Deal-Related Litigation in Latin America
M&A deal flow in Latin American jurisdictions has not been as prominent as in other jurisdictions, including the United States. For example, for the first three quarters of 2020, according to KPMG, approximately 8,391 M&A transactions were announced or consummated in the United States, while, according to Transaction Track Record, 1,517 M&A transactions were announced or consummated in Latin America, and the aggregate value of those transactions was US$1,136.5 billion and US$46.8 billion, respectively. It is not surprising, then, that there is also less deal-related litigation in Latin America than in the United States. However, even on a proportional basis, there also appears to be less deal-related litigation in Latin America than in the United States and other common law jurisdictions, where the system itself favours the development of corporate law through judicial precedent. For example, according to Cornerstone Research, between 2009 and 2018 an average 86.5 per cent of M&A deals over US$100 million resulting from acquisitions of publicly traded companies in the United States were challenged by M&A related litigation from shareholders claims (that is, excluding all private target deals, disputes between buyers and sellers and representations and warranty insurance claims). This type of litigation is almost non-existent in Latin America, given the size of the capital markets and the minimal number of M&A transactions in our jurisdictions that occurred over publicly traded targets.
This article covers disputes between buyers and sellers and other signatories to the M&A agreements, as opposed to derivative claims by shareholders of the target or of the seller or acquirer and other third party claims. There is a common view across Latin America that our jurisdictions are not as litigious as the United States or Europe when it comes to M&A deals. This is our perception and experience in Colombia, and it seems to be aligned with that of our colleagues across countries in Latin America.
Colombia is in fact highly litigious across the board, on torts, criminal matters, general civil and commercial litigation, administrative and government contracting matters, real property, family and estate matters, corporate governance issues, etc. This is one of the reasons why our court system is so heavily congested, and even though lawsuits and criminal investigations are common and numerous, final decisions take years or even decades to obtain.
However, the litigious nature of the Colombian market has not historically permeated the M&A deal-making arena. As a result, decisions in the court system related to M&A deals are extremely limited, and while there has been some activity in recent years in arbitration, there is only a handful of publicly available arbitration awards that have been produced regarding M&A matters. Most of those arbitration awards are fairly recent and started emerging back in the early 2000s.
We believe that deal-related disputes in Colombia have been on the rise. Some years ago, the norm seemed to be that parties would shy away from initiating claims, whereas in recent times, we have seen that parties will increasingly consider initiating post-closing, deal-related claims, whenever they have a contractual right to do so.
When speaking with our colleagues throughout Latin America, we have seen that our experience in Colombia is similar to what they seem to be facing in their home jurisdictions. This article will assess the perception of experienced M&A practitioners on deal-related litigation in Latin America. For that purpose, we have conducted a survey of 18 M&A practitioners from LatinLawyer 250 firms, with substantial experience under their belts.
The result is not surprising, the general perception across Latin American jurisdictions is that deal-related litigation may be on the rise in recent years.
Hard data is not available at this point and therefore in this article we offer comments and thoughts on the trends in the region based on the results of such survey.
Participants in the survey generally perceive that pre-litigious claims have moderately increased, and that deal-related litigation has maintained or moderately increased.
Practitioners were asked about their perception regarding the status of pre-litigious deal-related claims (excluding lawsuits), as well as to actual disputes initiated (whether in the ordinary court systems or in arbitration) in their jurisdictions. They were requested to classify whether such pre-litigious claims, on the one side, and actual proceedings in litigation or arbitration, on the other side, over the past five years, had reduced significantly, reduced moderately, remained consistent, increased moderately or increased significantly.
The results were as follows:
|Reduced significantly||Reduced moderately||Remained consistent||Increased moderately||Increased significantly|
|Pre-litigious Claims||0 per cent||7 per cent||27 per cent||60 per cent||6 per cent|
|Lawsuits||0 per cent||7 per cent||40 per cent||47 per cent||6 per cent|
Our results indicate that there is a trend of a moderate increase in deal-related, pre-litigious claims over the recent years. The numbers of actual lawsuits, on the other hand, have in general remained consistent with a slight trend of moderate increase in the region.
It appears that the trend throughout the region matches what we believe has been occurring in Colombia, where pre-litigious, deal-related claims, are increasing. Parties in M&A deals seem to be more determined to initiate claims to enforce rights available in their agreements. However, the trend of an increase in lawsuits on deal-related matters is not as evident. It may be that parties are more wary to begin full-blown litigation or arbitration, whereas they are becoming more and more comfortable with initiating claims to at least prompt a negotiation with opposing parties to resolve differences. It may also be the case that most claims may be settled prior to reaching the courts or arbitration panels.
Practitioners generally perceive that a majority of deal-related claims are resolved by direct negotiations of the parties.
Practitioners were asked about their perception as to how M&A-related disputes are commonly resolved, whether through direct negotiations, with the assistance of a third-party mediator, or through litigation or arbitration proceedings. We tallied and grouped the results and came up with the following categories for our results:
|Percentage of disputes practitioners perceive are resolved in the categories to the right||Disputes are resolved by direct negotiations or with assistance of mediators or other forms of ADR||Disputes resolved by litigation or arbitration|
|0-50 per cent||20 per cent||100 per cent|
|50 per cent-75 per cent||20 per cent||0 per cent|
|75 per cent-100 per cent||60 per cent||0 per cent|
This survey shows that a significant majority of disputes are resolved by avoiding litigation or arbitration. In effect, 60 per cent of respondents believe that 75 per cent to 100 per cent of disputes are resolved by direct negotiation (or with the assistance of mediators), whereas all respondents believe that less than 50 per cent of disputes are resolved by arbitration or litigation. It would seem that parties in Latin America consistently seek to resolve M&A-related matters outside of courts or arbitration tribunals.
Practitioners generally perceive that parties overwhelmingly prefer to submit dispute resolution to arbitration (be it local or international) over the court system of their respective jurisdictions.
Practitioners were questioned as to their experience with respect to the selection of dispute resolution mechanisms in M&A agreements, asking them to indicate which of the following mechanisms were more commonly used in their agreements: court system, local or international arbitration. We also included a third slot for other mechanisms, such as mediation, amigable composición, or others. We tallied and grouped the results, as follows:
|Agreements selecting courts as dispute resolution mechanism||Agreements selecting international or local arbitration as dispute resolution mechanism|
|0-50 per cent||94 per cent||6 per cent|
|50 per cent-75 per cent||6 per cent||14 per cent|
|75 per cent-100 per cent||0 per cent||80 per cent|
More than 90 per cent of respondents considered that fewer than half of dispute resolution clauses in M&A agreements included a submission to jurisdiction of courts, whereas 80 per cent of respondents considered that most (75 per cent to 100 per cent) dispute resolution clauses in M&A agreements provided for arbitration.
Based on these results, it seems that arbitration as a dispute resolution mechanism is highly popular as compared with domestic courts or other dispute resolution mechanisms. We could not identify a market preference for international or domestic arbitration as responses were generally divided, with some jurisdictions slanted towards domestic arbitration and others towards international arbitration.
Issues that are more commonly disputed include purchase price adjustments, indemnification obligations and issues regarding escrow arrangements and amounts that may be retained.
We asked our colleagues which topics or issues are commonly the object of disputes in the M&A context in their respective jurisdictions. We coined general broad topics to facilitate the response, including disputes regarding the satisfaction of conditions precedent, material adverse change clauses, purchase price adjustment mechanisms, indemnification obligations, limitations to liability, process for claims, sand-bagging related matters, among others. We also asked our colleagues to indicate whether the litigation or disputes regarding the following topics or issues is common or uncommon. The results were as follows:
|Topic/issue||Percentage of respondents who consider the disputes around this topic/issue are common||Percentage of respondents who consider the disputes around this topic/issue are uncommon|
|Satisfaction of conditions to closing||25 per cent||75 per cent|
|Material adverse change||33 per cent||66 per cent|
|Compliance of interim covenants||19 per cent||81 per cent|
|Purchase price adjustment||94 per cent||6 per cent|
|Indemnification obligations||94 per cent||6 per cent|
|Application of limitations of liability||44 per cent||56 per cent|
|Fraud, wilful misconduct, bad faith and similar actions||13 per cent||87 per cent|
|Procedural aspects regarding claims||50 per cent||50 per cent|
|Valuation of damages claimed and right to retain amounts under escrow arrangements||75 per cent||25 per cent|
|Sand-bagging related claims; whether an issue was disclosed by seller or should have been known by buyer||53 per cent||47 per cent|
Based on these responses, certain topics appear to be commonly litigated or disputed, such as post-closing indemnification and purchase price adjustment. Additionally, we can also see that claims regarding pre-closing matters, such as conditions precedent, the occurrence of a material adverse change, are not as common.
Timing considerations regarding deal-related litigation
Colleagues were asked to opine on the timing required to resolve claims in their jurisdictions. On the one side, they were asked how long does it usually take for a claim to evolve into litigation or arbitration, or otherwise to be resolved by direct negotiation. Further, we asked our colleagues about their perception regarding the duration of proceedings in arbitration and in the ordinary court system in their respective jurisdictions. The responses were tallied to show the percentage of respondents for each option. The results were the following:
|Less than 12 months||Between 12 and 24 months||Longer than 24 months|
|Average duration of a claim until it evolves into a proceeding or is settled out of court or arbitration||62 per cent||38 per cent||0 per cent|
|Average duration of arbitration||25 per cent||75 per cent||0 per cent|
|Average duration of proceeding before ordinary courts (first instance decision)||0 per cent||25 per cent||75 per cent|
A majority of our respondents believe that claims will either get resolved or evolve into a court or arbitral proceeding in a fairly short period of time (less than 12 months). Once a lawsuit has been initiated, arbitration seems to be the mechanism that will deliver a decision on a shorter period of time.
Our conclusions and analysis on the results of our survey
Deal-related claims and litigation may be on the rise in Latin America, but parties seem hesitant to engage in full-blown litigation or arbitration.
Pre-litigious, deal-related claims seem to be on the rise in the region. This trend is not as overwhelming for full-blown litigation or arbitration proceedings. However, there is still an increasing trend in deal-related lawsuits. In effect, 66 per cent of our respondents across the region believe that pre-litigious claims have increased over recent years, whereas 53 per cent of our respondents believe that deal-related lawsuits have also increased.
The survey would support the conclusion that parties in M&A deals are more comfortable initiating formal claims to seek to enforce their rights, but still not as convinced to go through with a full-blown litigation or arbitration to resolve disputes. This may also suggest that most claims are resolved prior to reaching the courts or arbitration by mutually satisfactory settlements. Accordingly, our survey showed that disputes in the M&A arena are resolved by negotiations of the parties, with 60 per cent of respondents indicating that more than 75 per cent of deal-related claims are resolved by direct negotiations (or with the assistance of a mediator), whereas 100 per cent of respondents indicated that less than 50 per cent of claims are resolved through litigation or arbitration. Parties seem to avoid a formal proceeding before courts or arbitrators.
This initial conclusion can have several explanations:
- Based on our experience, parties may be inclined to avoid full-blown litigation for several reasons: cost, time and effort are most likely the main reason for parties to avoid full-blown litigation or arbitration. Regarding time, the results of our survey show that 75 per cent of respondents believed that reaching a final decision in arbitration may take between 12 to 24 months, whereas 75 per cent of respondents believed that a resolution in ordinary courts may take more than 24 months.
- Clients are always hesitant to initiate litigation or arbitration unless there is a positive cost-benefit expectation. However, even though less common, there are cases where clients decide to initiate full litigation or arbitration as a matter of principle to defend their organisation’s interests and reputation in the market, regardless of the potential costs and benefits. Some clients also may go into court or arbitration proceedings with the expectation that a settlement early on may be available, often believing that initiating a lawsuit is a necessary step to bring the counterparty into settlement territory.
- In some cases, parties may avoid litigation over a certain topic, as it may produce the effect of triggering the other party’s determination to also pursue full-blown litigation over other claims that could have not evolved into lawsuits or could have been resolved otherwise by negotiations. Once the door to litigation is open, when engaged and focused on litigation, and knowing that legal fees and other costs will begin to accrue, parties will usually decide to go ahead and claim for all other matters pending to be resolved. Therefore, parties may be hesitant to trigger the domino effect that could result from initiating litigation.
- Escrow agreements may have a significant impact on post-closing, deal-related litigation. Our survey did not address questions regarding the effect of escrow arrangements in litigious settings, and the ability of claiming parties to retain portions of an escrow as a result of valid claims. It is unclear whether parties are more swayed to initiate claims when there is an escrow in place, allowing for retention of cash amounts in the escrow as a result of such claims. As we see it, the buyer’s opportunity to retain cash in an escrow arrangement has the potential to change the mindset of both parties when deciding whether to initiate claims.
- Absent an escrow (or similar guarantee) the defendant to such claim will have no immediate economic incentive to dedicate substantial time and efforts to amicably resolve claims, unless such claims have a strong basis or have the ability to cause increased damages.
In our view, a lack of escrows or similar guarantees in an M&A deal disincentivise parties to pursue claims or initiate lawsuits, such as M&A deals that include liability-restricting provisions (such as caps, baskets and de minimis).
Parties prefer to submit to arbitration rather than the domestic ordinary court system
Arbitration seems to be the prevalent choice as a dispute resolution mechanism in M&A deals in Latin America. Arbitration, whether domestic or international, appears much more popular than litigation in the domestic courts. The results across Latin America match what we are seeing in deals in Colombia where the discussion in negotiations mainly revolves around whether the choice would be domestic arbitration or international arbitration if available, and domestic courts are hardly ever considered.
Parties’ preference towards arbitration could be related to the estimated period of time that it takes for each proceeding to come to a conclusion. Whereas in arbitration, 100 per cent of respondents believe that, on average, an arbitral proceeding takes less than 24 months to reach a conclusion, when it comes to the ordinary court system, 75 per cent of respondents believe that a proceeding in average will take more than 24 months to reach a first instance decision (which could be subject to appeal, and therefore a final decision in a second instance will take a longer period of time to be reached).
Additionally, as discussed in point one above, at least in Colombia, practitioners may have the perception that, while in arbitration, the parties will have the ability to appoint arbitrators who have experience and have had exposure to M&A transactions or to issues related to M&A matters and contracts law, there is significant uncertainty in the ordinary court system and its unclear whether the appointed judge has comparable experience to that of hand-picked professional arbitrators. Local courts may also be ill-equipped to appropriately handle M&A disputes compared with international arbitrators with respect to cross-border M&A transactions in which the deal documents are frequently drafted in English or governed by an internationally recognised foreign substantive law with comprehensive case law on M&A matters (such as New York law).
Most common matters over which claims or disputes revolve around are purchase price adjustments and post-closing indemnification matters. Litigation over pre-closing matters is generally uncommon.
Several observations can be made based on the responses regarding the topics or issues that are commonly or uncommonly disputed:
- Topics and issues that are more commonly disputed revolve around post-closing matters, such as purchase price adjustment and indemnification obligations, where, in both cases, 94 per cent of practitioners believe such topics are commonly disputed.
- Topics that address pre-closing issues, such as the satisfaction of conditions precedent and the occurrence of a material adverse change, are not as commonly disputed (where 75 per cent of respondents, for the case of conditions precedent, and 66 per cent of respondents, for the case of material adverse change, consider such topics not to be commonly disputed).
Based on these responses, we could infer that, in Latin America, pre-closing issues, such as the satisfaction of conditions to closing or the occurrence of a material adverse change, which generally revolve around closing certainty, are not as common.
This survey was distributed to respondents four months into the covid-19 pandemic. Pre-closing issues were still being analysed and it would be premature to discuss definitive conclusions applicable throughout the region. In Colombia, we have seen several ongoing transactions that have debated the occurrence of a material adverse change, but we are still to see lawsuits initiated seeking performance or damages.
Based on responses, it seems that parties are mostly focused on claiming issues with direct monetary implications, such as purchase price adjustments and post-closing indemnification provisions. The general perception of respondents is generally aligned with ours in Colombia. We believe that, in Colombia, most of the issues that rise to a level of a claim or lawsuit revolve around provisions regarding adjustments to the purchase price and post-closing indemnification obligations where the calculation and payment of monetary damages is critical, and less on specific performance with injunctive relief.
We believe that responses regarding claims and lawsuits on purchase price adjustment provisions deserve special attention from practitioners. While some may think that purchase price adjustments should be merely an update of uncontroversial figures, there are many details on the way in which accounts are developed and reflected, and variations in methodology that may cause disputes. Consistently, respondents perceive in an overwhelming majority that disputes relating to purchase price adjustment are common in their jurisdictions.
The result of the survey on this point raises a few questions that we believe should be analysed by practitioners with their clients: are we using the purchase price adjustment provision to renegotiate the purchase price, or as a backdoor avenue to bring claims that would otherwise be indemnification claims on the basis of breach or inaccuracy of representations and warranties, which are subject to specific limitations and survival provisions? Does this mean that the parties are not fully aligned on their agreement on the purchase price, which is absolutely critical? Therefore, it may be a question on whether parties are silently delaying a discussion on purchase price.
Alternatively, maybe the parties are just not really aligned on how the purchase price adjustment provision will be applied after closing. If this is the case, practitioners should be focusing more during negotiations to ensure that both parties and their financial and accounting teams understand and fully appreciate the implications on how the purchase price adjustment provision will be applied.
The responses on the frequency of post-closing indemnification matters do not come as a surprise. This implies that parties negotiated post-closing indemnification rights and find, after closing, that the target may suffer losses that are indemnifiable under the contract. In fact, these provisions are allocations of risk that need to be honoured when the risk materialises, and often the disputes revolve around the scope of the assumed risk and the qualification and assumption of the identifiable losses.
It is interesting to see that parties are divided in their responses as to whether issues relating to ‘sand-bagging’ (whether the buyer knew or should have known and whether such knowledge or constructive knowledge should preclude the buyer from benefiting from indemnification rights). Thus, 53 per cent of respondents believe that discussions regarding ‘sand-bagging’ matters are common.
In Colombia, we believe that even though this discussion is rather common, it is not necessarily the focus of the attention in a claim. This may be because the whole discussion on ‘sand-bagging’ issues opens up a much broader question on whether the parties, buyer and seller, have been acting in good faith or have been diligent throughout the negotiation and after closing. It is certainly a hot topic that, if elicited by a court, has the potential of questioning indemnification rights that parties may have thought were uncontroverted under the contract.
Finally, practitioners generally believe that disputes relating to escrows and the amounts that may be retained are also common (with 75 per cent of practitioners indicating such disputes are common in their jurisdiction). This response is also consistent with what we are seeing in Colombia. The question on whether retention of cash during the pendency of a final resolution of a claim is available under the escrow, and how claims are valued, are the aspects of escrow agreements that are more frequently debated.
We believe that deal-related litigation in Latin America will continue to evolve, in numbers and in substance, which underscores the critical role of M&A practitioners in constantly improving practices, procedures and forms to ensure that agreements are well-equipped to reduce disputes with abundantly clear language that can withstand future litigation or arbitration.
 Carolina Posada and Jaime Cubillos are partners, and Estefanía Ponce is an associate at Posse Herrera Ruiz.
 Pitchbook – KPMG, ‘North American M&A Report Q3 2020’, 2020
 Transaction Track Record, ‘Latin America Quarterly Report – 3Q 2020’, 2020.
 Cornerstone Research, ‘Shareholder Litigation Involving Acquisition of Public Companies – Review of 2018 M&A Litigation’, 2019.
 See Chapter 7 of this guide.
 We delivered a Q&A form to some of the most important law firms in Latin America. 18 respondents participated on an anonymous non-attribution basis and provided their responses between 28 August 2020 and 10 September 2020.
 See Chapter 14 of this guide regarding escrows and other indemnity guarantees.
 See Chapter 1 for further analysis of the impact of the covid-19 pandemic on M&A in the region.