What is M&A Litigation? What You Need to Know When a Deal Goes Sideways

No one knows your business like you do. When it comes to pursuing a merger or acquisition, however, it isn’t enough to know your business inside out - you also need to be aware of the common risks associated with mergers and acquisitions (“M&A”)  so you can minimize or mitigate them and stay focused on what matters most - your business and what you want to do with it.

If you’re someone who is considering engaging in an M&A transaction, whether as a buyer or a seller, you should take the time to understand the potential challenges you may encounter and your legal options should a dispute arise. Proper planning, understanding risks, knowing how to spot potential issues before they happen, and having a trusted advisor by your side can minimize the risk and the impact of M&A litigation, maximizing the likelihood of achieving a successful deal. 

What is M&A Litigation?

M&A litigation refers to any legal dispute that arises in relation to the purchase and sale of a business. Common M&A disputes that can lead to litigation include:

Breach of Representations and Warranties Disputes 

A key component of any M&A transaction is the promises made by each party to the deal - their representations and warranties, which are usually set out in the transaction documents. Concerns about the accuracy of and compliance with such representations and warranties may arise during the due diligence process or afterwards, and if the parties are unable to resolve such concerns, may lead to M&A litigation.

Purchase Price Disputes 

Common types of purchase price disputes that can lead to litigation include:

• Earnout Disputes: Sometimes when structuring the purchase and sale of a business, parties agree to allocate a portion of the purchase price to be calculated based on the target company’s performance after the acquisition and paid at a designated time in the future. While this approach has benefits, such as incentivizing both seller and buyer to work to improve the performance of the  business, it also introduces litigation risk because whenever something is left to be determined in the future, there is a possibility that there will be disagreement over that determination when it is made.
• Purchase Price Adjustment Disputes: Disputes may arise where there are changes in the target company’s financial status between signing and closing.
• Working Capital Calculation Disputes: Working capital disputes arise when the buyer disagrees with the approach historically taken by the seller to the target company’s working capital.

Post-Closing Integration Disputes: 

Disputes may arise during an M&A transaction when addressing operational practices. As part of this work, parties may have to deal with important matters such as the future treatment of existing employees, or the approach to be taken to accounting, expenses, and performance measurement. These issues can significantly affect expectations around key elements of the sale, such as the calculation of the purchase price or earnout payments and pose a real litigation risk if the parties are not able to agree on how to address them. 

What Are the Signs an M&A Deal is Headed for Litigation?

While it is impossible to know with certainty at the outset if your M&A transaction will end up in litigation, there are warning signs that may indicate litigation is on the horizon. For example, if you find yourself repeatedly questioning the accuracy or completeness of information provided or notice that deliverables aren’t complying with agreed-to requirements, such discrepancies lead to future disputes. Identifying these risks and taking strategic steps to address them can minimize the likelihood that they will end in litigation. 

Why You Need an M&A Litigator

If your M&A deal runs into an issue, you’ll want to consider working with litigation lawyers to address the dispute. While you may think that any litigation lawyer will be up to the task, M&A litigators can spot litigation risks early, capitalize on the shared goals of the deal parties to facilitate early resolution, and utilize their experience in crafting pragmatic business solutions to work towards a resolution that may not be available through a conventional court process. 

How to Choose an M&A Litigation Lawyer

When considering who to retain to advise you on an M&A dispute, there are several questions you should consider, including:

What is my lawyer’s experience level?

Look for a lawyer who not only has experience in M&A litigation, but who has tackled issues similar to yours—they can provide specialized insight and advice about the issues you are facing.

Will I be comfortable with this lawyer?

When deciding on counsel, you need to pick someone with whom you genuinely feel comfortable speaking with. The litigation process is stressful, time-consuming, and will have serious implications for the business and those involved in the transaction at issue. You need to be able to speak freely with your lawyer and to be confident in the advice you are receiving.

How To Avoid M&A Litigation

Ideally, parties to an M&A transaction avoid litigation. Working with appropriate professional advisors from the outset can assist in achieving this goal.

Choose your financial advisors, legal counsel, and other deal professionals carefully. These individuals should anticipate potential disputes and help you to proactively plan for them. For example, your deal counsel should consider including mediation and arbitration clauses that outline how certain issues will be resolved and in what time frame in your deal documentation.

Issues that may at first appear insignificant can lead to costly, time-consuming disputes that diminish deal value and sour working relationships. The right professional advice can help you prepare the groundwork for efficient and effective dispute resolution, identify potential issues early to minimize the risk they pose to your deal, and resolve any disputes that arise, whether through a negotiated settlement or contested hearing before a judge or arbitrator.

Conclusion

M&A litigation is a potential risk in any transaction. By understanding the process, engaging the right legal team, and planning for possible outcomes, you can navigate your deal with greater confidence and help protect your interests—whatever challenges may arise.