Notes on arbitration agreements in mergers and acquisitions

A survey made this year by the School of International Arbitration at Queen Mary, University of London, [1] showed that 50% of the respondents, who were corporate users, erroneously believe that arbitration is confidential even where there is no specific clause to that effect in the arbitration agreement; and 12% did not know whether arbitration is confidential in these circumstances.

While 62% said that confidentiality was important, a number of interviewees noted the various obligations of corporations to report to shareholders, make disclosures in their annual accounts and reports and otherwise publicize significant information to the market (in the case of publicly listed companies) that may cut across confidentiality in its strictest sense. Even when corporate counsel accepted that this can make confidentiality “porous”, a number said that often commercial arbitration matters do not involve sensitive commercial information and concluded that, in many cases, confidentiality is not an extremely serious concern.

However, this is not the case of mergers and acquisitions where handling commercially sensitive information is usual enough because, inevitably, the purchaser or prospective partner needs to assess the potential of the company or property that it would acquire or operate jointly. In most cases, the parties involved in these transactions agreed which information is considered confidential and, in general, there is some consensus that confidential information is that which is not available to the general public or the relevant public because it is related to intellectual property, technology, trade secrets or know-how. It could also be agreed that negotiations taking place on the occasion of such operations will also be considered confidential, since the information that “a company is in negotiations to buy or sell assets, or the company itself,” is sensitive information and, therefore, may well be considered confidential. Notes or reports prepared on the basis of confidential information provided might also be considered confidential.[2]  

Given this slight exposure of the myth of confidentiality in arbitrations, and despite the tendency to preserve the confidentiality of those involved in arbitration, it would be reasonable to stipulate expressly in the arbitration agreements related to mergers and acquisitions, the duty of confidentiality of people involved (including lawyers, arbitrators, experts, witnesses and arbitral institutions.) And the scope of the confidentiality of the arbitration clause of the final agreement should be consistent with what was already agreed on that matter, even related to venue in previous stages –agreements with consultants or advisors, negotiations, letters of intent or memorandum of understanding (MOU)- and with those who had access to that information as directors, officers, employees, contractors, subcontractors, consultants, advisors, banks and underwriters.

Another feature to consider regarding arbitration agreements related to mergers and acquisitions is that on certain occasions, there are more people involved than those who typically sign the final agreement, such as parent companies or guarantors. For this reason and due to the reluctance to admit the joinder of non-signatories to arbitrations, this issue could be analyzed and planned in advance.

Despite the tendency not to allow the joinder of a third party non-signatory of the contract containing the arbitration clause, it is important to note that recently the ICC Court has adopted a more flexible case-by-case approach to joinder applications in recent years, which exceptionally allowed for the joinder of non-signatory parties, when facing specific circumstances[3].

Thus, the Court allowed the joinder of a third party in a case where it had signed an MOU amending the contract containing the arbitration agreement but had not signed the contract itself. The new party was the claimant's parent company. In addition to the fact that it had signed the MOU, which was indisputably related to the contract and incorporated provisions of it, the Court took into account many other factors, including that the parent had closely participated in the performance of the contract and had played a key role in settlement negotiations relating to the dispute.

Finally, in early 2010, the ICC Court accepted for the first time to join a non-signatory on the basis of a previous state court decision in an acquisition case. The case concerned a contract entered into by two parties pursuant to which the claimant acquired from the respondent 100% of the capital stock in a third party.  The claimant agreed to pay the respondent a certain amount over a three-year period and to cause the third party to pay the respondent the balance of the purchase price. Before commencing the arbitration, the respondent had filed claims against the third party in a domestic court in Europe. In the course of that action, the third party in its submissions described itself as a party to the agreement on the basis that it had assumed specific obligations under that agreement. The third party relied on the arbitration clause contained in the agreement in support of its application to stay the domestic court proceeding. The domestic court granted the stay, finding that it did not have jurisdiction to hear the dispute due to the existence of the arbitration agreement. The domestic court reasoned that, while the third party was not a signatory to the contract, it had assumed obligations under both that contract and other related agreements. An arbitration was subsequently initiated by the claimant against the respondent. When the respondent sought to join the third party, the claimant objected on the grounds that the third party had not signed the agreement and was not a party thereof. The Court decided to join the third party taking into account the domestic court's decision and the third party's position in that domestic court proceeding.