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  • Dealing with divorce in the business family

    In a business family, any divorce has important business implications. In this article we look at the different scenarios that can arise and how to anticipate them in advance.

    Two divorces for every three marriages

    This is a fact. The chances of a couple ending up separating are very high. According to data from the National Institute of Statistics, in Spain there are two divorces, separations or annulments for every three marriages. In 2022, 20% were conflictive dissolutions, while 80% of the cases were by mutual agreement. And it should be borne in mind that these data do not take into account unmarried couples, who for civil purposes can have the same consequences as married couples.

    For this reason, in the family business, it is necessary to be realistic and always make provision for the eventuality of a divorce within the family.

    What to do before and after getting married

    Community of property or separation of property?

    Divorce is prepared before the wedding. Because one of the most important factors in determining the fate of a business after a divorce is the applicable matrimonial property regime. The most common are:

    • Regime of separation of property. The assets of both spouses remain separate, although subject to certain duties of family protection.
    • Community property regime. This is the one applied by default in most of the Autonomous Communities, and it complicates things considerably in the event of divorce. Because it differentiates between the assets of each of the spouses and those of the marriage itself. Broadly speaking, each spouse keeps as his/her private property what he/she had before getting married. Whatever either of them earned during the marriage belongs to the community of property. In the event of separation or divorce, the assets of the marriage must be liquidated and divided equally.

    Marriage contracts

    Marriage contracts allow the spouses to regulate their financial relations. For example:

    • Applicable matrimonial property regime. At its most basic level, the marriage contract allows, for example, that instead of the community of property regime, the separation of property regime is applied.
    • Referential matrimonial adjudication. This makes it possible to anticipate the distribution of assets in the event of divorce. For example, it is possible to determine that one of the spouses keeps the business in exchange for a definite financial compensation.
    • Inheritance transcendence. Allows the inheritance improvements to be anticipated. For example, by reserving a higher share in the company for one or more of the children.

    It is important to note that an agreement may be granted before the marriage, but also at any time while the marriage is still in force. They are particularly advisable when the couple is going into a joint business or if one of the spouses has a business project.

    The family protocol

    Family protocols are covenants applicable to family businesses, useful to regulate the internal functioning. For example, they can define in detail the process of generational succession, requirements for entering or leaving the company, corporate culture…

    The ultimate aim of family protocols is to bring stability to the family business. For this reason, they are also key to avoiding part of the conflict in the event of separation or divorce.

    Other caveats

    Even in marriages in community of property, one of the spouses may contribute funds to the family business by reserving a right of reimbursement or by expressly declaring its privative character. Otherwise, it will be considered as a contribution of property and it will be difficult to prove its privative character in the event of divorce.

    In any case, each case and the circumstances of each company, marriage and individual must always be analysed separately. To avoid the family business being directly affected by the marital breakdown, it is key to seek specialist legal advice before mixing family and business.

  • What are MAC clauses in M&A transactions and what are they for

    MAC clauses are a legal concept whose purpose is to cover the parties to a contract against the risk of a material adverse change that could frustrate the purpose of the contract or render it meaningless. In fact, their acronym corresponds to the English expression «material adverse change».

    The inclusion of MAC clauses is common in different types of contracts: financing transactions, leasing contracts, supply contracts. However, in this article we will focus on their usefulness in M&A transactions.

    A clause against negative circumstantial changes

    MAC clauses come from Anglo-Saxon law. They are included in mergers and acquisitions contracts to make the completion of the operation or transaction conditional upon the non-occurrence of certain negative and relevant events or circumstances that entail a substantial change with respect to the situation existing at the time of signing the contract. A classic example would be the drastic and unexpected loss of value of the target company in the context of a share deal.

    There are various possibilities. Most commonly, MAC clauses give one party the right to terminate the contract in the event of the material change adverse to its interests. But an MAC clause may also simply grant the right to modify the initial contractual terms. Or it may act as a suspensive clause so that the transaction is never consummated.

    When to include MAC clauses in mergers and acquisitions

    MAC clauses are particularly advisable when there is a long time delay between the signing of the contract (perfection) and the closing of the transaction (consummation). This delay may be due to a lack of necessary consent or because the buyer is waiting for the necessary financing.

    In these cases, MAC clauses serve to ensure the buyer a contractual exit without incurring a breach of contract. Because the longer the time between completion and consummation, the greater the chances that unforeseen events will occur and frustrate the deal.

    Even if there is no long time deferral. The inclusion of MAC clauses is also advisable in any contract of a complex nature. Also in those that are framed in volatile or highly uncertain markets.

    The limitations of the rebus sic statingus doctrine

    MAC clauses share similar features with the so-called rebus sic stantibus doctrine. This is a figure that applies when, in the face of unforeseeable circumstances not attributable to either of the parties, there is a rupture or an absolute disproportion of the equilibrium that causes the performance of the contract under the conditions initially agreed to be excessively burdensome for one of the parties.

    However, Spanish courts have traditionally applied the rebus sic stantibus jurisprudential doctrine in an extremely restrictive manner. For this reason, the subscription of a MAC clause is always the best alternative. Because it constitutes an express and binding contractual agreement between the parties.

    How to draft a MAC clause

    In order to provide MAC clauses with maximum legal certainty and avoid disputes over their interpretation, it is essential to define in the greatest detail which circumstances are to be considered as substantial or material. For this reason, it is essential to have a team of lawyers who are experts in negotiating and drafting M&A contracts and who are able to foresee all the possibilities that may arise in each case without leaving any loose ends.

  • The new Green Claims Directive will oblige companies to justify any environmental claims

    The new Green Claims Directive will oblige companies to back up their corporate commitment to the environment with data. It will also sanction misleading practices by companies regarding their products and activities. The aim is to crack down on greenwashing. That is, the practice of some companies and brands claiming to be greener and more sustainable than they really are.

    With the new Green Claims Directive it will no longer be enough to appear environmentally friendly, it will also be necessary to prove it. The Green Claims Directive aims to promote corporate transparency of companies through the reporting of environmental, social and sustainability claims that are reliable, comparable and verifiable across the EU. The aim is twofold: not to mislead consumers or stakeholders and to avoid unfair competition practices suffered by companies that do comply with sustainability standards.

    More than 50% of environmental claims are vague, misleading or unfounded

    The inclusion of green claims in advertising, corporate communication and product packaging is widespread in the EU. According to a study by the European Commission, 80% of websites, online shops or advertisements include some kind of environmental claim. According to research by the Observatory of Local Production and Sustainable Consumption, these claims positively influence the purchases of 72% of Spaniards.

    According to the study prior to the proposed directive, more than 50% of environmental claims are vague, misleading or unfounded; almost 40% have no evidence to back them up; and, in the case of the more than 230 green seals that exist at EU level, almost 50% have no verification whatsoever.

    Green Claims: advertising based on carbon offsetting schemes to be banned

    Now, with the Green Claims Directive, green or sustainable claims must be based on a comprehensive study, supported by a full life cycle analysis, considering environmental impacts from the beginning to the end of the products’ life cycle, including impacts on biodiversity, climate, soil and water.

    Member States will appoint verifiers to pre-approve the use of claims such as «biodegradable», «less polluting», «uses less water»… This is to protect purchasers from misleading and ambiguous advertising. Claims, together with supporting evidence, must be examined within 30 days. Member States must ensure that the cost of verification and certification takes into account the complexity of the claim and the size of the companies requesting verification and certification.

    Advertising based exclusively on carbon offset programmes shall be prohibited. Any mention of programmes related to carbon credits must be certified, such as those established under the EU certification framework for carbon offsets.

    The next round of negotiations on this Directive will start after the new EU Parliament is constituted following the elections in June 2024.

    Spanish legislation: over 100,000 euros fine

    The Ministry of Social Rights, Consumption and Agenda 2030, already started in March the processing of a Sustainable Consumption Law. One of its main aims is to firmly fight against greenwashing. Moving forward, the Ministry of Consumer Affairs has already published a Sustainable Communication Guide for businesses entitled: «How to include environmental information in your strategies and campaigns». It provides detailed information on how to identify greenwashing and the relevant legislation. For example: if a company makes unverifiable environmental claims this could be considered an unfair practice in breach of Article 47.1.m of the Royal Legislative Decree 1/2007 and lead to penalties of up to 100,000 euros. Penalties could exceed these amounts, up to four to six times the unlawful benefit obtained by the unfair practice.

    If your company needs advice to ensure compliance with these new regulations, Confianz can help you.

  • How to deal with an M&A transaction in the pharmaceutical industry

    The pharmaceutical industry has a number of particularities that set it apart from other sectors. Pharmaceutical companies operate in a market that is highly regulated by the authorities. They require administrative authorisation to launch any medicine. Distribution, promotion, dispensing and administration are also subject to exhaustive state control.

    All these differential facts condition any M&A operation involving companies dedicated to the development, manufacture or marketing of medicines. In fact, due to the strategic status of the pharmaceutical industry, the EU has specific control mechanisms for the sector.

    Due diligence and representations and warranties

    Both in the due diligence phase and in the representations and warranties, all information and documentation must be requested, analysed and taken into account in order to identify the greatest risks potentially faced by the company:

    • What is the status of the company’s assets?

    The main asset of pharmaceutical companies is intangible: the patent of the product, the know-how associated with the manufacturing process, the data resulting from the clinical trial, etc. Therefore, the acquirer has to check whether the intangible asset belongs to the target company, whether it is the sole owner, whether it is an asset licensed by a third party, whether it is duly registered with the Spanish Patent and Trademark Office or the European Union Intellectual Property Office… When the rights are formalised in contracts (licensing contracts, co-development contracts, etc.) it will be necessary to analyse whether the licence or co-ownership is subject to a change of control clause or expiry of its term.

    • Have there been any recalls? 

    Any withdrawal from the market entails significant administrative and financial costs, as well as a huge reputational cost. 

    • Have there been any judicial or extradjudicial actions for tort or strict product liability?

    This is a particularly big risk in markets such as the US, where there is a risk of collective actions.

    • Does the target company have robust compliance procedures?

    As we said, the pharmaceutical industry is one of the most regulated.  Administrative authorisation is essential to market a drug in each of the autonomous communities, set the price, promote it… Therefore, in the due diligence phase, it is advisable to analyse the consistency of compliance processes and procedures. It is also important to check whether the company adheres to any industry self-regulation code, such as the Farmaindustria Code of Good Practices or the EFPIA Transparency Code.

    • Have there been any judicial or extrajudicial actions for nullity of infrigement of industrial property rights?

    It is necessary to analyse whether there is any risk, existing or potential, that the target company will be sued for patent infringement.

    • Are there any incompatibilities between the target and the acquiring company?

    In these cases the acquiring company is usually also a pharmaceutical company. It is therefore necessary to analyse whether the target company’s business might conflict with its existing exclusivity, sole-source or non-compete obligations.

    Specific steps to complete a merger or acquisition in the pharmaceutical industry

    In order to close the M&A transaction, it is necessary to formalise the deed of transfer of the marketing authorisations of the acquired medicines. In the case of Spain, the transfer must be authorised by the Spanish Medicines and Health Products Agency (AEMPS).

    It is also often advisable to sign a transitional support services agreement until the acquirer has integrated the new quality, medical and pharmacovigilance departments into its structure. This ensures the smooth fulfilment of contracts for the manufacture or marketing of medicines without interruption.

    At Confianz, we have the experience and expertise to guide your company through every stage of an M&A transaction in the pharmaceutical industry. To ensure the success and regulatory compliance of your transaction, do not hesitate to contact us.

  • Tax compliance: how to implement it in the company to avoid risks

    Tax compliance or correct compliance with all tax obligations is an obligation that requires significant efforts on the part of companies. And not only in terms of management, because keeping up to date with all the tax regulations in force at all times requires constant updating.

    It is essential to apply good tax compliance to ensure due compliance with all tax obligations in accordance with applicable tax regulations. From the payment of taxes to the filing of tax returns, including the control and mitigation of tax risks that may affect the organisation. Let us not forget that the Capital Companies Act establishes as one of the non-delegable powers of the management bodies the determination of the risk control and management policy, including tax risks. Failure to do so may result in liability for the company’s directors for not applying due diligence.

    Advantages of tax compliance

    Tax compliance is a management system that facilitates the identification, prevention and detection of tax risks in order to avoid complementary tax assessments, penalties or even accidentally committing a tax offence. Having a tax compliance system in place has significant advantages for the company and even its managers:

    • Avoid or minimise the risk of having to pay significant penalties or fines to the tax authorities.
    • Improve business reputation. Because appearing on the list of tax debtors can generate mistrust among customers, suppliers and partners.
    • Plan financial resources in advance. Acting in advance also makes it possible to avoid mistakes that can be detrimental to the company itself and to optimise the management of its monetary resources.
    • The risk of criminal liability for poor control of their tax risks is minimised. Companies can be charged with an offence against the tax authorities if they seriously fail to comply with their tax obligations.
    • The risk of a possible subsidiary liability of the directors for the tax debt is limited. Tax compliance is an additional means of proof to demonstrate due diligence on the part of the directors.

    How to achieve tax compliance

    The UNE 19602 Standard (Tax compliance management systems and requirements with guidance for their use) establishes the key elements that a company must take into account in order to implement a tax compliance system:

    • Understand the tax laws and regulations affecting the company and know how to apply them.
    • Maintain accurate and up to date accounting to avoid significant alterations in the outcome of the company’s tax assessments.
    • Define a timetable of tax obligations with the corresponding deadlines. This will avoid receiving penalties or having to pay interest for late payment.
    • Have a tax compliance officer or a tax compliance body in charge of approving and publishing the tax compliance policy and defining due diligence processes with employees, suppliers and business partners. This role can also be performed by an external tax advisor.
    • Define a tax compliance policy with commitments and objectives.
    • Establish a whistleblowing channel through which employees can report suspected bona fide tax breaches.
    • Use accounting and tax management software that complies with the Anti-Fraud Law and allows the automation of accounting processes. It should prevent parallel accounting and the alteration and cancellation of invoices. This will increase efficiency, reduce the possibility of making mistakes and speed up the filing of tax returns.

    If your company needs help in implementing a tax compliance system, the tax experts at Confianz can help you develop a tailor-made one.

  • Is buying a company in insolvency proceedings a good idea?

    Certainly, acquiring a company in insolvency is not an investment for everyone. However, the boldest can find unique opportunities in this market. Companies that, although now in distress, have a strong legacy on which they can build to overcome these difficulties. This is a great opportunity for potential buyers to gain access to their assets at a reduced price, restructure the company, adapt it to current needs and return it to profitability.

    Within the uncertainty inherent to this type of operation, in this article we review how to buy a company in insolvency proceedings with maximum guarantees of success.

    Comprehensive preliminary assessment

    Before embarking on the purchase of a company in insolvency proceedings, the first step is to carry out a thorough preliminary assessment to determine the potential of the investment and identify the risks involved. To this end, it is important to review any documentation that may be relevant: the latest financial reports, minutes of the administrative and management bodies, etc.

    Identifying the causes of insolvency

    When assessing the purchase of a company in insolvency proceedings, perhaps the most important point is to evaluate the causes that have led it into insolvency. To analyse whether it is a viable company, it is not the same whether its difficulties are due to structural problems, whether they are the result of poor management by the management team, the appearance of new competitors…

    Analyse the debt structure

    The Insolvency Act establishes a certain order in the payment of creditors. In order to negotiate with them, it is therefore essential to analyse the structure of the company’s debt: its total debt, the hierarchy of creditors and the conditions of the credits.

    Analysis of the assets of the company in insolvency proceedings

    The chances of recovering the investment will depend to a large extent on whether the assets of the business are liquid or whether they will be difficult to sell. Another point to clarify is whether the core business assets are encumbered by liens or encumbrances.

    Review of existing contracts

    • In the case of existing contracts with customers and suppliers, it is essential to know whether they are transferable after the acquisition.
    • With regard to existing contracts with employees, it should be noted that the acquisition usually entails the subrogation of employment responsibilities. The purchaser must be prepared to assume the obligations in terms of wages, severance and other labour rights.

    Full due diligence

    In order to minimise risks, it is essential to carry out a complete due diligence including all commercial, legal and financial aspects. This process identifies each and every burden and liability of the company and assesses its viability. The legal review should cover, among others, ongoing litigation and possible tax contingencies.

    Drawing up a realistic viability plan for the company in insolvency proceedings

    A realistic viability plan based on sound financial projections must be drawn up before the purchase is initiated. Because this will be the key document in the negotiation with the insolvency administration and creditors.

    In short, the purchase of a company in insolvency proceedings is an investment for investors with a high risk profile. The uncertainties are many, but with a thorough preliminary assessment and advice from a team of insolvency and M&A specialists, it is possible to find excellent opportunities.

  • Family protocol: the best way to ensure the survival of the family business

    I will never tire of repeating it: an orderly generational transition in management and ownership is perhaps the main key to the long-term survival of family businesses. And a very useful tool to achieve this is the family covenant or protocol, a comprehensive agreement in common for all members of the business family.

    What is the family protocol

    The family agreement or protocol is a set of carefully detailed agreements, and is an essential tool for planning and facilitating an orderly generational transition in the management and ownership of the family business.

    It is a legal document, but it is separate from the rules governing corporations and is not a legally binding document in all countries. However, it does have a strong moral commitment and can be part of broader legal agreements within the corporate structure of the company. Violation of the family protocol can lead to major internal conflicts. It is therefore important to provide for clear conflict resolution mechanisms and sanctions in case of non-compliance.

    Objectives

    The main objective of the protocol is to ensure both the internal cohesion of the family and the durability of the company within the family. To achieve this, it can be broken down into several secondary objectives:

    • Prevent disputes from arising. It does this by setting clear rules for interactions between family members, ownership and the company.
    • Ensure the sustainability and progress of the business. To this end, it dictates how the business should operate and the level of family involvement.
    • Forge a common project that strengthens family ties and fosters a unified commitment to the business.

    What content should be included in the family agreement or protocol

    Every family business is different. For this reason, the family protocol can and should cover a wide range of issues. From those of a legal nature, to ethical or moral issues, to the values and culture of the family, etc. Some of the points it usually covers are succession in the management and ownership of the company, family employment policies, distribution of profits, conflict management, responsibilities of family members and criteria to be followed in decision making.

    The formula to be used is the integration of contractual clauses signed by all family members. These have a binding effect between them and can influence other legal documents of the company, such as the articles of association.

    Unlike the partnership contract, which is an agreement that focuses on the creation and management of a business with the aim of distributing profits, the family agreement assumes that the company is already established and aims to harmonise the relations between the family members and their company. For this reason, no capital contributions are required from the signatories, as the family members have already been allocated their shares in the company.

    Family businesses are a living entity, so the protocol must be reviewed periodically to adapt to changes in both the family and the business.

    How to create a family protocol 

    Family businesses are complex and involve a mixture of personal and professional relationships. Therefore, it is highly advisable, if not essential, to have external advice from lawyers who are experts in family businesses. In any case, all family members with an interest in the company, from those who are active in its management to those who are simply shareholders or heirs, should be involved in the drafting. Because its successful implementation requires unanimous agreement.

  • The risks of transferring criminal liability following an M&A transaction

    A recent Constitutional Court ruling has reopened the debate on whether the criminal liability of companies can be transferred after a merger or acquisition. Let’s take a closer look at the state of play.

    Banco Santander receives a sanction for a violation by Banco Popular

    The story goes back a few years. In 2018 Banco Santander took over Banco Popular. Shortly afterwards, in January 2019, Banco Santander was indicted for allegedly criminal acts that took place years earlier at Banco Popular. In this case, the case concerns a failure to comply with the regulations on the prevention of money laundering and the financing of terrorism.

    In May 2019, Banco Santander was sentenced to pay an administrative fine of one million euros. However, the Criminal Division of the National High Court overturned the indictment of Banco Santander, citing, among other criteria, the absence of typical behaviour in the resulting entity.

    Everything has now changed with the ruling of the Constitutional Court no. 179/2023 of 11 December, which resolves an appeal for protection in a contentious-administrative case and concludes that the transfer of the administrative sanction to the successor does not violate the principle of culpability. It therefore upheld the financial penalty imposed on Banco Santander for an infringement that would have been committed by Banco Popular prior to its takeover.

    The criminal liability of the company being acquired is transferred to the acquiring company

    The debate focuses on whether in cases of succession between legal persons, criminal liability for acts committed by the absorbed company is transmitted to the absorbing company. In this respect, the Constitutional Court points to the principle set out in Article 130.2 of the Criminal Code: «to admit that the dissolution of the legal person entails the extinction of all liability for offences, as happens with the death of natural persons (Art. 130.1.1 CP), would be tantamount – as the State Attorney and the Public Prosecutor argue – to allowing liability to be evaded by continuing under another legal form the same activity in the exercise of which the typical conduct was committed«. However, in order to be able to declare the transfer of liability from one company to another, there must be «substantial economic identity» between the activity carried out by the absorbed entity and that carried out by the new legal owner.

    In any case, it should be noted that this judgment is pronounced in relation to an administrative sanction and with respect to the challenge of that sanction before the Contentious-Administrative Chamber of the Supreme Court. In other words, it cannot be automatically extrapolated to penal sanctions of a criminal nature.

    How this ruling affects mergers and acquisitions

    This ruling highlights the risk assumed by company purchasers. Because the wording of Art. 130.2 PC opens the door to an automatic transfer of criminal liability. Following this ruling, the importance of the due diligence phase in M&A transactions is more evident than ever. Because it is essential to determine with the greatest possible certainty:

    • What criminal liabilities may have arisen in the acquired, merged or acquired company;
    • Whether there is «substantial economic identity» between the activities of the acquiring and acquired companies;
    • Whether there are other circumstances that mitigate the potential criminal liability of the acquiring company.

    At Confianz we have a team of M&A specialists capable of foreseeing all these possible complications. Our extensive experience in this type of operations allows us to carry out the entire process with maximum guarantees.

  • Directive on corporate sustainability due diligence is now adopted

    Following the recent approval of the CSDR Directive on corporate sustainability reporting, the EU has just approved on 24 April the new and ambitious Directive on Corporate Sustainability Due Diligence (also known as CSDDD). This regulation aims to make companies increase their corporate responsibility from the point of view of human rights and the environment. To this end, it is estimated that more than 5,000 companies, not only in the European Union, will have to comply with new obligations and requirements.

    Which companies will be affected by CSDDD?

    The implementation of the CSDDD will affect:

    • Large European Union (EU) companies with more than 1,000 employees and more than 450 million annual turnover worldwide. However, implementation will be gradual:
      • 2027: companies with more than 5,000 employees and a turnover of more than 1.5 billion euros.
      • 2028: companies with more than 3,000 employees and a turnover of more than 900 million euros.
      • 2029: companies with more than 1,000 employees and a turnover of more than 450 million euros.
    • Non-EU companies with activities in the EU with a turnover of more than €450 million in the territory of the EU. Implementation will also be gradual:
      • 2027: companies with a turnover of more than EUR 1.5 billion.
      • 2028: companies with a turnover of more than 900 million euros.
      • 2029: companies with a turnover of more than EUR 450 million.

    Obligations of companies

    Companies affected by the CSDD must comply with these standards for human rights and environmental due diligence:

    • Develop a due diligence policy containing a description of the company’s approach, a code of conduct and a description of the processes in place to implement it. Companies should also monitor the effectiveness of their strategy and the measures taken.
    • Determine the actual or potential negative effects of its activity, that of its subsidiaries and that of its chain of activities on human rights and the environment. Prevent and mitigate them through the application of the due diligence policy.
    • Establish and maintain a complaints procedure.
    • Communicate publicly on an annual basis on due diligence.
    • Adopt and implement a climate transition plan in line with the Paris Agreement, with the objective of mitigating climate change and limiting global warming to a maximum of 1.5°C.

    In order to comply with all these regulations, companies will have to collect qualitative and quantitative information through independent reports.

    How the Sustainability Diligence Directive affects the value chain

    In addition, large companies will also have to carry out at least annual assessments of their subsidiaries and value chains. The regulation adopts the term «chain of activities», which covers both upstream and, in part, downstream business partners. That is:

    • The activities of upstream business partners related to the production of goods or the provision of services. This includes the design, extraction, procurement, manufacture, transport, storage and supply of raw materials, products or parts of products and the development of the product or service.
    • The activities of the company’s downstream business partners related to distribution, transport and storage of the product.

    Significant financial penalties

    Non-compliance with the CSDD will lead to both administrative and civil sanctions. Supervisory authorities will be in charge of monitoring compliance and will be able to impose fines of up to 5% of the worldwide net turnover of companies that violate the rules.

    In conclusion, the new Corporate Sustainability Due Diligence Directive (CSDDD) significantly increases due diligence obligations. Confianz’s legal team can help companies to ensure proper compliance.

  • Advantages of arbitration for resolving disputes in M&A transactions

    Mergers and acquisitions are very complex transactions that are sometimes concluded too hastily due to the risk of a competitor coming along with a better offer. For this reason, it is inevitable that disputes between the parties sometimes arise after the closing of the transaction. E.g. for non-compliance with declarations and warranties, insurance coverage of risks… In these cases, initiating arbitration is always less aggressive and quicker than resorting to litigation, which is a process that can take a long time and will force the disputing parties to make provisions for possible adverse results in their accounts during the time it takes to resolve the dispute. Between the first and second instance, in the ordinary courts, we can easily be talking about years. And we know that in today’s fast-moving environment, companies need to act fast and cannot afford to waste time. Because that means money and lost opportunities.

    For this reason, arbitration is becoming increasingly popular in the resolution of all types of disputes, including those arising from the sale and purchase of companies. Some sources already suggest that up to 25% of post-M&A disputes already resort to arbitration in Spain.

    Advantages of arbitration in M&A disputes

    The arbitration institution currently enjoys prestige and recognition because:

    • As we have seen, it ensures shorter timeframes and prevents disputes from stagnating for fear of litigation.
    • It grants confidentiality to the parties and makes it possible to avoid publicising the terms of the contract or even the very existence of the dispute. In ordinary justice, on the other hand, judgments are always public.
    • A specialist arbitration tribunal makes a final decision on the dispute.
    • It is an amicable procedure that makes it possible to save the relationship between the parties in dispute because initiating arbitration is less aggressive than initiating a lawsuit. Litigation often leads to an irretrievable breakdown of relations. Arbitration is more like seeking a neutral expert opinion to resolve a dispute and the relationship between the parties can be restored.
    • For investment funds, it provides certainty, reduces the uncertainties of the transaction and ensures that a possible divestment is not penalised by the risk involved in any conflict.
    • Arbitration is less formally rigid than litigation. Its flexibility allows it to be adapted to the interests of the parties.

    When it is best to use the arbitration process

    Arbitration is particularly advisable in two types of M&A transactions:

    • In international transactions. Because it overcomes possible discussions about the jurisdiction to be applied and facilitates the enforcement of the award in different countries. In addition, it allows the natural use of other languages in the process.
    • In transactions of particular technical complexity. If the subject of the transaction is a company in a particularly complex sector, such as pharmaceuticals or banking, arbitration provides valuable external expertise to resolve the dispute.

    Incorporating the arbitration clause into contracts

    To facilitate the resolution of possible disputes in an agile and amicable manner, at Confianz we always recommend including the arbitration clause in all contracts that form part of the purchase-sale transaction (shareholders’ agreement, articles of association, investment agreement…).

    But the most important thing is always to conduct a thorough pre-assessment to mitigate the risks intrinsic to all M&A transactions. Because sometimes the best way to avoid conflict is to withdraw from the transaction. A favourable award is of no use if the other party does not have sufficient resources to mitigate the damage caused.