M&A Claims

Mergers and acquisitions are commercial transactions, involving detailed contracts, negotiated between the parties following a process of due diligence.

What are M&A claims?

M&A claims can arise following the deal and usually involve the seller and acquirer companies, typically because either the acquirer did not get what was expected, or something has gone wrong for the seller company in terms of the promises made by the acquirer company (such as provisions dealing with earn-out and deferred consideration, for example).

Common types of M&A disputes we handle

We deal with all merger & acquisition disputes, including:

• Breach of Warranty
• Indemnity Claims
• Misrepresentation in M&A Transactions
• Earn-Out and Deferred Consideration Disputes
• Disclosure Letter Disputes
• Shareholder disputes arising from M&A
• Claims against directors that become apparent through the M&A process

Who do we act for?

We act for both buyers and sellers (claimants and defendants), including the transacting companies themselves and/or, where relevant, any outgoing or incoming shareholders and directors.

Legal basis for M&A Claims

M&A disputes is a convenient shorthand for a wide variety of claims. These can include shareholder disputes, claims arising from defective disclosure, breach of warranty claims, and many others.

Aside from shareholder disputes, the main causes of action are usually misrepresentation and breach of contract, since most of the issues arising will have been covered by the ordinarily extensive contractual documents.

These apply whether there is an issue with disclosure, a breach of warranty, an earn-out dispute, or issues concerning post termination restrictions in, for example, shareholder agreements or the share purchase agreement itself.

Evidence required to prove and M&A claim

The evidence required depends on the type of claim. It is often useful to start with a factual narrative, and to assemble the following:

• Share Purchase Agreement / Asset Purchase Agreement
• Disclosure letter
• Completion accounts
• Earn-out provisions
• Financial statements
• Due diligence documents
• Board minutes / shareholder documents
• Key correspondence and emails
• Evidence of non-compliance or wrongful conduct

It is very important to preserve all documents and to pause any automatic deletion, as there will be detailed disclosure obligations should the matter proceed to Court.

In addition to the above, evidence of loss will need to be considered in-depth, and will very likely necessitate expert evidence, particularly where issues of valuation are involved.

What document issues weaken a claim?

Anything that is ambiguous in a contract, or not included, causes uncertainty. However, such ambiguities can work both ways and can be useful tools in settlement negotiations. Uncertainty is both a risk and an opportunity in a dispute. However, these should obviously be avoided as far as possible at the drafting stage.

The wording of the documents needs to be analysed very closely in context to ensure that all processes; time limits; notice periods; service methods; and ADR provisions are followed precisely. Exclusion and limitation clauses also require very careful attention.

Time limits for M&A claims

The basis for a claim does not always become apparent immediately. It takes time for the dust to settle, especially for breach of warranty and/or earn-out provisions, because these depend on the future performance of the business.

There is no special limitation period for M&A claims. A breach of contract claim has a 6-year limitation period from the date of the breach. The same applies for misrepresentation claims (which are technically “tort” (civil wrong) claims), but the starting point is different. Tort claims run from the date when loss arises though in some circumstances this deadline can be extended.

The bottom line is that, as soon as any claim is suspected, advice should be sought urgently. There are usually contractual limitation periods in the M&A agreements themselves, which can shorten these periods substantially, and there are often contractual notification and redress procedure, in parallel to limitation or exclusion clauses which can limit the scope of certain types of claim and the time for bringing them.

What should you do if you suspect you have a claim?

As soon as you suspect you have a claim, seek advice from a dispute resolution solicitor. It is very important to ensure that the early stages are handled in the right way, as there can be strict contractual time limits and very specific mechanisms for notifying claims.

If a claim is made against you it is important you seek immediate legal advice. The way in which an issue is handled in the early stages can determine success or failure. Early advice, and the right guidance, can help to achieve a quick and efficient resolution in order to avoid litigation.

Breach of Warranty Claims

What is a breach of warranty claim in M&A?

In Share Purchase Agreements, there will be general and specific warranties. In short, the seller provides a contractual promise about the target company or shares.

A typical example of a warranty is a promise that the accounts given are accurate, or that there are no regulatory proceedings or disputes underway.

Disputes arise where one party alleges that the warranties given have been breached, were untrue, or not adhered to. This also depends on what was in the disclosure letter, or otherwise made known prior to the purchase.

How do I prove a breach of warranty in a business sale?

It depends on the warranty. You have to provide evidence that the position is not as stated in the warranty. If, for example, the warranty relates to the value of an asset, then there will need to be expert evidence on the value.

What losses can be recovered in a breach of warranty claim?

The successful claimant in a breach of contract claim is entitled to be put in the position in which it would have been had there been compliance with the warranty.

The most straightforward starting point is the difference in value of the shares or the business if the warranty had been true as compared to the position given that the warranty is untrue.

However, the complexity of establishing that often requires detailed accounting evidence, and also involves questions of remoteness and consequential loss, as well as causation (e.g. if the price would have been paid in any event given prevailing market or specific industry conditions, such as competition etc.). It is also important to look at the effect of exclusion and limitation clauses.

Are there time limits or financial caps on breach of warranty claims?

Breach of warranty claims are contractual and usually have a 6-year limitation period as a matter of statute. However, there are usually contractual limitation periods, which are much shorter, and require a specific notification process to be followed, making matters much more strict and potentially urgent.

How do warranty claim notice requirements work and what happens if they are missed?

Typically, there will be a short window of opportunity to notify a breach of warranty claim to the other side, and there will then be a mechanism for a response, and possibly a dispute resolution procedure. These are interpreted strictly by the Courts, and the wording of the clauses are very important. Much can turn on the interpretation, and even the use of the correct method of service of any required notice.

What remedies are available?

Typically, the remedy is damages for a breach of warranty, or misrepresentation, for example. Rescission (the right to be put back in the position as if the deal never happened) is rare, and often excluded by the contract.

In what situations might an injunction be relevant?

Where urgent action is required to avoid prejudice occurring, it may be possible to get an injunction to stop the offending conduct, such as to enforce a restrictive covenant where the damage could later be such that damages would be insufficient as a remedy to compensate.

This could also apply to client solicitation and non-dealing clauses, and where there is an intellectual property or confidential information issue.

Do you have to go to court to get a resolution?

No. There are three ways to resolve claims:

• The best is prevention. As soon as a potential issue becomes apparent, it can be diffused with the right advice, without giving up all of your rights.
• The second is settlement. This can potentially allow commercial relationships to be preserved. Informal negotiations, joint settlement meetings, and mediation are examples of how this can be achieved with the right commercial focus and guidance.
• The third way is to go to Court. This is the last resort and requires careful cost and risk management advice.

How M&A disputes are resolved

What is the M&A claims process from initial contact with our team to resolution?

• Initial discussion
• Putting together the documents and ensuring that document preservation is in place
• Brief consideration leading to a cost estimate or funding discussion
• Formal instructions (engagement letters, client onboarding)
• Initial Review – advice on merits and costs as far as possible
• Commencement of correspondence, with a view to establishing and narrowing the issues, and preferably towards settlement or ADR
• If necessary, Court proceedings are issued
• Exploring ways to resolve continues throughout, as do cost and merits reviews
• Following Court directions in the lead up to Court (including directions for disclosure, witness evidence and expert evidence)
• If there is no settlement, there will be a trial

How long do merger & acquisition claims take to resolve?

As with all claims, this depends. Leaving aside interim applications and possible interim injunctions where appropriate, they could take around two years, depending on value and complexity if the matter proceeds to a full trial. This is one of the many reasons why a commercial approach, with clear legal and costs advice, is key at the outset – because in the right hands, a resolution focus can settle matters much more quickly and efficiently.

Who pays the legal costs in a merger or acquisition dispute?

The usual rule is that the successful party will recover their costs from the other party. There will almost always be an element of irrecoverable cost. This should factored in to the cost-benefit approach to early settlement.

What funding options are available for M&A claims?

In some cases, Conditional Funding Arrangements (CFAs) OR Damages Based Agreements (“DBA’s”) may be appropriate. This is commonly known as a ‘no win, no fee agreement’. We will explain how these work to you if the case is appropriate and it’s something you would like to consider, or alternatively you can learn more in our funding options guide. 

Where they suit the case, CFAs or DBA’s can work really well. However, it is important that they are suitable for not only the solicitor, but also for the case and for the client.

The default position is the traditional hourly rate. This can nevertheless be blended with fixed fees at certain stages for certainty, or even worked into a discounted (or partial) CFA.

We offer a The available funding options should always be discussed and assessed at the outset between lawyer and client so that a well-informed decision can be made.

Our M&A dispute solicitors in action

• Handled a breach of warranty claim concerning software licences that were not in fact owned by the company being acquired. 
• Advised on securing payment where there had been a default on payment obligations where the payments had not previously been properly secured.
• Experienced in advising on professional negligence claims where obligations of the parties are not properly documented, leaving room for disputes to arise and obligations to be circumvented.
• Resolving a high value claim for payments pursuant to an earn-out agreement in the purchase by a national chain of a professional services firm, whereby the consideration had been significantly reduced due to several breaches of warranty which had depressed the revenue.
• Significant experience in advising and resolving disputes concerning tax warranties; the calculation of deferred consideration and earn-out payments; undisclosed liabilities and restrictive covenants (where outgoing directors, for example, engage in competitive conduct post sale, in breach of the covenants given)
• Advising in circumstances where sales brokers and professional advisers receiving referrals from the other party may have had a conflict of interest in promoting and/or advising on the deal.
• Advising selling shareholders in respect of claims against them for damages for alleged breaches of various warranties following share sale and advising on claims by them against purchaser for alleged failure to pay deferred consideration and the application of acceleration provisions in respect of entirety of deferred consideration. 

Contact Our Dispute Resolution Team