How Standing Mediators Can Add Value in M&A Deals
Joe Basile, Managing Director, Pari Passu M&A Mediation LLC
The popular conception of a professional mediator is that of an individual parachuting into the midst of a hot dispute on short notice to facilitate a resolution that the parties view as a better net result than they are likely to obtain from further combat. The idea of a “standing mediator”, a neutral engaged by parties to a business transaction before a dispute has arisen to be available to assist in solving problems as they may from time to time arise, has far less currency. This article discusses how a standing mediator can add significant value, particularly in the context of an M&A transaction.
The “Ad Hoc” Mediator
When parties to a business transaction, including an M&A deal, agree to engage a mediator, the catalyst is typically a specific, active dispute that the parties have been unable to resolve on their own by direct negotiation. Although mediation is almost always a more value enhancing way to resolve an M&A-related dispute than is outsourcing resolution to a judge or arbitrator (see Basile, Using Mediation to Maximize Value in M&A Disputes, 22 The M&A Journal 9 (2023)), there are several factors that can make achievement of an optimal outcome difficult for an “ad hoc” mediator.
First, there is a good chance that the ad hoc mediator never gets engaged at all. This is because once parties to an active dispute have lawyered up, there may be a reluctance on the part of either to suggest mediation for fear of appearing doubtful of that party’s prospects for success in litigation or arbitration.
Second, an ad hoc mediator will almost certainly begin the engagement with no, or at best limited, familiarity with the background of the transaction and the dispute, the transaction documents, the parties’ relevant personnel, the parties’ interests and the barriers to achieving a settlement. Although this handicap can be mitigated with preparation, the ad hoc mediator’s ability to catch up will be limited, particularly if there is any time sensitivity to arriving at a settlement.
Third, because by definition an ad hoc mediator is beginning her or his work at a time after which the parties are already disputing, it is likely that temperatures on all sides are by then elevated. This may be especially so if litigation or arbitration has been initiated before the ad hoc mediator is engaged. Heightened emotions and commitment to winning conspire to make an ad hoc mediator’s job all the more challenging.
The M&A Deal as an LTR
Before discussing the use of a standing mediator in an M&A deal, it is useful to observe that in most M&A transactions, the parties’ arrival at an agreement to proceed initiates a long-term relationship between them. Although one could imagine an M&A deal that consists of only a simultaneous signing of the purchase agreement and closing with no post-closing interactions between the parties, this would be a rarity. Much more typically, the signing of a definitive M&A agreement marks the commencement of a relationship that will extend over some, often considerable, period of time. For example:
- Many M&A deals contemplate a gap between the signing of the definitive agreement and the closing. There are often conditions to closing that the parties must work to satisfy (for example obtaining shareholder approvals, third party consents and regulatory clearances) and the parties often undertake various other performance obligations during this interlude.
- Most private company acquisitions provide for some type of purchase price adjustment that is negotiated and finalized after closing.
- Many private deals provide for the payment of contingent consideration upon the target’s attainment of financial performance goals or other milestones that extend over a period of months or years after closing.
- Private M&A deals typically include indemnification obligations and the performance of various post-closing covenants that survive the closing, often for years.
- Carve-out deals often include transition service agreements requiring ongoing interactions between the parties after the closing.
- If the deal consideration includes buyer equity, then the transaction may include a multi-year shareholders’ agreement.
- Some M&A deals entail the creation of a joint venture, the very essence of which is a long-term relationship.
Ideally, the parties will grow better to understand each other as they work together over time. Nonetheless, as can happen in the closest of relationships, disagreements can arise, and some disagreements may become disputes. If the parties to a relationship are large organizations, their respective personnel, circumstances and interests are not likely to remain static. As such relationships extend for longer periods of time, the number of issues and opportunities for disagreement necessarily increases.
The Case for a Standing Mediator
As an alternative to awaiting the eruption of a dispute before calling in an ad hoc mediator, parties to an M&A transaction may benefit from engaging a standing mediator at the inception of their relationship before any dispute has arisen. (The type of standing mediator discussed in this article should not be confused with the standby mediator that one occasionally sees engaged to follow an active litigation or arbitration. See “FedArb – Stand-by mediation.”
Once selected and engaged, a standing mediator would begin working to become thoroughly familiar with the background of the deal, the terms of the transaction documents, the details of each party’s internal organization and reporting structure, the identities and personalities of each party’s decision-makers, influencers and stakeholders in the relationship, and each party’s interests and objectives in deciding to enter into the transaction. Thereafter, the standing mediator would periodically meet with each party to monitor their respective perceptions of the progress of their relationship and be available to attend key meetings at which the parties discuss issues. As with conventional ad hoc mediation, the parties and mediator would agree that private communications between a party and the standing mediator would be kept confidential unless the disclosing party otherwise agrees. The duration of the engagement would be tailored to the nature and expected duration of the parties’ relationship, however, as with ad hoc mediation, any party could withdraw from the arrangement at any time. A standing mediator in an M&A deal operates as a true neutral and therefore should be distinguished from an employee assigned by a party to function as a relationship manager, an arrangement that one sometimes sees in joint ventures and strategic alliances.
The standing mediator’s work would have two components. First, on an ongoing basis, the standing mediator would be on the lookout for issues that are likely to ignite disagreements and would assist the parties in problem solving before disputes arise. Second, if a dispute does occur, the standing mediator would be available at the request of the parties to facilitate a resolution of the dispute, much in the way that an ad hoc mediator would operate, but with the benefit of having a significantly better understanding of the parties and the background of the dispute than an ad hoc mediator would likely be able to achieve.
There are several advantages to the appointment of a standing mediator in an M&A transaction as compared with waiting for an active dispute as the occasion for hiring an ad hoc mediator. These advantages include the following:
- Because a standing mediation arrangement by definition is put in place before a dispute has occurred, neither party should be reluctant to propose it for fear of appearing doubtful of that party’s likelihood of success in a non-existent lawsuit or arbitration.
- A standing mediator is on the scene and in position to spot brewing disagreements and facilitate problem solving before disagreements ripen into disputes. The parties, assisted by their respective counsel, can of course do their part to problem solve by means of their direct interactions, but the professional training, experience and neutrality of a standing mediator would enhance these efforts.
- With much more time to gather background information about the parties, their relationship and the transaction, if a dispute were to arise a standing mediator is almost certain to be better prepared to facilitate resolution than an ad hoc mediator would be.
- By virtue of working with the parties on an ongoing basis, a standing mediator is likely to be able to build more trust and credibility over time with the parties than an ad hoc mediator called in on short notice could. This trust and credibility will be valuable assets to enhance the likelihood of a standing mediator’s success, both in the context of ongoing problem solving and if called upon to facilitate the resolution of a dispute.
- For all the above reasons, a standing mediation arrangement is likely to reduce the number of disputes that arise during the course of an M&A based relationship and to increase the likelihood that the parties will be able to more efficiently resolve such disputes should any arise.
As observed earlier in this article, in most M&A deals, reaching initial agreement marks the beginning on an on-going, often long-term, relationship between the parties. The value of the deal for each party is likely to be a function of their ability to preserve and work well within that relationship. Hence, the early addition of a neutral standing mediator to the deal team is likely to create significant value for the parties.