WHY INCLUDE AN ARBITRATION CLAUSE IN A SHARE PURCHASE AGREEMENT?

Although arbitration clauses are provided for in some share purchase agreements (SPAs), they are not widespread and parties to such contracts still often refer disputes to formal litigation before state courts. However, arbitration presents many advantages compared to state litigation in case a dispute arises between parties to an SPA. Therefore, prior to inserting a dispute resolution clause in a contract, one should consider whether arbitration or litigation is the best method to resolve potential future disputes that may arise out of it.

First, it should be kept in mind that the opportunity to resolve disputes through arbitration needs to be discussed as early as possible during the drafting of the contract. Indeed, since arbitration is consensual, both parties have to agree to submitting their dispute to an arbitral tribunal. Moreover, given that the decision rendered is final and binding, it is not to be taken lightly and negotiated at the last minute, as is unfortunately too often the case; which is why the arbitration clause is often referred to as a ‘midnight clause’. On the contrary, prior to discussing a contract, each party should assess carefully the pros and cons of negotiating and including an arbitration clause.

Regarding SPAs, globally speaking, the most frequent types of dispute are: (i) disputes on complementary prices in accordance with earn-out clauses; (ii) disputes pertaining to warranties and representations; and (iii) disputes arising out of non-compete clauses.

The question then arises as to the criteria on which the lawyer or in-house counsel in charge of the contract will proceed to the assessment of whether or not to insert an arbitration clause in the contract currently being negotiated.

Jul-Sep 2013 issue

Altana