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

Chapter II

Implementation of ADR mechanisms

challenged

The conduct of international mergers has been accepted with potential difficulties that generates disputes. The only efficient way to resolve potential cross border mergers disputes should by including mediation and arbitration clauses during the drafting of the merger contract.

Implementing these ADR procedures separately is challenged

When it concerns Mediation (section 1) and when it concerns Arbitration (section 2)

Sectionl: Challenges to implement ADR in Cross-

Border Mergers as it concerns Mediation

During the negotiation of a merger, merging companies' managements decide to insert problem solving clause that call for the intervention of a neutral third person, called "mediator", this clause is called mediation clause. In this section we will discuss first the mediator's intervention (A) and then we will explore the significance of the mediation clause (B)

Pargi: the mediator intervention

In this paragraph we discuss fundamentals of the mediator intervention (A) and then we will discuss its significance (B)

A-Fundamentals of the mediator intervention: the American experience

The first think that need to be said is that there is no universally accepted definition of mediation. Most commonly, mediation is understood to comprise a form of non binding third party intervention to help the parties negotiate an agreement.

Generally the intervention of the mediator facilitates agreement in the following different ways: first by creating a neutral and safe environment for the parties to get together and discuss the dispute, second by bringing order to the negotiations and serves as a guarantor of the integrity of the process, by clarifying the facts and issues being discussed, third by translating certain statements into non partisanlanguage that reflect the underlying interests and providing the parties with proposals, subject matter expertise, assessment of the situation and decision-making tools; and finally by injecting the necessary realism into the process. In the business merger context, in promoting Mediation as an

alternative to litigation, however, many scholars have largely ignored the transactional area¹⁸⁰. No one has analyzed in depth whether mediators can add value in closing mergers just as they do in litigation. How can a mediator add value to their merger negotiations?

Some are skeptical of Mediation. If one assumes that self-interested actors can generally bargain to efficient agreements, why involve a third party? If a mediator has no authority to bind the parties to a given outcome, then what does the mediators add other than costs--that the parties cannot do for themselves?

Based on the American experience, it is first of all important to define the concept of transactional mediator. Peppet, S., who has used for the first time the term "transactional Mediation," has quoted that when

180 The literature on Mediation and alternative dispute resolution fails to evidence much exploration of the use of mediators in transactions. Several major treatments of the field, for example, contain no discussion of this issue. Moore, Christopher. W., the Mediation Process, Practical strategies for resolving conflicts , San Francisco, Jossey- Bass publications, US, 1996

referring to transactional mediator, it not about the mediator's style or approach but instead it is about the transactional context as opposed to litigation¹⁸¹. Better, Raîffa defines a transactional Mediator as an impartial person or entity that intervenes in a transactional negotiation pre-closing to facilitate the creation of a durable and efficient contract¹⁸². Raîffa 183 was the first one to discuss the possibility of using mediators in mergers. He has assumed an experimental hypothesis in which teams of experienced executives were given detailed information about two simulated companies, then assigned to represent one company or the other and asked to evaluate the companies and negotiate a merger¹⁸⁴.

According to Raiffa, transacting parties fail to "close the deal" because of "strategic exaggeration". He then suggested that a mediator should concentrate on such inefficiencies.

In merger context, any merger often takes characteristics at certain stages of the deal's life cycle. It was stated that problems may arise at any of three stages of a transaction--matching, pricing and closing--but that they are likely to increase in intensity as a transaction progresses towards closing¹⁸⁵.

In the matching stage of the deal, as it was mentioned in the first chapter of this paper, merging companies must often find each other on their own, but sometimes they may need the active assistance of matchmakers in many transactional contexts, in particular in mergers generally named investments banks or lawyers. Would a mediator offer advantages over investment banks? In most case probably not! At this stage there are unlikely to be difficult adverse selection problems for a mediator to resolve. There are however, some situations in which a

¹⁸¹ Peppet, S.R, CONTRACT FORMATION IN IMPERFECT MARKETS: SHOULD WE USE MEDIATORS IN DEALS? Ohio State Journal on Dispute Resolution, 2004

¹⁸² RAIFFA, H., The Art & Science of Negotiation", op.cit. page 60, note 1

¹⁸³ The one major treatment of the topic is in Howard Raiffa's classic text on bargaining, where he discusses the possibility of using mediators in mergers and acquisitions.

¹⁸⁴ Raiffa , Id

¹⁸⁵ Classification inspired by Peppet's analysis regarding the use of mediators in deals see supra note 3 page 83

mediator might add value in the matching stage. Some transactions require that parties share confidential information to determine whether a match is possible. A mediator could help parties in this situation by determining whether a deal is possible or whether further discussions would be worthwhile. As long as the parties trust that the mediator can and will keep such information confidential and so long as the mediator is sufficiently expert to render an opinion on the viability of the deal, the parties might use a mediator to overcome these matching stage strategic difficulties.

In the pricing stage, after finding each other, the companies must set a basic deal price. This often takes place through direct negotiation by the management boards of both companies.

In the closing stage negotiations --the stage at which transactional lawyers are likely to be most involved-- the mediator's intervention is particularly attractive in that stage. Negotiations during the closing stage focus on the contract^,s terms. In a merger, for example, a preliminary price has likely already been set. The parties now attempt to confirm the quality of the assets to be transferred. The absorbing company may conduct due diligence and the parties bargain over discovered information about asset value. This company may try to use such information to exit the deal, sometimes for strategic or economic reasons, or the parties may re-negotiate the closing price to reflect new information. In such complex transactions, lawyers and accountants are generally brought in to assist in the closing stage¹⁸⁶. Lawyers in particular are needed to draft legal language for a merger agreement or other contract. As the closing stage progresses, due diligence may not eliminate all uncertainties about the company or assets in question. Lawyers will therefore negotiate over contract language to modify the risks associated with these remaining uncertainties. One might expect these legal negotiations during closing to

¹⁸⁶ In the merger context, brokers are very Common http://www.chicagofed.org/publications/publicpolicystudies/emergingissues/pdf/S&R-2000-11R.pdf

be fairly collaborative. At least in theory, the parties to a transaction have good reason to share information openly. In a merger, for example, the absorbed company has little motivation to keep back information from the absorbing company about the condition of the absorbed company. If it does so, the absorbing company will likely assume that the absorbed company's information is problematic for the absorbed company, and thus the absorbing company will alter the transaction price if the information cannot be acquired elsewhere.

If the absorbed company, therefore, wants to cooperate in educating the absorbing company. The question is how to do so at the least cost. A mediator might add value in closing stage negotiations by facilitating discussion over such terms while minimizing the downside risk to the parties 'relationships. He should theoretically be able to help merging companies to resolve disagreements for example over "social issues," such as how to name the post- merger company, how to resolve status

and position questions, and where to locate the new company's headquarters or over

"financial issues", such as how to resolve parity exchange terms issues...etc

In this regards, at the start of negotiating, in order to balance their contract to preserve their interests, parties should include a mediation clause calling for the intervention of a mediator at any stage of the deal. If the mediator is appointed to assist contracting parties during the negotiations, he could privately interview each party about its needs, priorities, and perceptions. Then he would lock away that information and the parties are left alone to negotiate the deal, and at the conclusion of their negotiation, prior to closing the deal, a mediator would intervene, after examining the terms of the parties' agreement, and as it was suggested by Raîffa, he will try "to use his private information about the parties' interests to draft a superior deal"¹⁸⁷. It is difficult to believe that Raîffa's mediator drafting a superior deal will succeed in practice!

187 Raîffa see supra note 1 page 67

Internationally, the interventions of an experienced mediator who both respects and understands cultural differences to minimize the parties' potential for misunderstanding throughout the negotiation process remain to be seen¹⁸⁸.

Whether mediators are currently involved in transactions to a greater extent than suggested here is obviously an empirical question deserving additional study and legal framework acceptance.

The mediator intervention may faces obstacles that need to be overcome.