procedures used in M&A Transactions and Interaction with
Arbitration Proceedings ......................................................................................................... 170
C-1) Conciliation.................................................................................................................................... 171
C-2) Mediation ....................................................................................................................................... 175
C-3) Med-Arb or Arb-Med ................................................................................................................... 177
C-4) Expert Determination ................................................................................................................... 182
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C-4-1) Problems Involving Expert Determination ............................................................................. 185
C-4-2) Solutions proposed ..................................................................................................................... 187
D) The problem of Confidentiality in Multi-Tiered Dispute Resolution Processes ........................ 189
E) Conclusion of Chapter IV ............................................................................................................... 191
CHAPTER V: ISSUES OF CONSENT IN M&A ARBITRATION...................... 194
A) Introduction ....................................................................................................................... 194
B) Identifying Consent in M&A Arbitration ....................................................................... 195
B-1) Incorporation by Reference.......................................................................................................... 198
B-2) Consent to an Underlying a Contract Typically Constitutes Consent to an Arbitration
Agreement .............................................................................................................................................. 200
B-3) Consent to Underlying Contract Not Required for Consent to Arbitration Agreement ........ 201
B-4) Consent on the related agreements .............................................................................................. 202
B-5) Defects of consent: Fraud (dol), mistake (erreur) ...................................................................... 205
ICC Case No. 11961............................................................................................................................... 206
ICC Case No. 12502............................................................................................................................... 209
B-6) Implied or Tacit Consent .............................................................................................................. 212
C) Consent on the Transfer of the Arbitration Agreement After M&A Transactions .... 214
C-1) Assignment .................................................................................................................................... 216
ICC Case No. 12745............................................................................................................................... 224
C-2) The Latter Superseded the Former and Succession .................................................................. 231
D) Conclusion of Chapter V .................................................................................................. 241
CONCLUSION ........................................................................................................... 246
BIBLIOGRAPHY....................................................................................................... 258
Books and Thesis .................................................................................................................... 258
Articles ..................................................................................................................................... 265
Regulations, Directives ........................................................................................................... 280
TABLE OF CASES ................................................................................................................ 281
WEB SITES ............................................................................................................................. 291

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ABBREVIATIONS

Institutions and Organisations and Rules

AAA American Arbitration Association
ABA American Bar Association
ASA Association Suisse de l’arbitrage (Swiss Arbitration
Association)
CEPANI Belgian Centre for Arbitration and Mediation
CIETAC China International Economic and Trade Arbitration
Commission
CILS Center of International Legal Studies
CMI Comité Maritime International
COMECON Council for Mutual Economic Assistance
DIS Deutsche Institution für Schiedsgerichtsbarkeit (German
Institute of Arbitration)
EC European Commission
EEC European Economic Community
EU European Union
FIDIC Fédération Internationale des ingénieurs-Conseils
Geneva Rules Chamber of Commerce and Industry of Geneva Arbitration
Rules
IBA International Bar Association
ICC International Chamber of Commerce
ICC Court International Court of Arbitration of the ICC
ICC Rules ICC Rules of Arbitration
ICCA International Council for Commercial Arbitration
ICSID International Centre for the Settlement of Investment
Disputes
LCIA London Court of International Arbitration
LCIA Rules LCIA Arbitration rules
NAI Netherland Arbitration Institute
OECD Organisation for Economic Co-operation and Development
PCA Permanent Court of Arbitration
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SAA Singapore Arbitration Act
Swiss Rules Swiss Rules of International Arbitration
UNCITRAL United Nations Commission for International Trade Law
UNCITRAL Model Model Law on International Commercial Arbitration Law
UNIDROIT International Institute for the Unification of Private Law

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General Abbreviations

A.L.R. American Law Report
ADR Alternative Dispute Resolution
All ER All England Law Reports
Arb. Int. Arbitration International
Art. article
art./arts. Article/Articles
ASA Bulletin Swiss Arbitration Association bulletin
ATF Arrêt du Tribunal Fédéral
AIAJ Asian International Arbitration Journal
Baylor L. Rev. Baylor Law Review
BGB Bürgerliches Gesetzbuch (German Civil Code)
BGE Entscheidungen des schweizerischen Bundesgerichts
BGH Bundesgerichtshof (German Supreme Court)
BGHZ Sammlung der Entscheidungen des Bundesgerichtshofs in
Zivilsachen
Bull. Bulletin
Cal. California
CC Swiss Civil Code
CCP Code of Civil Procedure
Ch. Chamber
Ch. Chapter
Cir. Circuit
Civ. Civil
Clunet (JDI) Journal de droit international
CO Swiss Code of Obligations
Com. Commercial
CPR Civil Procedure Rules
D Mass District of Massachusetts
Del. Delaware
DFT Decision of the Swiss Federal Tribunal
DIS-Materialien DIS Collection of materials on arbitration
Doc. Document
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e.g. exempli gratia, for instance
ed Edition
Ed./Eds. Editor / Editors
EDNY Eastern District of New York
ER English Reports
et al. Et alii / and others
et seq. Et sequitur
etc. Et cetera, and so on
F 2d The Federal Reporter Second Series
F 3d The Federal Reporter Third Series
F Supp Federal Supplement
FAA United States Federal Arbitration Act
FLR Federal Law Reports
Gen. ed. General Editor
Genova Convention European Convention on International Commercial
Arbitration 1961 (Geneva)
HL House of Lords
Ibid Ibidem, in the same place
ICC Bulletin International Chamber of Commerce International Court of
Arbitration
ICSID Rev.-FILJ ICSID Review – Foreign Investment Law Journal
ILA International Law Association
Int. ALR International Arbitration Law Review
Int. Const. Law Rev International Construction Law Review
Int. International
Int'l A.L.R International Arbitration Law Review
Iran-Us C.T.R. Iran-US Claims Tribunal Reports
i.e. id est, that is
J. Disp. Res Journal of Dispute Resolution
J. Int. Arb Journal of International Arbitration
LAD Last Access Date
LJ Lord Justice of Appeal
Lloyd’s Rep. Lloyd’s Law Reports
Mealey’s IAR Mealey’s International Arbitration Reports
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