Implementation of alternative dispute resolution mechanisms in cross border mergers: International legal study

Parg2: the poorly-drafted Arbitration clause

If poorly drafted, the Arbitration clause contained in the merger agreement may generate problems relating to the type of Arbitration (A) and to the arbitrability disputes relating to the merger contract (B)

A: problems regarding the type of Arbitration

The interest by the international business community for Arbitration is attributable to the perception that Arbitration is quicker; more specialized more confidential and cheaper than litigation. In a cross- border merger transaction, it is strongly advisable that lawyers do their Arbitration-related work at the negotiation stage. For this they have to state clearly during the drafting stage of the merger agreement that they agree on Arbitration rules because the local law usually does not contain detailed procedures for conducting the Arbitration. the purpose of designating a certain set of rules of procedure is to inform the parties involved in the transaction on how to activate the Arbitration, terms, witnesses and expertise, cross-examination and many other important

issues, including the calculation of the arbitrators^, fees. Whether or not to modify or negotiate the set of Arbitration rules chosen will depend on the type of Arbitration finally selected by the parties.

The law of International Arbitration provides two types of Arbitration: ad hoc Arbitration and institutional Arbitration²⁰⁹. What would be the best choice of the type of arbitration in case of merger?

If the parties to a cross-border merger transaction have a good relationship and are confident that, should a dispute arise, they would be capable of maintaining an ongoing and constructive communication then it may be advisable to design ad-hoc procedures themselves. Ad hoc Arbitration may result from the procedures which the parties intend to follow at the negotiating table or from specifying that one or another set of rules shall serve as the gap-fillers in the event that eventuality for which no procedures have been specified arise. The stated goals of an ad hoc system include the quick resolution of disputes, as well as the avoidance of costs in the form of administrative and arbitrators^, fees specified in the rules of many of the institutional bodies. However, since ad hoc Arbitration is not institutionally supervised its main disadvantage is the lack of established procedures?

The parties and the arbitrators are "on their own" for all aspects of the case. They must either develop their own rules in their Arbitration clause or at the time of the Arbitration, or use standard rules that have been promulgated to assist parties in ad hoc Arbitration- i.e., UNCITRAL Arbitration Rules. Moreover, the parties must arrange to appoint arbitrators. Cremades has observed that in cross-border merger transactions institutional Arbitration may be preferable to ad hoc Arbitration disputed because the parties involved are more comfortable with institutional Arbitration²¹⁰.

²⁰⁹ Article 13 of the Tunisian Arbitration code " l'Arbitrage peut être ad hoc ou institutionnel...

210210 CREMADES, M.B, "Settlement of Disputes in Cross border Mergers and Acquisitions. Op.cit. note 2 page 27

In merger transactions a record of money is at risk, due to the specialization and multiplicity of the parties and the sophistication of their business. Thus, Arbitration institutions worldwide provide important administrative services and assistance with the appointment of arbitrators. These institutions maintain updated of qualified lawyers in various fields and different nationalities with experienced arbitrators. Additionally, these institutions have the necessary administrative infrastructure go fix the amount of and arrange for the arbitrator s fees, determining the place of Arbitration, if necessary, secure deposits from the parties and arrange hearings. They provide the parties with sets of rules on the basis of a longstanding and specialized practice.

the International Chamber of Commerce, considered the leading Arbitration Institution (ICC) in the world, has recently provided a model mergers &and acquisitions contract²¹¹, the first of series of agreements covering a variety of contracts such as share purchase agreements or a sale of assets²¹², made to assist parties and lawyers who are not specialized in the field of Mergers contracts to draft a simple contract covering the most common and important issues involved. The structure and content of this model contract are strongly influenced by the models and forms developed within common law jurisdictions and it contains dispute resolution clauses that chose Arbitration for the settlement of any dispute arising out or in connection with the agreement in accordance with the ICC ADR rules²¹³. When deciding the applicable law, it should however be considered that, since the model has been drafted independently of any particular national law, with the purpose of establishing a truly international standard, parties will need to check if and to what extent this model contract conforms to the domestic law they wish to apply. If it appears impossible to determine the content of the rules which would apply under the domestic law of the absorbed company, parties have alternatives proposed by this model contract: 1-another

²¹¹ ICC model Mergers & Acquisitions Contract, I - share purchase agreement, Publication CCI n° 656E, 2004.

²¹² see appendices n°10

²¹³ ICC ADR rules can be found on the web site www.iccadr.org

domestic law or 2-the principles of law generally recognized in international trade, called "lex mercatoria". In our opinion, the second alternative has the advantage of being more appropriate for a contract like this model, which reflects international contract practice without being based on a particular domestic law. At the same time, this solution gives wider autonomy for Arbitration, since it based on very general principles.

In this regards, the incorporation of the UNIDROIT principles in this model contract should become an essential tool in creating a secure and balanced legal frame work for cross border merger contract.

A persistent question regarding Arbitration is relating to dispute that is or not open to Arbitration.