Deal-Related Litigation in Colombia and 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, in 2021, approximately 18,530 M&A transactions closed in North America for a combined US$2.8 trillion.^[2] In contrast, according to Refinitiv, in 2021, M&A transactions with any Latin American involvement totalled US$253.3 billion and M&A transactions with a Latin American target recorded US$162.4 billion.^[3]

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,^[4] 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.^[5]

This chapter addresses 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, the manner in which such claims are usually resolved in Colombia and in Latin America and the factors driving the parties’ incentives and appetite (or lack thereof) to proceed with arbitration or litigation once a dispute arises.

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 seems to be aligned with the perceptions 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 overly litigious nature of the Colombian market has not historically permeated the M&A dealmaking arena. As a result, decisions in the court system related to M&A deals are extremely limited, and while there has been some activity over the past years in arbitration, only a handful of publicly available arbitration awards have been produced regarding M&A matters. Most of those arbitration awards are fairly recent and started emerging back in the early 2000s.

However, it appears that deal-related disputes in Colombia and Latin America have been on the rise. Some years ago, the norm would be that parties would shy away from initiating claims, whereas in recent years we have seen that parties will increasingly consider presenting post-closing, deal-related claims whenever they have a contractual right to do so. Based on surveys conducted in 2020 and 2021 by the authors targeting M&A, litigation and arbitration practitioners from Latin Lawyer 250 firms, with our experience in Colombia appears to be similar to what our colleagues seem to be evidencing in their home jurisdictions.^[6]

In recent years, there appears to be a trend of a moderate increase in deal-related, pre-litigious claims. However, such trend has not yet clearly translated into a significant increase in number of actual M&A related lawsuits in the region.

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 arbitral tribunals. We generally perceive that a majority of deal-related claims are resolved by direct negotiations of the parties, outside of courts or arbitration tribunals. Furthermore, respondents to our survey generally agree that parties to M&A transactions prefer to submit their disputes to arbitration over local court systems in their respective jurisdictions. Therefore, the limited number of M&A disputes that do end up being litigated are often subject to confidential arbitration proceedings, providing limited visibility with respect to valuable information about the adjudication of M&A disputes in Latin America.

The strong preference of the parties to M&A transactions in Latin America for arbitration over domestic courts or other dispute resolution mechanisms^[7] is unsurprising, considering the rise in number of arbitrators and arbitration centres in Latin America in the past 20 years. Over recent decades, Latin America has transitioned to having an arbitration-friendly legal framework and culture.^[8] A significant number of countries in Latin American have adopted arbitration statutes, which in many cases closely follow the UNCITRAL Model Law on International Commercial Arbitration.^[9] Also, Latin America has seen widespread ratification of international conventions on the recognition and enforcement of arbitration awards, such as the 1958 New York Convention and the 1975 Panama Convention.

This chapter addresses the reasons why parties dealing in Colombia usually agree to resolving disputes via arbitration rather than court proceedings. It also highlights issues that should be considered in the drafting of dispute resolution clauses in M&A agreements and in choosing the seat of arbitration.

Lastly, we provide a brief mention of certain topics that are commonly litigated or disputed, such as post-closing indemnification, purchase price adjustment, issues regarding escrow arrangements and amounts that may be retained, and how tribunals have resolved such matters.

Whether or not to proceed with arbitration or litigation

While deal-related claims may be on the rise in Latin America, parties seem hesitant to proceed with 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.

Parties in M&A deals appear 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.^[10]

Based on our experience, cost, time and effort are most likely the main reasons for parties to avoid full-blown litigation or arbitration. Considering that the majority of post-M&A disputes are resolved via arbitration, costs typically run high.

We perceive that clients are always hesitant to initiate litigation or arbitration unless there is a positive cost-benefit expectation and reasonable level of certainty as to probability of success, which is hardly ever clear-cut in M&A disputes, which tend to involve complex issues, sets of facts and agreements. 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 may also 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.

M&A agreements sometimes include multi-tiered dispute resolution clauses, which provide for a mandatory negotiation period and for the submission of notifications of disputes within a specific time frame. If, as required by the agreement, parties to an M&A deal present detailed descriptions of their claims and defences prior to submitting a claim to litigation or arbitration, each could more readily realise the relative strengths and weaknesses of their respective allegations. It could also allow parties to more effectively assess the risks of moving forward with a litigation or arbitration, and thus incentivise direct negotiations.

Escrow agreements may have a significant impact on post-closing, deal-related litigation. 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)^[11] 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 (e.g., caps, baskets and de minimis).

Parties prefer to submit their disputes to arbitration rather than to domestic courts

Arbitration seems to be the prevalent choice as a dispute resolution mechanism in M&A deals in Latin America.^[12] Arbitration, whether domestic or international, appears much more popular than litigation in domestic courts. This is likely because of the ‘often complex, specialised, cross-border and sensitive nature of many M&A transactions’.^[13] Although there is promise on the basis of certain positive improvements to Latin American judicial systems in recent years, Latin

American courts continue to be perceived to lack experience in highly specialised transactional disputes, such as M&A litigation, and systemic concerns regarding efficiency, reliability and business-friendliness persist.

Parties’ preference towards arbitration in Latin America could also be related, in part, to the estimated period of time that it takes for each proceeding to conclude. Once a lawsuit has been initiated, arbitration seems to be the mechanism that will deliver a quicker judgment, most usually within 24 months.^[14] It is no secret that, across the board in Latin America, courts generally take much longer than arbitral tribunals to adjudicate disputes.

Furthermore, in the past five years, most international arbitral institutions have updated their arbitration rules to provide for expedited arbitration. According to the ICC 2020 statistics, of the total of 115 final awards rendered under the expedited procedure provisions since they were implemented, 67 per cent were delivered six months after the case management conference.^[15] In the case of the SCC Rules for Expedited Arbitration, almost 50 per cent of the awards were rendered within three months from referral.^[16] Expedited rules, which are usually applied in arbitrations when the amount in dispute is relatively low, have thus opened the door to resolving disputes much faster.

Arbitration also provides for a more neutral ground for the resolution of disputes between parties that are domiciled in different jurisdictions. Parties usually prefer to submit their dispute to experienced arbitrators, rather than to the home courts of the opposing side. Such fear of unconscious (or conscious) bias of the other party’s home courts may be unjustified; however, a party may feel at a disadvantage in a litigation subject to a particular set of unfamiliar procedural rules.

Flexibility of international arbitration proceedings is another key advantage. Parties may tailor the proceedings to suit the specific needs of the dispute at hand. Such flexibility applies, for example, with regard to:

• the number and order of pleadings submitted by each party;
• the moments at which such pleadings are presented;
• the submission of evidence, the manner in which evidentiary hearings are conducted;
• whether the dispute will be decided in different phases (jurisdiction, responsibility or damages); and
• the language of the proceedings.

Furthermore, because of its flexibility, arbitration is generally preferable (compared to litigation before local courts) as parties may carve-out certain disputes into a separate and distinct dispute resolution mechanism, such as expert determination, in which case parallel or subsequent proceedings may arise.^[17] For instance, in 2014, the arbitral tribunal in Grupo Pegasus SA v. New Global Energy Inc, in an arbitration administered by the Bogota Chamber of Commerce, concluded that expert determination – rather than arbitration – was the agreed-upon form of dispute resolution to determine the adjustment of the purchase price.^[18]

Additionally, Colombian practitioners 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. This is especially relevant since M&A agreements in Latin America follow closely the practice and drafting that has been typically used in common law jurisdictions. It would be challenging for local judges to familiarise themselves with these provisions. In contrast, we believe that arbitration has managed to keep up with international or foreign practices. 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).

Parties can handle the challenges that arise from a multiparty or multicontract transaction through the careful drafting of the arbitration agreement in the M&A agreements.^[19] In addition, institutional arbitration rules today provide for clear rules that apply to the joinder of additional parties, to the consolidation of arbitrations and to the way the arbitral tribunal is constituted, where the arbitration involves multiple parties.

In contrast with litigation before local courts, arbitration may provide a confidential means of resolving disputes. ‘Trial by press release’ is disallowed, resulting in a more efficient dispute resolution process. Parties often look to keep certain reserved information regarding commercial and industrial practices such as profit margins, production costs, pricing policies, trade secrets and know-how.^[20] In the case of Colombia, however, parties should still be wary that domestic arbitral awards are not confidential and are usually published by local arbitration centres.^[21]

There is a particular advantage to international arbitration in Colombia, as opposed to litigation before local courts or domestic arbitration.^[22] The Colombian arbitration statute provides for party autonomy in selecting the substantive law (including foreign law) applicable to resolving the dispute (and to the M&A agreement), so long as the arbitration is deemed an 'international arbitration' under Colombian law. The parties’ choice of law will be upheld in international arbitration regardless of the place of performance of the M&A agreement.^[23]

Usually, awards resolving disputes are more easily enforceable in other jurisdictions, compared with court judgments. This is also the case for enforcement of awards and judgments in Colombia. Where the seat of an arbitration is located abroad, an arbitral award can be enforced in local courts if the award was rendered in a state that is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).

As mentioned above, virtually all Latin-American states are parties to the New York Convention. The enforcement regime is straightforward and efficient, especially compared to local recognition rules applicable to foreign court judgments.^[24] By way of example, the Colombian General Procedure Code provides that the exequatur of a foreign court judgment would be refused if there is a Colombian court judgment or pending proceedings before Colombian courts regarding the same matter. Parties may thus seek to commence local court litigation to block the enforcement of a foreign court judgment.

Choosing the seat of the arbitration

The seat of an arbitration determines, among other things, the mandatory legal framework applicable to the arbitration proceedings,^[25] the post-award remedies available to the parties and the way in which international awards are recognised. It also outlines the judges' and judicial courts' role in relation to an arbitration.

At the moment of agreeing to the seat of the arbitration, the parties should consider, inter alia:

• whether the seat is located in a territory that is a party to the New York Convention and that has a modern arbitration law (such as a law based on the UNCITRAL Model Arbitration Law);
• the possible place (or places) of enforcement of the award, bearing in mind the location where the parties' assets are located;
• whether there is an independent and efficient judiciary at the seat of the arbitration;
• accessibility to the seat of the arbitration by the parties, potential witnesses and experts and the arbitration tribunal in the event that the hearings take place at the seat;
• local courts' enforcement of arbitration clauses; and
• the rules regarding confidentiality and privilege.

Select issues in arbitration agreements regarding M&A transactions

In our experience, it is common for parties to reach agreements on applicable law and dispute resolution clauses late in the negotiation of M&A agreements, and arbitration provisions are sometimes overlooked as boilerplate. This could result in pathological arbitration agreements, or in arbitration agreements that are not best suited to the particular M&A transaction. The complexities of M&A transactions call for careful planning of its dispute resolution mechanisms.

Put succinctly, a well-drafted arbitration clause provides for mandatory resolution of disputes via arbitration, is valid and enforceable and includes a broad scope setting out the disputes that shall be referred to arbitration. It also includes agreements on the seat of the arbitration, the applicable arbitration rules, the language of the arbitration and the number and appointment of arbitrators.

M&A transactions often involve multiple contracts and multiple parties. If the purchaser, the seller or the target company is composed of multiple entities, the arbitration would most likely involve multiple parties. Viewed broadly, an M&A transaction could also involve a share purchase agreement (with one or multiple buyers or sellers, as well as the target company), a shareholder agreement, an escrow agreement (including a financial institution) and a guarantee (signed by the buyer’s parent company).

Certainly, a claimant will always prefer a swift and cost-effective resolution of the dispute. Furthermore, parties to an M&A transaction could generally benefit from having their dispute decided in a single arbitration, as there would be no risk of contradictory decisions stemming from parallel proceedings. The parties could thus look to include compatible arbitration clauses in each of the relevant transaction agreements. Arbitration clauses are usually deemed compatible if they provide for the same arbitration rules, seat, language, method for the constitution of the tribunal and number of arbitrators.

Depending on the law applicable to the arbitration agreement or the law of the seat, it may be difficult to resolve a dispute under multiple contracts in a single arbitration, even if the contracts include compatible arbitration clauses. Parties may thus wish to expressly provide for this scenario in each of the arbitration clauses in the transaction agreements and for the possibility of consolidation of arbitrations.^[26] Parties could also agree to a separate umbrella arbitration agreement that applies to all M&A agreements.^[27]

Multitiered dispute resolution clauses are sometimes used in M&A agreements. These generally provide for one or more of the following prior to initiating litigation or arbitration:

• the submission of notice of a claim or a notice of a dispute and an answer to the notice;
• a period of negotiations between the parties (sometimes calling for structured negotiations or negotiations advancing within the hierarchical structure of each party); or
• other forms of alternative dispute resolution such as mediation.

There is a question of whether parties must exhaust each such alternative method or preliminary step or whether parties must wait until a negotiation period ends prior to submitting a claim to arbitration. In the case of Colombian domestic arbitrations, local procedural law allows parties to initiate the proceeding regardless of whether such pre-arbitral dispute resolution mechanisms are met.^[28] For instance, the tribunal in Mercantil Galerazambra in an arbitration administered by the Bogota Chamber of Commerce, held that the principle of party autonomy allows for contractual agreements on the manner in which parties may claim their rights before each other. However, such an agreement cannot limit the parties' rights to access to justice and thus to initiate an arbitration.^[29]

Because such local procedural rule does not apply to international arbitrations seated in Colombia, and since there are no publicly available awards or court judgments on the matter, it is unclear whether the requirement would be deemed mandatory in an international arbitration. Other jurisdictions may provide for different approaches, such as the inadmissibility of claims or a lack of jurisdiction of the arbitral tribunal. Subject to the applicable law, parties may consider initiating an arbitration and then requesting for the stay of proceedings to attempt to exhaust a contractual negotiation period.

Parties should also bear in mind the applicable law regarding privilege and confidentiality of arbitrations, and of the scope of any confidentiality clause in an M&A agreement. Confidentiality rules or agreements may prohibit parties from disclosing hearing transcripts, written pleadings, evidence or the arbitral award, or third parties from attending arbitral hearings. The agreed upon institutional arbitration rules and conflict of law rules are also relevant. The ICDR Rules, for example, provide that whenever the parties, their counsel or their documents would be subject under applicable law to different rules, the tribunal should, to the extent possible, apply the same legal rule to all parties, giving preference to the rule that provides the highest level of protection.^[30] Under the ICC Rules, arbitral tribunals may make orders concerning confidentiality of the arbitration proceedings or any other matters in connection with the arbitration, and they may also take measures to protect trade secrets and confidential information.^[31]

Common disputes in M&A litigations and arbitrations in Colombia and Latin America

Based on our experience, parties are mostly focused on claiming issues with direct monetary implications, such as purchase price adjustments and post-closing indemnification provisions.^[32] Litigation over pre-closing matters is generally uncommon in Latin America.

We find 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 and injunctive relief.

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. This 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.

A higher frequency of post-closing indemnification matters would imply that parties negotiate 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.

In Colombia, we believe that even though the discussion of sandbagging (whether the buyer knew or should have known and whether such knowledge or constructive knowledge should preclude the buyer from benefiting from indemnification rights) is rather common, it is not necessarily the main focus of the attention in a claim. The whole discussion on ‘sand-bagging’ issues in civil law jurisdictions 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.

Recent cases have discussed the relationship between representations and warranties, due diligence and good faith. The tribunal in ASA Bioenergy Holding AG, and others v. Adriano Gianetti and others, in an arbitration under ICC Rules, analysed the nondisclosure of a swap agreement by the seller, and concluded that, under Brazilian law, that conduct was a breach of the party's obligation to act in good faith.^[33] In addition, in Alicorp Colombia SA v. Helados Modernos and others, in an arbitration administered by the Bogota Chamber of Commerce, the tribunal concluded that carrying out due diligence does not automatically exonerate the seller's liability, and even less so if the parties have expressly agreed on representations and warranties.^[34] Similarly, the tribunal in CAM Santiago Case No. A-1526-2012 held that certain knowledge that a party may have had by virtue of the due diligence does not generally affect the other party's liability in the case of false or inaccurate representations and warranties.^[35]

Finally, we generally consider that disputes relating to escrows and the amounts that may be retained are also common. The questions of whether retention of cash amounts during the pendency of a final resolution of a claim is justified under the agreement, and how direct or third-party claims are valued, are aspects that are more frequently debated. A recent example is ICC case Premium Petroleum Services Corp v. Superior Energy Colombia SAS and others,^[36] where the buyer withheld payments on the grounds of a breach of the sale and purchase agreement (SPA) by the sellers. After analysing the evidence submitted by the parties, as well as the obligations under the SPA, the tribunal concluded that the respondent lawfully exercised its retention right given that the claimant's breaches triggered that retention right.

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.

Notes