It is not unexpected that Latin America experiences lower levels of deal-related litigation than the United States. Even so, Latin America appears to have less deal-related litigation than the United States and other common law nations, where the system favours the creation of business law through court precedent.
In contrast to derivative claims by shareholders of the target, the seller, or the acquirer and other third-party claims, this chapter addresses disputes between buyers and sellers and other signatories to the M&A agreements. It also discusses how such claims are typically resolved in Colombia and Latin America and the factors influencing the parties’ incentives and appetite (or lack thereof) to pursue arbitration or litigation once a dispute arises.
It is widely believed in Latin America that our countries have fewer M&A lawsuits than those in the US or Europe. This is consistent with the opinions of our colleagues in Latin American nations.
Colombia is notoriously litigious regarding civil, criminal, administrative, and government contract disputes, real estate, family and estate affairs, corporate governance issues, and other conflicts. One of the leading causes of severe overcrowding in our justice system is this. While criminal investigations and lawsuits are frequent and numerous, it can take years or even decades to reach a final verdict.
The Colombian market’s excessive litigiousness hasn’t historically permeated the M&A dealmaking space. As a result, there are few court rulings concerning M&A transactions. Although there has been considerable arbitration action in recent years, few publicly available arbitration rulings deal with M&A issues. Most such arbitration awards were rendered relatively recently, beginning in the early 2000s.
Deal-related problems are on the rise in Latin America and Colombia. Before a few years ago, it was typical for parties to delay filing claims. Contrarily, we have observed in recent years that parties will increasingly consider bringing post-closing, deal-related claims wherever they have a contractual right to do so. Our experience in Colombia appears to be comparable to what our colleagues experience in their home countries, according to surveys the authors performed in 2020 and 2021 of M&A, litigation, and arbitration practitioners from Latin Lawyer 250 companies.
Pre-litigious allegations relating to deals appear to have increased slightly in recent years. The number of genuine M&A-related cases in the area has stayed the same due to this trend.
Parties may be more hesitant to start formal lawsuits or arbitration. On the other hand, they are growing more at ease with making claims to start a conversation with the opposite party to settle issues. Additionally, most disputes may be resolved outside the jurisdiction of courts or arbitral tribunals. Most contract-related disputes are usually settled through direct conversations between the parties rather than through courts or arbitration panels. Furthermore, participants in our poll concur that parties to M&A transactions often choose arbitration over local courts in their jurisdictions to resolve their issues. As a result, the few M&A conflicts that are ultimately resolved through litigation are frequently the topic of private arbitration processes, which limits public access to important information about resolving M&A disputes in Latin America.
It is not surprising that parties to M&A deals in Latin America strongly prefer arbitration to domestic courts or alternative dispute resolution procedures, given the region’s recent growth in the number of arbitrators and arbitration centres. Latin America has recently changed to have a legal system and culture supportive of arbitration. Numerous Latin American nations have passed arbitration laws that frequently closely resemble the UNCITRAL Model Law on International Commercial Arbitration. Additionally, international conventions on recognising and upholding arbitration rulings, such as the 1958 New York Convention and the 1975 Panama Convention, have been widely ratified in Latin America.
This chapter explains why partners doing business in Colombia typically agree to arbitrate issues rather than take them to court. Additionally, it outlines concerns that should be considered when writing M&A agreements’ dispute resolution provisions and selecting the location of the arbitration.
Finally, we quickly discuss a few problems that are frequently contested or challenged, including post-closing indemnification, purchase price adjustments, concerns about escrow agreements and possible sums that may be retained, and how tribunals have handled such situations..
Choosing whether to pursue arbitration or litigation
Although there may be an increase in deal-related disputes in Latin America, parties do not appear eager to pursue full-scale litigation or arbitration. Pre-litigious allegations involving deals are increasing in the area. For full-blown litigation or arbitration processes, this trend is less dominating.
In M&A transactions, parties seem more at ease filing formal claims to enforce their rights, but they still need to be persuaded to proceed with full-fledged litigation or arbitration to settle disagreements.
According to our experience, the main factors influencing parties’ decisions to forgo full-fledged litigation or arbitration are likely to cost, time, and effort. The majority of post-M&A disputes are arbitrated, so expenses are frequently high.
Since M & A disputes frequently involve complicated issues, sets of facts, and agreements, clients are always reluctant to file a lawsuit or request arbitration unless there is a favourable cost-benefit expectation and a reasonable degree of certainty regarding the likelihood of success. Even if they are less frequent, customers may file for full court action or arbitrate a dispute out of principle to protect their company’s interests and reputation in the marketplace, regardless of the costs and advantages. Additionally, some clients may enter court or arbitration proceedings anticipating that a settlement may be available early. These clients frequently think filing a lawsuit is necessary to force the counterparty into settlement territory.
In some situations, parties may want to avoid going to court on a specific issue because doing so could make the opposing party more determined to pursue full-blown litigation over other matters that never would have progressed to court or might have been settled in another way through negotiation. Once the door to litigation is open, engaged and focused on litigation, and aware that legal fees and other costs would start to accrue, parties will typically choose to move forward and assert claims for all other matters still open to resolution. As a result, parties could be reluctant to start litigation for fear of the cascading effects that could follow.
Multi-tiered dispute resolution provisions are sometimes included in M&A agreements. These provisions call for a required negotiation period and the timely submission of notices of issues. Before submitting a claim to litigation or arbitration, parties to an M&A deal must provide detailed descriptions of their claims and defences as specified by the agreement. If this is done, each party will better understand their respective allegations’ relative strengths and weaknesses. Direct talks are encouraged by the ability of parties to more effectively analyse the risks of proceeding with litigation or arbitration.
Escrow agreements may have a substantial effect on lawsuits following contract closure. As we can see, while choosing whether to file a claim, both parties may have a different perspectives depending on the buyer’s ability to keep money in an escrow agreement. Without an escrow (or similar assurance), the defendant to such a claim will lack an immediate economic motivation to invest significant time and energy into settling unless the claims are well-founded or have the potential to result in more substantial damages. The absence of escrows or comparable guarantees in an M&A deal deters parties from bringing claims or filing lawsuits, as is the case with M&A deals that contain liability-restricting clauses (e.g., caps, baskets and de minimis).
Parties prefer to submit their disputes to arbitration rather than to domestic courts.
In M&A transactions in Latin America, arbitration is the most common form of dispute settlement. Arbitration is far more popular than domestic court action, whether domestic or foreign. This is probably because many M&A transactions are frequently sophisticated, specialised, cross-border, and sensitive. Latin American legal systems have made unique, recent advancements that have given rise to a promise, yet Latin.
In highly specialised commercial conflicts, such as M&A litigation, American courts still lack experience, and systemic worries about efficiency, dependability, and business-friendly prevail.
The projected duration of each proceeding’s conclusion may also factor in the parties’ decision for arbitration in Latin America. Arbitration is the process that will result in a verdict more quickly once a lawsuit has been filed, typically within 24 months. It is well known that Latin American courts usually take significantly longer than arbitral tribunals to resolve disputes.
Furthermore, most international arbitral institutions amended their arbitration rules to include accelerated arbitration over the past five years. Six months following the case management conference, 67% of the 115 final awards issued under the provisions of the expedited procedure, as reported by the ICC 2020 data, were delivered. Nearly 50% of the awards made under the SCC Rules for Expedited Arbitration were completed within three months after referral. Thus, the door has been opened for disputes to be resolved considerably more quickly. Expedited procedures are typically used in arbitrations when the disputed amount is small.
Arbitration offers a more impartial forum for settling conflicts between parties with domiciles in several nations. Most parties submit their dispute to expert arbitrators rather than the opposite side’s native courts. However, a party may feel disadvantageous in litigation subject to a particular set of new procedural rules. Such concern of unconscious (or conscious) bias of the opposing party’s home courts may not be legitimate.
Another significant benefit of international arbitration processes is their flexibility. The methods may be customised by the parties to meet the unique requirements of the current dispute. Such adaptability is applicable, for instance, to
- The quantity and sequence in which each party filed pleadings.
- The occasions when these pleadings are made.
- The presentation of evidence and the format of evidentiary proceedings.
- Whether or not the matter will be resolved in stages (jurisdiction, responsibility or damages).
- The conversation’s language.
Additionally, arbitration is generally preferred (in comparison to litigation before local courts) because it is flexible and allows parties to carve out specific disputes into separate and distinct dispute resolution mechanisms, such as expert determination, in which case parallel or subsequent proceedings may arise. For instance, in Grupo Pegasus SA v. New Global Energy Inc., an arbitration handled by the Bogota Chamber of Commerce, the arbitral tribunal determined that expert determination—rather than arbitration—was the agreed-upon method of dispute settlement to decide the adjustment of the purchase price.
Additionally, Colombian legal professionals believe that during the arbitration, the parties would be able to choose arbitrators who know mergers and acquisitions (M&A) transactions and related legal concerns as well as contract law. It needs to be established whether the assigned judge has the equivalent experience to that of hand-picked professional arbitrators because there is a lot of confusion in the traditional court system. This is especially important because the writing and practice of M&A agreements in Latin America closely resemble those of common law jurisdictions. It would be difficult for local judges to get familiar with these clauses. In contrast, arbitration has been able to keep up with foreign or international standards. Comparatively, to international arbitrators handling cross-border M&A transactions where the deal documents are frequently written in English or are governed by an internationally recognised foreign substantive law with extensive case law on M&A matters, local courts may be ill-equipped to handle M&A disputes (such as New York law).
By properly crafting the arbitration clause in the M&A agreements, parties can overcome the difficulties of a multiparty or multi-contract transaction.
Additionally, institutional arbitration rules currently offer explicit guidelines that apply to the admission of new parties, the consolidation of arbitrations, and the composition of the arbitral tribunal when several parties are involved in the arbitration.
The arbitration may offer a private manner of resolving conflicts, in contrast to litigation in front of local courts. The practice of “trial by press release” is forbidden, making resolving disputes more effective. Parties frequently seek to preserve confidential information about business and industrial processes, including profit margins, production costs, pricing guidelines, trade secrets, and know-how. However, in the case of Colombia, parties should continue to exercise caution because domestic arbitral rulings are not secret and are frequently made public by regional arbitration centres.
In Colombia, international arbitration has a distinct advantage over domestic and court-based litigation. The Colombian arbitration statute allows parties to arbitrate by their substantive laws, including foreign laws, as long as the arbitration is recognised as an “international arbitration” under Colombian law. Regardless of where the M&A agreement is to be performed, the party’s choice of law will be upheld in international arbitration.
Awards that settle conflicts typically have easier international enforcement than court judgements. The same holds for Colombia’s enforcement of awards and reviews. An arbitral award rendered in a state that is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards may be enforceable in local courts where the arbitration’s seat is situated overseas (the New York Convention).
The New York Convention is ratified by almost all of the states in Latin America, as was already established. The enforcement process is simple and effective, especially when contrasted to local recognition laws that apply to decisions from foreign courts. A Colombian court ruling or continuing procedures before Colombian courts regarding the same case, for instance, would prevent the exequatur of a foreign court judgement, according to the Colombian General Procedure Code. As a result, parties may try to file a lawsuit in a local court to prevent the enforcement of a ruling from a foreign court.
Choosing the arbitration’s location
The obligatory legislative framework that governs the arbitration processes, the post-award remedies accessible to the parties, and how international awards are recognised are all influenced by the arbitration’s seat. It also describes the functions of judges and judicial courts in arbitration.
The following points should be taken into account by the parties when deciding where the arbitration will take place:
- whether the centre is situated in a nation that has ratified the New York Convention and has a current arbitration statute (such as one based on the UNCITRAL Model Arbitration Law);
- the potential site (or locations), taking into account the parties’ assets’ areas, where the award might be enforced;
- whether the arbitration area has a practical and impartial judicial system;
- the ability of the parties, possible witnesses, experts, and the arbitration panel if proceedings are held at the location, to reach the arbitration’s seat;
- enforcement of arbitration clauses by local courts; and
- the laws governing privilege and confidentiality.
A few specific topics in M&A arbitration agreements
In our experience, parties frequently settle on relevant law and dispute resolution terms late in the M&A agreement negotiation process, and arbitration provisions are occasionally disregarded as boilerplate. This could lead to arbitration or pathological contracts inappropriate for the specific M&A transaction. The intricate nature of M&A transactions necessitates thoroughly considering its dispute resolution procedures.
Simply put, a well-written arbitration clause stipulates that arbitration must resolve disagreements, is legally enforceable, and offers a wide range of arguments that must be brought before the arbitrator. Additionally, it contains agreements regarding the location of the arbitration, the rules that will apply, the language of the arbitration, and the selection and number of arbitrators.
Multiple contracts and numerous parties are frequently involved in M&A deals. If the buyer, the seller, or the target company are made up of different companies, then there will probably be more than one party to the arbitration. A shareholder agreement, an escrow agreement (involving a financial institution), an escrow guarantee (signed by the buyer’s parent company), a share purchase agreement (with one or more buyers or sellers, as well as the target company), and an escrow agreement are additional possible components of an M&A transaction.
A claimant will, in fact, always favour a speedy and affordable resolution of the dispute. A single arbitration would be advantageous for the parties to an M&A transaction because there would be no chance of inconsistent rulings resulting from concurrent hearings. In each applicable transaction agreement, the parties may insert compliant arbitration provisions. Arbitration clauses are typically compatible if they stipulate the same arbitration rules, venue, language, method, and a number of arbitrators.
Even if the contracts contain similar arbitration clauses, resolving a dispute under numerous agreements in a single arbitration may be challenging, depending on the legislation applicable to the arbitration agreement or the law of the seat. The parties may expressly provide for this scenario in each arbitration clause in the transaction agreements and the potential for arbitral consolidation. The parties may also agree upon a separate umbrella arbitration agreement that covers all M&A deals.
In M&A agreements, multitiered dispute resolution clauses are occasionally employed. These typically call for one or more of the following before filing a lawsuit or beginning arbitration:
- The delivery of a claim or dispute notice and a response to the statement.
- A period during which the parties negotiate (sometimes calling for structured negotiations or negotiations advancing within the hierarchical structure of each party).
- Alternative dispute resolution techniques, like mediation.
Parties may elect to wait until a negotiation period is through or exhaust each alternative technique or preparatory step before submitting a claim to arbitration. Domestic arbitrations in Colombia are subject to local procedural law, which permits parties to begin the process whether or not specific pre-arbitral dispute settlement procedures are followed. For instance, the tribunal in Mercantil Galerazambra held that the principle of party autonomy permits contractual agreements on how parties may assert their rights before one another. The Bogota Chamber of Commerce conducted the arbitration. However, such an agreement cannot restrict the parties’ ability to file a lawsuit or request arbitration.
It is uncertain if the need would be regarded as mandatory in international arbitration because such a local procedural rule does not apply to international arbitrations with seats in Colombia and because there are no publicly known awards or court judgements. Different strategies may be allowed in this other jurisdiction, including the inadmissibility of claims or the arbitral tribunal’s lack of jurisdiction. Parties may consider starting the arbitration and asking for a stay of the proceedings to finish a contractual discussion time, subject to the applicable law.
The parties should also consider any confidentiality provisions in an M&A agreement and any applicable law governing the privilege and confidentiality of arbitration proceedings. Parties may be prohibited by confidentiality laws or agreements from disclosing written pleadings, evidence, or the arbitral award and inviting other parties to arbitral hearings. Conflict of law regulations and previously agreed-upon institutional arbitration norms are also pertinent. The ICDR Rules, for instance, state that the tribunal should, whenever possible, apply the same legal rule to all parties, giving preference to the power that offers the highest level of protection whenever the parties, their counsel, or their documents would be subject to different rules under applicable law.
Arbitral tribunals may issue orders under the ICC Rules regarding the secrecy of the arbitration proceedings or any other issues about the arbitration. They might also take steps to safeguard private data and trade secrets.
Common disputes in M&A litigations and arbitrations in Colombia and Latin America
According to our observations, parties typically focus on monetary claims, such as post-closing indemnity clauses and purchase price changes. Pre-closing litigation is infrequent in Latin America.
In Colombia, the provisions relating to adjustments to the purchase price and post-closing indemnification obligations—were calculating and paying monetary damages is critical and less on specific performance and injunctive relief—are the subjects of disputes that reach the level of a claim or lawsuit.
While some may believe that a purchase price adjustment should be an update of settled data, there are many specifics on how accounts are created and displayed and differences in technique that could lead to disagreements. This brings up a few issues that, in our opinion, practitioners should discuss with their clients: Are we trying to renegotiate the purchase price or are we using the purchase price adjustment provision as a backdoor to bring claims that would otherwise be indemnification claims based on representations and warranties that were broken or inaccurate, which are subject to specific limitations and survival clauses?
Does this imply that the binding purchase price agreed between the parties must be entirely aligned? Therefore, whether parties postpone discussing the purchase price may be an issue.
The parties may also need to agree on how the purchase price adjustment provision will be used following closing. In this situation, negotiators should pay more attention to both parties’ finance and accounting teams’ understanding and appreciation of the consequences of how the purchase price adjustment clause would be utilised.
Increased post-closing indemnification issues suggest that parties negotiate post-closing rights and discover that the target may sustain damages covered by the contract after closure. These clauses are risk allocations that must be honoured if the risk materialises. The debates frequently centre on the extent of the anticipated risk and the definition and assumption of the measurable losses.
We believe that even though sandbagging discussions (whether the buyer knew or should have known and whether such knowledge or constructive knowledge should preclude the buyer from benefiting from indemnification rights) are relatively common in Colombia, they are not always the main focus of an investigation into a claim. The debate over “sand-bagging” issues in civil law jurisdictions raises a bigger question about whether the buyer and seller acted in good faith or diligently during the negotiation and after the deal was closed.
The link between representations and warranties, diligence and good faith, has been explored in recent decisions. In ASA Bioenergy Holding AG, and others v. Adriano Gianetti, and others, in an arbitration under the ICC Rules, the panel examined the seller’s failure to disclose a swap agreement. It concluded that, under Brazilian law, that behaviour violated the party’s duty to act in good faith. Additionally, the tribunal in the case of Alicorp Colombia SA v. Helados Modernos and others concluded that performing due diligence does not automatically absolve the seller of liability, and even less so if the parties have expressly agreed on representations and warranties. The Bogota Chamber of Commerce conducted the arbitration.
Similarly to this, the court in CAM Santiago Case No. A-1526-2012 concluded that a party’s knowledge obtained through due diligence typically has no bearing on that party’s responsibility for making false or erroneous claims and warranties.
And finally, disagreements over escrows and the possible sums to be retained are frequently encountered. More often contested issues include whether the agreement justifies the retention of monetary aggregates while a claim is pending a final decision and whether direct or third-party claims should be evaluated differently. In the recent ICC case Premium Petroleum Services Corp v. Superior Energy Colombia SAS and others, the buyer withheld payments due to the seller’s violation of the sale and purchase agreement, which served as an example (SPA). The tribunal concluded that the respondent adequately utilised its retention right, given that the claimant’s breaches resulted in that retention right being activated after analysing the facts provided by the parties and the duties under the SPA.
We anticipate that the amount and nature of deal-related litigation in Latin America will continue to change, which emphasises the crucial role that M&A practitioners play in continuously enhancing practices, procedures, and forms to make sure that agreements are well-prepared to prevent disputes with resoundingly clear language that can withstand future litigation or arbitration.