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Arbitration of merger and acquisition disputes : ASA Swiss Arbitration

Association conference of January 21, 2005 in Basel

KAUFMANN-KOHLER, Gabrielle (Ed.), JOHNSON, Alexandra (Ed.)

KAUFMANN-KOHLER, Gabrielle (Ed.), JOHNSON, Alexandra (Ed.). Arbitration of merger

and acquisition disputes : ASA Swiss Arbitration Association conference of January

21, 2005 in Basel. Bâle : Association suisse de l'arbitrage, 2005, 294 p.

Available at:

http://archive-ouverte.unige.ch/unige:44150

Disclaimer: layout of this document may differ from the published version.

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http://archive-ouverte.unige.ch/unige:44150

ASA Special Series No. 24 May 2005

Arbitration of Merger and Acquisition Disputes

ASA Swiss Arbitration Association Conference of January 21, 2005 in Basel

Edited by Prof. Gabrielle Kaufmann-Kohler and Alexandra Johnson

Association Suisse de l’Arbitrage Swiss Arbitration Association Schweiz. Vereinigung für Schiedsgerichtsbarkeit Associazione svizzera per l’arbitrato

ASA_Titel_Einleitung 1 21.07.2005, 7:58:51 Uhr

Association Suisse de l’Arbitrage Schweiz. Vereinigung für Schiedsgerichtsbarkeit

Swiss Arbitration Association

ASA Secretariat attn. Dr. Rainer Füeg Aeschenvorstadt 67 P.O.BoxCH-4010 Basel Tel : 41 61 270 60 15 Fax : 41 61 270 60 05 E-mail : [email protected] Website : www.arbitration-ch.org


TABLE OF CONTENTS

PrefaceGabrielle Kaufmann-Kohler

page V

Program of the conference page VIII

M&A transactions: process and possible disputes Henry Peter

page 1

Pre-closing disputesGeorg von Segesser

page 17

Purchase price adjustment arbitrations Wolfgang Peter

page 55

Post-closing disputes on representations and warranties Rudolf Tschäni

page 67

The user’s perspectiveJuergen Reul

page 85

The importance of being earnest – Toughening up on experts John Ellison

page 95

Arbitration and EU merger control Marc Blessing

page 99

The interaction between expert determination and arbitration Klaus Sachs

page 235

Case management and advocacy Nicholas Fletcher

page 247

Letters of intent in the M&A context Henry Peter / Jean-Christophe Liebeskind

page 265

List of participants page 281



PREFACE

This volume of the ASA Special Series contains the papers presented at the ASA 2005

Annual Conference entitled “Arbitration of Merger and Acquisition Disputes”.

In recent years, the volume of arbitrations involving disputes arising out of M&A transactions

has exploded. In order to assist the increasing number of practitioners involved in such

arbitrations, the ASA Conference sought to provide a comprehensive review of the issues,

both procedural and substantive, which arise when resolving M&A disputes. For this

purpose, the first presentation set forth the chronology and process of an M&A transaction

and the different categories of disputes which may arise at each stage of the process.

Building on this overview, the following papers then addressed each category of dispute

identified and its specificities. These contributions dealt with all types of pre-closing1 and

post-closing disputes, including price adjustment arbitrations.

After the review of the various categories of disputes and the ensuing difficulties, a second

set of papers focused on selected topics peculiar to M&A arbitrations. These included a

discussion of the know-how related to arbitrating M&A disputes, specifically case

management and advocacy and the role of expert witnesses in valuation matters. Among

these special topics, attention was also drawn to the recurrent and often problematic

interaction between expert determination and arbitration, as well as to a new development

with significant potential, i.e. arbitration in the context of EU merger control. Finally, the

users’ perspective brought a refreshing outside view, including some criticisms and avenues

for improvement, which arbitrators and counsel will undoubtedly wish to bear in mind in the

future.

It is our hope that this volume of the ASA Special Series will contribute to a better

understanding of M&A arbitration and will help improve the efficiency of dispute resolution in

this field.

Geneva, 31 May 2005

Prof. Gabrielle Kaufmann-Kohler President of ASA

1 This volume closes with a discussion of letters of intent, which at the Annual Conference was dealt with as part of pre-closing disputes and was thought to be a welcome addition to this publication.

V



Association Suisse de l'Arbitrage Schweizerische Vereinigung für Schiedsgerichtsbarkeit

Associazione Svizzera per l'Arbitrato Swiss Arbitration Association

ASA Conference

January 21, 2005

9:00 a.m. to 4:30 p.m.

Arbitration of merger and acquisition disputes

Swissôtel Basel

www.arbitration-ch.org


00486232.DOC 14.6.05 2/3

Arbitration of Merger and Acquisition Disputes

9.00 - 9.10 WELCOME ADDRESS Prof. Gabrielle Kaufmann-Kohler, President of ASA

9.10 - 9.20 INTRODUCTION AND CHAIR OF MORNINGSESSION

Prof. Bernard Hanotiau,Hanotiau & van den Berg, Brussels

9.20 – 9.40 M & A TRANSACTIONS: PROCESS AND POSSIBLE DISPUTES

Prof. Henry Peter, BernasconiPeter & Gaggini, Lugano

9.40 – 10.00 PRE-CLOSING DISPUTES Dr. Georg von Segesser,Schellenberg Wittmer, Zurich

10.00 – 10.20 PRICE ADJUSTMENT ARBITRATIONS Dr. Wolfgang Peter, PythonSchifferli Peter & Partners, Geneva

10.20 - 10.30 DISCUSSION

10.30 - 11.00 COFFEE BREAK

11.00 – 11.20 POST-CLOSING DISPUTES ON REPRESENTATIONS AND WARRANTIES

Dr. Rudolf Tschäni, Lenz & Staehelin, Zurich

11.20 – 11.50 THE USER’S PERSPECTIVE Dr. Juergen Reul, Head of the International Legal Department,BMW, Germany

11.50 – 12.20 DISCUSSION

12.00 - 14.00 LUNCH Swissôtel Basel

VIII


00486232.DOC 14.6.05 3/3

14.15 – 14.20 INTRODUCTION AND CHAIR OF AFTERNOON SESSION

Dr. Robert Briner, Lenz & Staehelin, Geneva, President of the ICC Court of Arbitration

14.20 – 14.40 THE ROLE OF EXPERT WITNESSES IN INTERNATIONAL ARBITRATION: ANEXPERT’S VIEW

John Ellison, Chairman, KPMG Forensic international arbitration group

14.40 – 15.00 ARBITRATION AND EU MERGERCONTROLS

Dr. Marc Blessing, Bär & Karrer, Zurich, Honorary President of ASA

15.00 - 15.20 COFFEE BREAK

15.20 – 15.40 THE INTERACTION BETWEEN EXPERT DETERMINATION AND ARBITRATION

Dr. Klaus Sachs, CMS Hasche Sigle Eschenlohr Peltzer, Munich

15.40 – 16.00 CASE MANAGEMENT AND ADVOCACY Nicholas Fletcher, CliffordChance LLP, London

16.00 – 16.30 DISCUSSION AND CONCLUSIONS

IX



1

M&A TRANSACTIONS: PROCESS AND POSSIBLE DISPUTES

Henry Peter1

1. Introduction

The purpose of this paper is to set the scene. Before getting into specific topics, it indeed appears appropriate to briefly recall the chronology and logic of merger & acquisitions ("M&A") transactions. Although not codified, and subject to variations depending on the circumstances, M&A transactions actually tend more and more to follow a standardised pattern. This is less the result of dogmatic studies as to why such transactions should occur in this manner, than simply the pragmatic outcome of a somewhat darwinist evolution. Practitioners have thus progressively developed a process which provides a balance between the often conflicting interests of the seller and those of the buyer. It is important to know and understand this process, keeping in mind that, over the years and sometimes questionably, practitioners have come to believe that there is no alternative. One can safely say that there is currently an opinio necessitatis with respect to the standardised way of doing M&A deals.

While recalling the chronology and logic of M&A transactions, we will also identify and attempt to define specific concepts and terminology which have developed and are commonly used in this particular context.

Finally, we will list a series of potential and common disputes that may arise throughout the various stages of an M&A transaction.

By no means does this introductory paper attempt to address, let alone solve, all the complex issues that arise in or in relation to M&A transactions2. Its limited ambition is to identify and put into perspective the much more technical and in-depth contributions that follow in this ASA special issue.

2. Chronology of an M&A Transaction

2.1. The standard process

Schedule 1 to this paper endeavours to illustrate the chronology of a standard M&A transaction. Using a timeline, it distinguishes between what happens ("facts"), which documents are drawn up and executed ("documents"), and highlights the specific clauses that are particularly relevant at the various stages and their effects ("clauses and effects").

1 Henry Peter is Professor at the University of Geneva where he is in charge of the Master in Business Law (MBL) graduate program. He is also attorney at law and partner with the law firm Bernasconi Peter Gaggini, Lugano.

2 With respect to M&A transactions in Switzerland, see in particular Rudolf Tschäni, M&A-Transaktionen nach Schweizer Recht, Zürich/Basel/Geneva 2003; Rudolf Tschäni (Editor), Mergers & Acquisitions I to V, Zürich 1998-2003; Ralph Malacrida / Nedim Peter Vogt / Rolf Watter, Swiss Mergers & Acquisitions Practice, Basel 2001; Nedim Peter Vogt / Rolf Watter, Mergers & Acquisitions in Switzerland, Basel 1992; Rolf Watter, Unternehmensübernahmen, Zürich 1990.

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In a normal pattern, the process is the following:

2.1.1 Preliminary contacts

First contacts between the parties take place directly or indirectly. It is not uncommon for third parties, such as investment or merchant banks, to be involved. Exploratory discussions are conducted. A bidding process may occur in order for the seller to decide with whom the negotiations should be pursued.

Quite obviously any potential buyer wishes to have access to at least a certain amount of information in this preliminary phase. This is usually achieved through an information memorandum issued by the seller or his agents. It is a more or less elaborate document that supplies data about the business that is for sale as well as the envisaged transaction and the process that should lead thereto.

Often, at least part of the information to which the potential buyer(s) has access in this first phase is confidential. Frequently, even the very fact that a selling process has been initiated with respect to the target is sensitive and must therefore remain secret. This may be a concern of the seller as well as the buyer. A confidentiality agreement may therefore be executed between the parties at some point during this initial part of the process.

It also occurs that, after preliminary discussions, the potential buyer wants to make sure that he is not bidding against others (or against himself). Depending on his bargaining power, the buyer may therefore require from the seller an exclusive right to negotiate, at least for a certain time. Exclusivity arrangements would then also be made.

2.1.2 Letter of Intent

Unless, for whatever reason, the negotiations collapse, the parties usually reach a stage where the seller has identified a purchaser with whom there exists a common intent to implement a specific deal. At that point in time, the parties often deem it useful to execute a "letter of intent", sometimes also called “heads of agreement”, “memorandum of understanding”, “term sheet” or the like. A separate paper will address more accurately the sometimes complex nature, content and effects of this kind of document3. Very synthetically, however, the main characteristics of letters of intent are:

(i) as such, a "letter of intent" has no codified meaning, neither with respect to its content nor to its nature or legal consequences. Caution should therefore prevail; what matters is the letter’s substance and the circumstances surrounding its execution;

(ii) in particular, the question as to whether a letter of intent has any binding effect dependson its content and on the parties’ intentions (whether expressed or implied);

(iii) usually the parties state that the only purpose of the letter of intent is to outline their (then current) intentions. They sometimes expressly say that it shall have no binding effect, and

3 See Henry Peter / Jean-Christophe Liebeskind, Letters of Intent in the M&A Context; see also Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, § 3.3.1.

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that it is “subject to contract”. However, this is usually untrue, at least in part. Most letters of intent probably do have legal implications, the real issue being which ones;

(iv) this said, any letter of intent usually describes the subject matter of the deal (the "target"),the price range or at least the methods or parameters which will enable the determination of the price; the nature of the deal (a share deal, an asset deal, a merger, a spin-off, etc.); the parties’ intention to enter into the envisaged deal; the procedure that will be followed in order to implement the deal (due diligence, signing, closing, adjusting, etc.); as well as the relevant timetable. If the parties have not yet entered into confidentiality or exclusivity agreements, provisions governing these two aspects are usually included in the letter of intent.

2.1.3 Due diligence

The "due diligence" process then usually begins. It amounts to a phase during which the potential buyer is given access to more information in order to decide whether or not he will actually go through with the acquisition and, if so, under what conditions. This applies to all aspects of the target’s business (financial, tax, legal, environmental, intellectual property, real estate, etc.).4

Although the term "due diligence" has a clear meaning for any practitioner, it might be somewhat puzzling for M&A outsiders and from a terminological standpoint. Knowing the origin of the phrase is therefore helpful in better understanding the purpose of this particular phase of most M&A transactions. The term is derived from an obligation – or at least incumbency - of the buyer: during this particular – and by essence preliminary - phase, the buyer must display the diligence reasonably required from (or “due” by) any potential purchaser in investigating, understanding and therefore knowing the "object" which he envisages to buy. Having done that – or waived his right to do so, or not done it well – if he pursues the transaction he will be barred from asserting that he did not know. "Due diligence" is thus the part of the more global M&A process during which the potential buyer must be duly diligent about fully understanding the target and is – or should be - put in the appropriate conditions to do so.

This explanation should help better understand the somewhat complex nature and multi-faceted purpose of due diligence. Its scope is broader than a plain "audit"5. It in effect aims at supplying the buyer with information about the target that is not only of an objective nature (pure facts) but also of a subjective nature, to help him understand the target and whether it will fit with his business, strategies, or even only intentions or tastes. A target that might seem perfect by auditing standards (whether financial, environmental or tax) could very well be deemed to be subjectively inappropriate by the potential buyer after the due diligence phase. This is why due diligence often includes direct contacts with

4 Rudolf Tschäni, Post-closing disputes on representations and warranties, § 3.4.1; Jakob Höhn, Einführung in die Rechtliche Due Diligence, Zürich 2003; Felix R. Ehrat, Switzerland, in Due Diligence for Corporate Acquisitions, London/The Hague/Boston (Kluwer Law) 1996, p. 275ss.

5 Sometimes "due diligence" is used as a synonym of "audit". We believe that this is wrong or at least inappropriate. The nature of an audit is narrower than that of a "due diligence". This difference is, we believe, generally acknowledged in the standardized M&A terminology.

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the target’s management (“management meetings”) to enable the purchaser to get to know the target's culture and understand how its management is likely to react should the transaction be implemented.

To enable the buyer to perform the (its) due diligence, the seller often organises a "data room". This is usually a room where all relevant data is put at the disposal of the purchaser or of his appointed agents. In view of the sometimes highly confidential nature of the process, this often takes place in a secret location, most likely a place which is known only to a few people and is totally outside the target's or the seller's premises. With the new technology available, a data room can take the form of a simple CD Rom containing all relevant information or documents. In transactions of a certain complexity or importance the parties often draw up a protocol which governs issues such as access to the data room and the right to copy documents.

By enabling the buyer to better understand the target, due diligence also inevitably has a direct effect on the terms and conditions of the purchase agreement. It is in fact only once he has better understood the subject matter of the deal that the purchaser and his advisors will be able to decide how the transaction should be structured and which conditions should be included in the agreement. This regards, in particular, the representations and warranties that the buyer will request. In many cases, the due diligence findings will, indeed, have a substantial influence on these provisions.

Sometimes due diligence also enables the parties to identify conditions that will have to be fulfilled before the execution and/or completion of the envisaged agreement can take place. These are sometimes called "signing" or "completion" conditions precedent.

In any event, due diligence often leads parties to start or intensify their negotiations regarding the content of the actual purchase agreement.

2.1.4 Purchase agreement (signing)

Unless the buyer has decided to give up in view of what he has learned as a result of the due diligence, i.e. if the latter has proven “satisfactory” and provided the parties have managed to agree on all terms and conditions of the deal, they then go on to execute the "real" agreement. It is usually called "purchase agreement", or "share purchase agreement" (“SPA”) in the case of a share deal as opposed to an asset deal. One also encounters "merger agreements" (in case of a merger as opposed to a plain acquisition) or "share swap agreements" (in case the consideration is not paid in cash but through shares of another entity).

This is in any event the contractual instrument pursuant to which the parties, in a binding manner, implement – or agree to implement - the transaction and list all terms and conditions thereof. It necessarily includes the subject matter of the deal (shares, whole or part of a business, only assets, etc.), as well as the price or at least the way the price will be (objectively) determined (pricing formula)6 and the nature of the consideration (cash,

6 Wolfang Peter, Arbitration of mergers and acquisitions: purchase price adjustment arbitrations, § 2.2.3, § 2.2.4 and § 3.

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shares or a combination thereof). It also comprises provisions, sometimes very lengthy, governing the representations and warranties made by the seller as well as detailed clauses regarding the way the buyer shall be indemnified should these "reps and warranties" prove to be inaccurate7. It also customarily contains "boilerplate clauses".

In order to attenuate the obligations of the seller deriving from its "reps and warranties" and therefore limit the rights of the buyer in such respect, it is not unusual for the seller to qualify them in the clauses themselves8 or to issue a "disclosure letter" in which the seller outlines facts that will thereafter be considered as known to the buyer, to prevent the buyer from later denying his awareness of them9.

2.1.5 Completion (Closing)

In the vast majority of cases the transaction is not actually implemented upon signing. There are many reasons for this, usually because the parties have provided for "condition(s) precedent" of various kinds. Some of the most common ones include10:

(i) in any deal of a certain size there will almost inevitably be competition law filingrequirements which will make it advisable or necessary to obtain clearance from the relevant authorities before the transaction can be completed11;

(ii) sometimes the buyer, but more often the seller, will have to take steps to be able to implement the deal. This can include restructuring the business, for instance by assigning some assets to or from the target, refinancing it or taking out all or part of the available free cash;

(iii) the parties may recognise that the due diligence has not been completed upon signing and that it has to be concluded thereafter. This can occur, for instance, when the buyer was deliberately not granted full access to very sensitive information before a truly binding agreement was executed. This is sometimes referred to as a "satisfactory (post-signing) due diligence" condition precedent12;

(iv) under the "no material adverse change" (“MAC”) clause, the seller represents that, at closing, the business will not be materially different to that known to the buyer through the information memorandum, due diligence and/or share purchase agreement13;

7 See in particular Rudolf Tschäni, Post-closing disputes on representation and warranties, § 4. 8 This is usually done in the following way: “subject to the following the seller represents ...” or “to the best of seller’s

knowledge ...”; see, Rudolf Tschäni, Post-closing disputes on representation and warranties, § 4.2. 9 Rudolf Tschäni, Post-closing disputes on representation and warranties, § 3.4.2. 10 See also Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, § 3.4.1. 11 Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, § 3.4.1.1. 12 Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, § 3.4.2. 13 Rudolf Tschäni, Post-closing disputes on representation and warranties, 2.4; Georg von Segesser, Arbitrating pre-

closing disputes in merger and acquisition transactions, 3.4.1.4.

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(v) the fact that all representations (and warranties) shall be true on the date of closing.

If a condition precedent is not satisfied, not fulfilled in the agreed time, or if the parties have agreed that the buyer could step out after signing and before completion (discretionary walk-away right, the granting of which is relatively rare), the signed agreement will not be "closed".

In a normal pattern, auditors often step in at this stage to assess the actual value of the target based on the agreed parameters (net asset value, discounted cash flow, turnover, EBIT or EBIDTA, etc., multiplied by an agreed number if appropriate). The result of this financial audit usually leads to the drawing up of "closing accounts"14.

Whether or not an audit takes place, assuming that all conditions precedent, if any, have been satisfied (or waived), the deal is then actually completed (in French "exécuté"; in German "durchgeführt") and the closing occurs. The transaction can be extremely simple (for instance cash against shares). It is often relatively complex due to all the steps it implies. A "closing agenda" or “completion list” might be useful in such cases. It describes what has to be done, by whom and when. For instance shares must be endorsed, shareholders and board of directors meetings must be held, resignations must be tendered, retention plans (with key managers or employees) must be entered into, new auditors and directors must be appointed, wire transfers must be made, amounts must be paid into escrow accounts, deeds, titles, opinions or secret formula must be handed over, and other related agreements must be executed.

2.1.6 Post-closing events

Although many scenarios can be envisaged at this stage, the closing is usually not – and sometimes by far – the end of the transaction.

First of all the amount which has been paid at closing is not necessarily the final price. In fact, it might be an approximation based on pro forma or non-audited accounts. In such cases, in accordance with the purchase agreement, a post-closing audit is often performed in order to assess what the actual and final price will be. This leads to so called "post-closing adjustments" of the price15.

In some cases the parties agree that the final price will depend, in whole or in part, on the income, profit or cash flow which will be actually generated by the target following its assignment to the buyer. In such cases the purchaser is buying future cash flows, which is incidentally the rationale whenever the price is calculated applying a discounted cash flow (“DCF”) method. If this is so, the purchaser might understandably wish to be protected in case these cash flows are less than what was envisaged. On the other hand, applying the same logic, the seller might require a price increase if the future results are more favourable than those which were used for calculating the price. To that effect "earn out adjustments" are often provided for16. They trigger an increase (or decrease) of the

14 Wolfgang Peter, Arbitrating pre-closing disputes in merger and acquisition transactions, § 2. 15 Wolfgang Peter, Arbitrating pre-closing disputes in merger and acquisition transactions, § 6. 16 Wolfgang Peter, Arbitrating pre-closing disputes in merger and acquisition transactions, § 3.2, § 4 and § 7.

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amount paid at closing. Technically speaking, they have an influence on the price and should therefore not be confused with the "reps and warranties" and related indemnification mechanisms.

Earn out clauses do give rise to an inherent conflict of interest: in order to avoid or limit any price increase, the buyer might endeavour to reduce (or defer) the success of the target at least to the extent that this shall be reflected in its financial statements; on the other hand, the seller might try to artificially improve or accelerate the relevant financial results in order to benefit from the highest possible adjustment. The seller often plays –or can be suspected to play- an active role in this respect if he continues to manage the business for a certain time following the closing.

2.1.7 Representations, warranties and indemnification

As any practitioner knows, at this stage the transaction is still far from over. Even when due diligence has been well carried out and the purchase agreement well drafted, problems often arise because the target is not perfectly in line with what the buyer had in mind. This is when the representations and warranties come into play, an almost inevitable and often unpleasant phase which can sometimes start many years after closing depending on the provisions of the purchase agreement or relevant statutes.

This is a delicate topic that will be addressed by other contributions17. Simply put, the purpose of this set of clauses is to ensure that, should the promised qualities of the target not exist, the buyer will be indemnified by the seller to the extent that he has suffered a prejudice.

2.2. The three main phases

The entire process of an M&A transaction can last months and, sometimes, years or even decades, from the beginning of negotiations to the end of the time frame for making claims under the representations and warranties clauses, and the resolution of possible disputes.

This process can be divided into three periods based on two main events of the transaction (signing and closing), as illustrated in Schedule 2 hereto:

(i) pre-signing (as opposed to post-signing);

(ii) pre-closing (as opposed to post-closing);

(iii) post-signing but pre-closing18.

It is useful to distinguish these three phases for various reasons, including, inter alia, the fundamentally different legal regime that applies to each of them. Simply put, it can be said that:

17 See in particular Rudolf Tschäni, Post-closing disputes on representation and warranties and Wolfgang PeterArbitrating pre-closing disputes in merger and acquisition transactions.

18 In this respect see the list of possible conflicts proposed by Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, § 3.4.

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- pre-signing: there is no binding arrangement so that the applicable rules are (mostly) of a pre-contractual nature;

- post-signing but pre-closing: there is a binding agreement but, at least under Swiss law, rights and obligations are usually of purely contractual nature, i.e. there is not yet any transfer of property (shares or assets) and therefore of control of the target;

- post-closing: in addition to contractual rights and obligations, the business has actually changed hands, so that the actual owner of the target is now the buyer.

Depending on when the controversy arises in the process, the applicable rules (whether contractual or statutory) might provide a different answer to the same question, such as whether or not specific performance can be successfully claimed by either one of the parties, or whether they can terminate the contract for breach, error or fraud.

Among these three phases, the most problematic is not, contrary to what one might think, the post-closing phase.

3. Possible disputes

The quite complex and lengthy acquisition process can give rise to disputes at all stages. It is not our intent to identify them all, let alone to comment on them in detail. Considering the purpose of this introductory paper, our ambition will be limited to suggesting a list of issues which, traditionally, is frequently the basis of disputes. In an attempt to structure the list, it is subdivided into disputes about procedural issues and disputes regarding the merit.

3.1. Procedural issues

3.1.1 Applicable law

The applicable law is expressly stated in most M&A contracts. Difficult issues arise, however, if it is not19. These obviously mostly come up in the pre-signing phase, certainly before the execution of a letter of intent, but sometimes also thereafter. This might occur if the parties felt that choosing an applicable law is unnecessary in a letter of intent, or inappropriate since it could imply that the document has legal effects although they state (or wish) the opposite.

3.1.2 Jurisdiction

Here as well delicate problems can arise, including:

(i) what is the competent court if it is not specified in the relevant document (letter of intent or agreement);

(ii) if an arbitration clause is valid, and for whom. Does it extend to the target and/or to other companies of the groups to which the seller or the purchaser belongs?;

19 Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, § 5.3.

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(iii) whether a particular issue falls within the scope of the arbitration clause. This problem may arise if specific types of disputes have been carved out or segmented so that they are to be submitted to different bodies (experts, expert arbitrators or arbitrators) depending on their nature20;

(iv) who has jurisdiction over interim relief, when and how. Additional issues arise when the laws of states involved deny arbitral tribunals the right to issue interim relief21.

3.1.3 Interim relief

Interim relief may also play an essential role in M&A disputes by preventing behaviours which could have irremediable consequences22, such as the breach of a confidentiality or exclusivity clause, or, most importantly, the completion of the proposed transaction with another party.

3.1.4 Specific performance

Specific performance is an important and difficult topic in the M&A environment, the main question being whether the actual implementation of the deal can be ordered by a judge or arbitral tribunal. The answer is likely to depend on the circumstances and stage at which the issue arises23.

With regard to the pre-signing phase, it is difficult to imagine cases where a court could issue an order to sign, especially if the terms and conditions of the (often complex) purchase agreement have not been at least substantially agreed upon24.

At the post-signing but pre-closing stage, specific performance can be envisaged25, but not without carefully taking into account the nature of the transaction. Ordering the assignment of 100% of the shares of a holding company could, for instance, not be too problematic. On the other hand, ordering parties to set up and manage a joint venture might prove impossible or at least unreasonable.

Finally, ordering specific performance through interim relief should be admitted only in very exceptional cases26.

20 See Klaus Sachs, The interaction between expert determination and arbitration, § 1 and § 3. 21 See Nicholas Fletcher, Case Management and advocacy in the arbitration of merger and acquisition disputes, §

2.13.2.22 See Nicholas Fletcher, Case Management and advocacy in the arbitration of merger and acquisition disputes, §

2.13; Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, § 5.5. 23 See Peter Forstmoser, Schweizerisches Aktienrecht, Zürich 1981, § 9, N. 19 and note 47. 24 One can think, for instance, about the fact that the – essential - reps. and warranties clauses have not yet been

finalised.25 See for instance the case mentioned by Georg von Segesser, Arbitrating pre-closing disputes in merger and

acquisition transactions, §2.3.4 in fine; see also § 5.6. 26 Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, 5.5.2.

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3.2. Merit

3.2.1 Pre-signing issues

Sometimes disputes concern the behaviour of one of the parties before the purchase agreement has been signed, e.g.:

(i) Disputes sometimes arise with respect to breaches of pre-signing confidentiality or exclusivity provisions, giving rise to the delicate questions of proof of the breach and of the resulting damages27.

(ii) Disputes based on alleged breaches of letters of intent are relatively common and, in most cases, complex28. They often address the issue of whether and to what extent the relevant "letter" is binding and, if it is not binding, what then are the pre-contractual obligations of the parties deriving from the letter of intent. This raises the question of a possible culpa in contrahendo, in other words whether and to what extent the parties have an obligation to act and negotiate in good faith even before any binding instrument has been executed. In that respect, several authors consider that qualified (i.e. increased) obligations exist once a letter of intent has been executed29, including possible obligations to inform the counterpart if the relevant party (whether the buyer or the seller) is also negotiating with a third party or if it does not seriously intend to enter into the envisaged agreement.

3.2.2 Disputes based on the terms and conditions

However, most controversies are based on the terms and conditions of the (purchase) agreement, whether expressed or implied. They include:

(i) whether all conditions precedent have been met and are still satisfied at the time of closing30;

(ii) whether a party has done what it was reasonably supposed to in order to make sure that the condition(s) precedent would be fulfilled31;

(iii) breaches of confidentiality and/or exclusivity provisions;

(iv) the existence and construction of MACs, i.e. “no material adverse changes” clauses32.The issue can probably be said to be the equivalent in the M&A environment of the well-known "force majeure" or, probably even more so, clausula rebus sic stantibus concepts33;

(v) cases where post-signing audits (or due diligences) do not prove satisfactory to the purchaser;

27 Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, § 5.8. 28 Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, § 3.3.1. 29 See inter alia Henry Peter / Jean-Christophe Liebeskind, Letters of Intent in the M&A Context, § 4.1. 30 Rudolf Tschäni, Post-closing disputes on representations and warranties, § 2.1. 31 Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, § 3.4.1. 32 Rudolf Tschäni, Post-closing disputes on representations and warranties, § 2.4. 33 Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, § 3.4.1.4.

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(vi) competition law issues: is there, and to what extent, a duty by both parties to actively collaborate in order to obtain clearance34? Should the competent authority delay its decision, to what extent can either party be required to postpone the closing date which was initially foreseen or agreed? If the competent authority gives clearance subject to certain conditions (for instance the dismissal of part of the target's business) are the parties still obligated to proceed with the (limited) implementation of the deal35? How should the revised price be set?;

(vii) breaches of covenants36;

(viii) controversies regarding post-closing adjustments37;

(ix) disputes surrounding the representations and warranties and related indemnification; these are, as Rudolf Tschäni puts it, often the "most hotly debated clauses in an M&A transaction"38;

(x) the effect thereon of the due diligence, of the information memorandum and of the disclosure letter39;

(xi) divergences regarding the earn out adjustments;

(xii) with respect to several of these issues, questions relating to consequential price increases or decreases. Often difficult problems will have to be resolved in the absence of a clear price formula and/or definition of key concepts, such as "working capital" or "financial debt", and/or whenever the parties have not specified which set of accounting standards will apply (IFRS, US or other (national) generally accepted accounting principles (“GAAPs”))40.

3.2.3 Disputes regarding the termination of the agreement

One of the most difficult and important issues is often whether or not a signed M&A agreement can actually be terminated (with an ex nunc or ex tunc effect). This question arises not only if the agreement is silent in such respect, but also, as often occurs, when the right to terminate has been excluded (expressly or even implicitly). In such a case, indeed, it might be alleged that termination remains in any event possible in particular circumstances, for instance in case of error, at least if it is fundamental ("Grundlagenirrtum"), or in the presence of fraud41.

The answer to the query will, here as well, be different depending on whether the question arises pre-signing, post-signing but pre-closing, or post-closing. The practical implications of any decision in this respect should never be underestimated. Indeed, the more time has

34 Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, § 5.9. 35 Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, § 5.9. 36 Rudolf Tschäni, Post-closing disputes on representations and warranties, § 2.1 . 37 Wolfgang Peter, Arbitrating pre-closing disputes in merger and acquisition transactions,, § 9. 38 Rudolf Tschäni, Post-closing disputes on representations and warranties, § 1; he probably refers to the drafting as

well as to the implementation of such clauses. 39 Rudolf Tschäni, Post-closing disputes on representations and warranties, § 3.4.1, § 3.4.2 and § 4.6.3. 40 Rudolf Tschäni, Post-closing disputes on representations and warranties, § 2.3. 41 Rudolf Tschäni, Post-closing disputes on representations and warranties, § 4.6.

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elapsed since the closing, the less possible or at least reasonable it will be to invalidate an M&A transaction. Because of its nature, the taking over of any business has consequences that once performed and implemented can hardly be undone. Conversely, it is as inappropriate to accept the invalidation of an M&A deal as it is to order its (specific) performance42.

Assuming that an M&A deal has been terminated or not implemented, for whatever reason, the question usually arises as to the compensation that should be awarded to the non-defaulting party, if any. The answer to this question can also have very substantial economic consequences.

The solution can theoretically be43:

- the granting of "positive" damages, where the party that has breached the agreement will indemnify the other by paying damages sufficient to put the latter in the situation in which it would have been if the agreement had been complied with, including loss of profits;

- alternatively, "negative" damages may be granted: the non-defaulting party shall be put in the situation in which it would have been, had it never started negotiating. In such cases, the damages will include the amount which has been paid, if any, the expenses suffered and perhaps even the loss of other opportunities44;

- "punitive" damages might be claimed under some laws, but not under Swiss law;

- "liquidated" damages or penalties can be agreed on and are probably sometimes advisable, but are usually subject to review45;

- last but not least, complex issues can derive from the necessity to wind up all or part of the business, in particular where the transaction led to setting up a joint-venture, whether contractual or corporate. This is a yet very much unexplored and controversial area of the law46.

4. Conclusion

The M&A process is complex and the sources and nature of possible disputes are numerous, yet not unusually difficult to resolve. Because of the peculiarities of M&A transactions, there is often no clear answer, at least under Swiss law. Different answers may be given to the same queries, inter alia depending on when the issue arises in the process. Time is usually of the essence.

42 See above, § 2.1.4. 43 See also Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, § 6. 44 This is the only remedy under Swiss law whenever a claim is based on "culpa in contrahendo", i.e. of a

precontractual nature, see i.a. Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, § 6.3.4.

45 Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, § 6.3.5; Peter Fortsmoser, Schweizerisches Aktienrecht, Zürich 1981, § 9, N. 19; ATF 102 II 420 = JT 1978 I 230, § 4.

46 See in this respect Alain, Hirsch, La rupture d’un contrat de “Joint venture”, in Mélanges offerts à Pierre Van Ommerslaghe, Bruxelles (Bruylant) 2000, p. 511ss ; Marcel Fontaine, Droit des contrats internationaux, analyse et rédaction de clauses, Paris (Forum européen de la communication) 1989, p. 45 and 329ss; Claude Reymond, Lecontrat de “Joint Venture”, in Innominatverträge, Zürich 1988, p. 383ss.

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Submitting M&A disputes to arbitration is probably often the most appropriate way to deal with these many difficult, specialised, sensitive, urgent, multinational and highly controversial problems47. This is undoubtedly why most M&A agreements contain an arbitration clause and why such a high proportion of arbitration awards concern M&A disputes48.

47 Nicholas Fletcher, Case Management and advocacy in the arbitration of merger and acquisition disputes, § 1; Rudolf Tschäni, Post-closing disputes on representations and warranties, § 1; Georg von Segesser, Arbitrating pre-closing disputes in merger and acquisition transactions, § 4 and § 7 in general and § 4.4 in particular.

48 Rudolf Tschäni, Post-closing disputes on representations and warranties, § 1.

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ARBITRATING PRE-CLOSING DISPUTES

IN MERGER AND ACQUISITION TRANSACTIONS

Georg von Segesser∗

1. Introduction

Pre-closing disputes typically arise during one of the most hectic phases of a merger and acquisition ("M&A") transaction, when the parties are struggling to have all the necessary documents ready and are striving to comply with all the conditions to be met for the closing. The buyers are often busy obtaining financing for the planned transaction and might suddenly have second thoughts about the deal. Thus, in many substantial M&A transactions, the closing is something of a balancing act on a knife’s edge and, up to the last minute, the parties are often not sure whether the deal will go through or not.

It might seem surprising that in these circumstances, where everything needs to be completed within a tight time frame, such transactions do not end up in court or arbitration proceedings more frequently. The reason for this may be that, when a conflict arises, the parties either continue to negotiate in order to find a solution to the problem or, if they cannot agree, simply call off the deal. If the parties, or one of them, realise that the intended acquisition or merger cannot be achieved, or that it can only be achieved under conditions which are prohibitive or unrealistic, the buyer or the seller simply withdraws1. Thereafter, the buyer often lacks the information to substantiate its claim and the evidence to prove its case, and the seller might find another buyer.

Although most M&A agreements contain arbitration clauses and the number of M&A arbitration proceedings has increased since the late nineties2, arbitration proceedings for pre-closing conflicts are still rather rare. The few that do occur are, for reasons of confidentiality, seldom published.

Over the last years, the complexity of M&A transactions has increased and the structures for individual transactions have become more sophisticated; the time span between the signing and closing of a transaction has extended. Even given the time it can take to initiate arbitration proceedings3, it is possible for conflicts which

∗ Attorney at law and partner with Schellenberg Wittmer, Zurich. The author wishes to acknowledge the assistance and input of Anna Katharina Müller of Schellenberg Wittmer.

1 Most disputes related to M&A transactions arise after closing, over issues such as price adjustment clauses or representations and warranties (Christian Borris, Streiterledigung beim Unternehmenskauf, in: Robert Briner / L. Yves Fortier / Klaus Peter Berger / Jens Bredow (Eds.), Law of International Business and Dispute Settlement in the 21st Century, Liber Amicorum Karl-Heinz Böckstiegel, Cologne / Berlin / Bonn / Munich 2001, 75).

2 Klaus Sachs, Schiedsgerichtsverfahren über Unternehmenskaufverträge – unter besonderer Berücksichtigung kartellrechtlicher Aspekte, SchiedsVZ 3/2004, 123; Christian Borris, op. cit. (footnote 1), 80.

3 See infra Section 5.4.

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arise during this time to be potentially resolved efficiently through arbitration or other means of alternative dispute resolution.

This article will try to show where, in this process, arbitration and related procedures can play a role in solving pre-closing conflicts. It will be necessary first to describe very briefly, with reference to examples, what pre-closing conflicts are and at what stage in the process of a M&A transaction they may arise.

2. A Brief Overview of the Merger and Acquisition Process

In very general terms, M&A transactions can be divided into take-overs, where one company acquires control over one or several others, and mergers of two entities, where the taking of control plays a lesser role. A clear distinction may, however, be difficult in certain cases4 and, for the purposes of this article, not necessary.

Acquisitions can take the form of asset deals, in which assets and liabilities are transferred individually or as a whole to the buyer, or of share deals in which the buyer acquires a controlling interest in the target company.

A further distinction can be made between private transactions and public take-over offers. With respect to the latter ones, arbitration is hardly ever chosen, as neither the offeror nor the shareholders seem to have an interest in arbitration5.

M&A transactions often start with an auction process following an invitation by the seller or its investment bank. After a first indicative offer and due diligence, the buyer submits a final bid and the seller chooses the party (or parties) with whom negotiations will continue.

After the bidding process, the parties start to negotiate a sale and purchase agreement. These negotiations are usually based on a letter of intent or a memorandum of understanding.

The often lengthy and complex negotiations which then follow are accompanied by further due diligence to investigate the target company, primarily to determine the purchase price. This investigation or due diligence can take a variety of forms, depending on the interests and bargaining power of the parties6. Ideally, this process leads to the signing of a purchase or merger agreement, which usually provides for a specific date when the agreement is to be completed by the parties (the closing date, i.e. when the purchase price is exchanged against the shares or the assets or when the merger becomes effective). Between the signing and the closing, there may be further due diligence, notification of the governmental authorities, approval by interested third parties, obtaining of required permits, etc.

4 For an overview of M&A transactions under Swiss law, see Rudolf Tschäni, M&A Transaktionen nach Schweizer Recht, Zurich 2003.

5 If an agreement to arbitrate is included in a public offer to shareholders of the target company, questions may arise as to the validity of the agreement, the consent of the sellers, etc.

6 See for example Ralph Malacrida / Nedim Peter Vogt / Rolf Watter, Swiss Mergers & Acquisitions Practice,Basle 2001, 55 – 56.

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3. Pre-Closing Conflicts

Pre-closing conflicts include all disputes related to M&A transactions which arise before the transaction has been completed, i.e. before the object of the transaction has been transferred and paid for. Such disputes may arise not only between buyer and seller, after they have entered into negotiations, but also among buyers who have formed e.g. a consortium to realise an acquisition, or among partners in a contract (e.g. a joint venture agreement) which provides for the acquisition of shares or assets in a company under specific circumstances. Broadly speaking, the following categories can be distinguished:

– conflicts among buyers7;

– conflicts under contracts which provide for put or call options;

– conflicts between buyers and sellers before signing; and

– conflicts between buyers and sellers after signing, but before closing.

3.1 Conflicts among Buyers

Parties who have formed a consortium in order to make an acquisition may end up in a conflict which can put the closing of the transaction at risk.

In a recent, unpublished, ICC arbitration8, two buyers formed a consortium to prepare a bid to acquire a particular company. To formalise their cooperation, they concluded a memorandum of understanding which also constituted the basis for a shareholders’ agreement to be concluded once the target company had been acquired. The shareholders’ agreement was intended to cover such issues as the level of shareholding of the two buyers, the appointment of the chairman of the board of the acquired company, the capital contributions, and the determination of decisions that required unanimity. The memorandum of understanding further included an exclusivity clause prohibiting the buyers from acquiring the target company individually. The buyers and the seller had signed a letter of intent to secure an exclusivity period for negotiations. The buyers initiated the due diligence process of the target company and began negotiating a stock purchase agreement. At the same time, the buyers started to negotiate the shareholders’ agreement and exchanged several drafts. The letter of intent between the seller and the two buyers expired without a share purchase or a shareholders’ agreement having been signed, but the parties continued to negotiate. After several unsuccessful meetings between the two buyers, one of them terminated the memorandum of understanding, arguing that they could not agree on a shareholders' agreement, and acquired the target company alone. The other buyer filed a request for arbitration and claimed that its partner had breached its obligations under the memorandum of understanding, that it had not attempted to negotiate a shareholders’ agreement in good faith, that it had acted in violation of the exclusivity provision of the memorandum of understanding

7 Conflicts among buyers are more typical than among sellers, although the latter ones of course also exist.

8 ICC Case No. 11404, 20 May 2003.

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when it acquired the target company alone, and that it had benefited from the work, information, and data produced during their joint negotiations with the seller. Based on these allegations, it claimed full compensation of damages suffered, including loss of profit and moral damages. Respondent contended that the memorandum of understanding was only a preliminary agreement (an agreement to negotiate), subject to further negotiations with the seller and the agreement on a shareholders’ agreement. Respondent claimed that the only obligation it had under the memorandum of understanding was to negotiate in good faith towards a joint bid for the target company and a final shareholders’ agreement, and that it had fulfilled these obligations in good faith. It further disputed claimant’s claim for damages. The arbitral tribunal decided that the memorandum of understanding was a binding agreement which provided for negotiating the acquisition of the target company and imposed on the parties an obligation to negotiate in good faith the terms of the shareholders’ agreement. It held that the memorandum of understanding had expired, but that the continuing negotiations constituted a pre-contractual relationship that, again, imposed an obligation to negotiate in good faith. It considered that respondent had breached both its obligation to negotiate in good faith and the exclusivity provision by acquiring the target company. The arbitral tribunal awarded compensation for costs and expenses incurred, but not for loss of profit or moral damages.

In a LCIA case9, several companies had concluded various agreements and founded a consortium in order to regulate their dealings in connection with a possible acquisition of rights relating to the exploration, appraisal, development, production and/or disposal of hydrocarbons. An exclusivity / non-circumvention obligation binding upon the parties and their affiliates provided that the parties should not seek to acquire directly or indirectly any rights relating to the exploration, etc. At an early stage of the bidding process, one of the consortium parties acquired a competitor. The other consortium members argued that the newly acquired competitor had become an affiliate and was thus also bound by the exclusivity / non-circumvention obligation. They started arbitration proceedings aimed at prohibiting the new competitor from getting involved in the bidding process and requesting that an order be issued to the consortium member not to induce the "new affiliate" to breach the consortium agreements. Further and in addition to this primary declaratory and injunctive relief, damages were sought. While the arbitral tribunal denied the request for injunctive relief, it issued a declaratory award which defined the permitted behaviour for the bidding process.

3.2 Conflicts under Contracts which Provide for Put or Call Options

Disputes may arise in situations where it is not clear whether or not a put or call option can be exercised and what the consequences (e.g. automatic transfer of shares, price) are.

9 LCIA Arbitration No. 9178, 20 December 2000.

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In a published ICC arbitration case decided in March 199810, the situation was as follows: two parties, both shareholders of the same company, had concluded a shareholders’ agreement providing for a buy/sell mechanism as a means of dissolving their relationship, should either of them wish to cease being partner with the other. The parties interpreted differently the statements made in applying this mechanism, with claimant alleging that defendant had sold all its shares, and defendant taking the position that it had bought claimant’s share. Defendant further claimed that some of the provisions of the shareholders’ agreement were null and void, or had been fraudulently engineered, or performed in bad faith, or violated by claimant. The tribunal had to decide on a request for interim or conservatory measures.

In another case, which was dealt with by the Superior Court of Justice, Ontario, Canada, upon appeal against an arbitration award11, the crux of the dispute was whether a trigger event, defined in the joint venture agreement, had indeed occurred, with the consequence that the shareholder in connection with whom the trigger event had occurred (bankruptcy, cease of business, etc.) should be deemed to have offered all its shares to the other shareholder at book value and whether the other shareholder should have the option to purchase the offeror’s shares, by giving due notice after the trigger event12.

3.3 Conflicts between Buyers and Sellers before Signing

As conflicts between buyers and sellers in the course of an ongoing M&A transaction may be considered to be typical of pre-closing conflicts, they will be dealt with in this article in more detail than the previously mentioned conflicts under Sections 3.1 and 3.2.

3.3.1 Conflicts Arising out of a Letter of Intent

Many M&A transactions start with an invitation by the seller or its investment banker to potential buyers to submit their offers. In virtually all M&A transactions, parties then sign a preliminary document at the beginning of negotiations in the form of a letter of intent or a memorandum of understanding. In this document, parties typically confirm their intention to continue or begin negotiations in good faith and specify a set of provisions to govern the negotiation process13.

In a letter of intent (LOI), rights and obligations are established to the extent intended by the parties. However, the core provisions of an LOI are frequently non-

10 ICC ICArb. Bull. Vol. 11 / No. 1 (Spring 2000), 84 et seq.

11 ASA Bull. 19/2 (2001), 355-366.

12 Other recent examples where conflicts over put and call options had been resolved through arbitration: ICC Case No. 12875/MS, final award of 16 August 2004, Mealey's International Arbitration Report, 19 / 9 (September 2004), 6-8, A.1-A.17; "Ahold bekommt Recht – Überhöhte Forderung für ICA-Kauf zurückgewiesen", Neue Zürcher Zeitung (NZZ) of 11 October 2004, 23.

13 See Peter R. Isler, Letter of Intent, in: Rudolf Tschäni (Ed.), Mergers & Acquisitions VI, Zurich 2004, 2 et seq.

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binding in nature: the parties are not bound to conclude a transaction but are merely expressing their intention to continue or commence negotiations. On the other hand, an LOI usually includes a number of so-called “accessory” obligations with regard to which the parties clearly intend to be bound14. Such “accessory” obligations provide e.g. for :

– confidentiality with regard to the negotiations as such, as well as the information about the other party and the target company;

– exclusive negotiations between the parties;

– no solicitation of managers and employees;

– rules on the allocation / division of the costs of the negotiations and the due diligence;

– choice of law and arbitration / jurisdiction.

As the core of an LOI does not create a binding obligation to conclude a transaction, it is not possible to insist successfully on a continuation of the negotiations, nor to interfere when one side abandons the negotiations without giving valid reasons. Claims for costs caused by an undue prolongation of negotiations or in cases of behaviour which violates the principle of good faith are the only remedies available based on the core of an LOI and are rather seldom successfully pursued. In contrast, claims based on a violation of an “accessory” obligation are more frequent, e.g. for breach of the confidentiality or the exclusivity granted to the buyer. In a reported ICC arbitration, claimant sought to recover a contractual penalty in the amount of USD 25 million on the basis that the seller had breached an exclusivity clause stipulated in a letter of intent by selling the target company to a third party buyer15.

Some of the “accessory” obligations include provisions which govern the negotiation process or define a certain behaviour which the parties and, in particular, the seller, must follow during the negotiation process, up to the signing of a purchase contract or even through the completion of the agreed transaction upon closing. Where such accessory obligations are violated the parties may, due to the time constraints and in order to safeguard the opportunity which the potential transaction represents, consider an application for interim relief or preliminary measures by a judiciary16.

14 In international transactions, it is important to provide for the law which governs the LOI and issues arising thereunder, as it is not always easy to determine which party is rendering the characteristic performance (Article 117 Federal Act on Private International Law; “PILA”) and laws of different jurisdictions may vary considerably in this area.

15 Reported in Sachs, op. cit. (footnote 2), 126.


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3.3.2 Unfair or Distorted Bidding Process, Insufficient Due Diligence

A conflict may also arise if the due diligence process which precedes the bidding is incomplete or favours one bidder over the other. A participating bidder may argue that it has incurred costs unlawfully caused by the seller17.

Where the bidder in an auction procedure submits a lean mark-up of the share purchase agreement as part of its bidding offer in order to obtain exclusivity, a subsequent request for material changes of the contract may cause a dispute, e.g. the seller may no longer have the possibility to switch to another buyer.

3.3.3 Abortion of Negotiations in Bad Faith

A pre-signing conflict may arise when one of the parties does not negotiate in good faith or even aborts negotiations in bad faith, with the consequence that the frustrated party claims damages.

In the above-mentioned ICC arbitration18, the arbitral tribunal held that the buyer, who had acquired the target company in violation of the exclusivity provision, had acted in breach of its obligation to negotiate in good faith with its partner, and had unreasonably delayed the negotiation process at a moment when time was of the essence by making itself unavailable, thus rendering any attempt to salvage the common acquisition impossible.

Even where the parties have not signed an LOI or memorandum of understanding, they are, in most jurisdictions, under a general duty to act in good faith. The parties’ obligation to negotiate in good faith implies that they may not mislead or deceive the other party and must even draw its attention to specific risks19.

A violation of this general principle of law may entail pre-contractual liability, in some legal systems known as "culpa in contrahendo". The consequences of the culpa in contrahendo liability are, in general, similar to those which arise where a party does not comply with the core provisions of an LOI20.

3.3.4 Conflicts Arising out of a Pre-contract (Provisional or Preliminary Contract)

Sometimes, a preliminary contract, heads of agreement, or even a letter of intent or a memorandum of understanding may already constitute a binding sale and purchase agreement, even though the terms of the merger or acquisition have not

17 See for other examples of conflicts arising in the context of a due diligence process: Bernd Ehle, Arbitration as Dispute Resolution Mechanism in Mergers & Acquisitions, extended and reviewed version of a speech given at the conference "International Business Transactions" organised by the Center of International Legal Studies (CILS) in Salzburg, 20-23 November 2004, to be published in 2005 in The Comparative Law Yearbook of International Business, 5.

18 See supra Section 3.1; ICC Case No. 11404, 20 May 2003.

19 Eugen Bucher in: Heinrich Honsell / Nedim Peter Vogt / Wolfgang Wiegand (Eds.), Basler Kommentar zum schweizerischen Privatrecht, Obligationenrecht I, 3rd Edition, Basel 2003, N 17 ad Vorbem. zu Art. 1 – 40 CO; Decision of the Swiss Federal Tribunal of 30 January 2002 X.SA c/Y.SA in ASA Bull. 20 (2002), 328.

20 Isler, op. cit. (footnote 13), 18.

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yet been fully negotiated. It is sometimes difficult to ascertain in an individual case whether there already exist binding sale and purchase obligations if the essentials of the sale and purchase agreement (essentialia negotii) are already circumscribed in a form which, although characterised as preliminary, is nevertheless fairly detailed. Where an explicit “non binding clause” is missing, the tribunal will have to determine the parties’ intent based on the specific situation, the circumstances, the negotiations, the purpose of the contract, and the way the parties communicated in the past.

In a case recently decided by an ad-hoc arbitral tribunal under the UNCITRAL Rules21, the parties had acquired joint ownership of a company and entered into a shareholders’ agreement governing their relations. Subsequently, their working relationship deteriorated to such an extent that the parties explored the possibility of either one of them acquiring 100% of the shares in the company. They entered into negotiations and one party made a detailed valuation of the company. Based on this valuation, it offered, in a telephone conversation with the representative of the other party, to buy the remaining shares for a specified price. At the end of the conversation, both representatives had reached an agreement and various conditions and points discussed were to be confirmed in a letter. The letter specifying the purchase in broad terms was sent and the parties subsequently resumed negotiations to implement the points set out therein. The parties exchanged various draft heads of agreement but, after several more meetings, the sellers (respondents) refused to sign the agreement; at this point, the buyers initiated arbitration proceedings to enforce the alleged agreement reached by the parties in their telephone conversation and subsequently confirmed by letter. The arbitral tribunal held that the confirmation letter constituted a valid share purchase agreement despite the fact that the parties intended to negotiate a full share purchase agreement at a later stage. The seller’s subsequent refusal to sign the full share purchase agreement was considered to be an anticipatory breach of the obligations stated in the confirmation letter. Specific performance, i.e. the sale at the price stated, was ordered by the tribunal.

3.3.5 Non-fulfilment of a Signing Condition

Conflicts may also arise if the signing of the purchase agreement (or the signing becoming effective) is subject to certain conditions. In a given case, the negotiated share purchase agreement may be subject to board approval or, in another case, the seller signed the agreement, but stated that he wanted its signature to have no binding effect until the management of the target company has been informed. Such information was to be given the day after signing. After the management opposed the deal, the seller refused to complete the transaction. The buyers requested performance based on the signed contract, arguing that the seller's “condition” concerning the information of the management was not a written contract clause and that the contract could only be modified in writing.

21 Unpublished award of 26 February 2002, T. v. C. et al.

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3.3.6 Summary of Pre-signing Conflicts

As outlined above, pre-signing disputes may involve a whole range of different issues, such as:

– disputes among buyers about the obligation to negotiate jointly and abstain from individual bids;

– violation of an exclusivity agreement or disputes about other “accessory” obligations under an LOI or a memorandum of understanding;

– inappropriate or insufficient due diligence (insufficient or incomplete information provided by the seller) resulting e.g. in an excessive price offer in the bidding process;

– manipulation of the bidding process providing for an “artificial” increase of the price;

– abandonment of negotiations in bad faith or undue prolongation of negotiations;

– non-fulfilment of conditions;

– refusal to perform the obligations under a pre-contract.

3.4 CONFLICTS BETWEEN BUYERS AND SELLERS AFTER SIGNING – BEFORE CLOSING

As mentioned above, in M&A transactions the signing of the contract and its execution often do not coincide and may occur several months, sometimes even years, apart. Conflicts which arise during this period, (i.e. post-signing / pre-closing conflicts) may have their origin in different incidents.

3.4.1 Non-fulfilment of a Condition Precedent to Closing

The execution of most M&A agreements is subject to certain conditions, known as the “conditions to closing”. Typically, these conditions are drafted as conditions precedent, with a suspensive effect, i.e. providing that the agreement will only become binding if and when a particular condition has been complied with. Before closing, the share purchase agreement is in abeyance and the parties may not do anything that might prevent them from duly executing their obligations to consummate the agreed transaction22.

Typically, parties fix a date when the conditions precedent have to be either fulfilled or waived, whoever has the right to waive pursuant to the contract. If the condition has not been met, the purchase agreement is automatically rescinded or the parties may terminate it.

Conditions precedent to closing include such issues as:

– governmental, regulatory and similar authorisations, permits, concessions, etc.;

22 For Switzerland, see Article 156 of the Swiss Code of Obligations (“CO”).

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– correctness of representations, warranties, guarantees;

– compliance with covenants;

– no material adverse changes;

– satisfaction with the due diligence process, in particular receipt of reports or letters from the accountants, consultants, professional advisors, etc.; and

– receipt of required letters of consent, e.g. from licensors, the principal of a distributor relationship, banks, etc.

Conflicts may arise in situations where it is not clear whether or not a condition for closing has been met, which of the parties has the right to waive the fulfilment of the condition, or which party bears the risk if a condition precedent has not been met. If clauses have been drafted vaguely, a dispute can arise over the interpretation of broadly expressed terms23. Conditions for closing may imply a contractual obligation for one of the parties; later, between signing and closing, the parties may disagree as to whether or not the obliged party has made all due efforts to have the condition fulfilled. In other situations, pre-closing conflicts can arise when one of the parties (usually the buyer) realises the implications of the intended transaction and, having undergone a change of mind with regard to the acquisition, “boycotts” the closing by not complying with its obligations or tries to find another way of rescinding the contract.

3.4.1.1 Governmental, Regulatory and Similar Authorisations

A typical condition precedent to closing is that all governmental, regulatory or similar authorisations, permits and concessions necessary for the consummation of the transaction must have been obtained. This applies in particular to clearance by merger control authorities, but also to other necessary permits and concessions, e.g. for banks, insurance companies, companies in the areas of telecommunication, radio and television or aviation24.

In this context, conflicts that may arise, in addition to those referred to above25, are e.g. over the question as to whether or not a party has undertaken every necessary measure to obtain the relevant permit or authorisation.

In a recent ICC arbitration26, parties entered into a "promissory purchase agreement", the closing of which was subject to a number of conditions precedent, including obtaining the necessary merger clearance from the EU Commission. The conditions precedent had to be satisfied by a certain date, otherwise the agreement

23 See infra Section 3.4.1.1 for examples.

24 For Switzerland: Articles 9 et seq. of the Federal Act on Cartels and Other Restraints of Competition; Article 3 of the Federal Law on Banks and Savings Banks; Articles 12 and 6 of the Federal Law on Insurance Supervision; Article 4 of the Federal Telecommunications Law; Articles 10, 39, and 43 of the Federal Law on Radio and Television; Articles 27 and 28 of the Federal Aviation Law.

25 See supra Section 3.4.1.

26 Case reported by Sachs, op. cit. (footnote 2), 126 – see detailed description of case in Section 5.9 infra.

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would automatically expire. EU merger clearance was not obtained. The sellers argued that the buyers, in the purchase agreement, had assumed the risk of failure of obtaining clearance and, therefore, were legally obligated to proceed with and complete the intended transaction. Alternatively, if the purchase was not legally possible, the seller wished to claim compensation for the damages suffered due to the buyers’ insufficient diligence in their attempts to obtain the EU merger clearance.

In another case which was tried before a DIS arbitration tribunal27, the share purchase agreement was subject to several conditions precedent and especially to the condition that if the buyers could not provide the sellers by an agreed date “with written, unconditional and legally binding commitments for one or several banks to loan the Purchase Price to the buyer on the closing Date”, they would have to pay DEM 20 million as compensation for the sellers’ willingness to stop auction proceedings and grant the buyers exclusivity in the negotiations. On the agreed date, the buyers submitted to the sellers a letter from their bank in which the bank declared its intention to support the intended acquisition by providing credit facility to the buyers on the basis of an attached term sheet. The term sheet contained the conditions for the credit facility and the material terms of a credit agreement still to be concluded. The arbitral tribunal held that the buyers (respondents) had forfeited the contractual penalty of DEM 20 million, as they had not provided a written, unconditional, and legally binding commitment from a bank to lend the purchase price.

3.4.1.2 Documents, Reports, Due Diligence

Closing “conditions” may include the obligation of the seller to provide the buyer with a financial statement as at the closing which is often used to definitively determine the purchase price. Other conditions precedent to be provided by the parties include all necessary approvals by the corporate bodies and the delivery of documents such as environmental reports, auditors’ statements, etc.

In transactions where closing is subject to the delivery of audited, consolidated statements by sellers, a dispute may arise as to whether the delivered statements meet certain requirements (e.g. provisions to be made and the inventory underlying the balance sheet). Buyers may argue during pre-closing proceedings that the statements do not meet the requirements stated in the sale and purchase agreement and that the individual closing conditions are not met.

3.4.1.3 Violation of Covenants

Generally, non-violation of the post-signing covenants of the share purchase agreements is made a condition precedent to closing. These covenants usually deal with the seller's business conduct from signing to closing and its compliance with obligations necessary for closing (such as timely filing with and notification of authorities), non-solicitation obligations, communication with employees, repayment

27 Case reported by Sachs, op. cit. (footnote 2), 126.

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of inter-company financing, remuneration to executives, payment of interim-dividends, etc.

Conflicts may not only arise as to whether a covenant has been complied with, but also as to the validity and enforceability of a covenant under the applicable cartel law provisions.

3.4.1.4 No Material Adverse Changes

Another important condition precedent in M&A agreements is the “No Material Adverse Changes clauses” (“MAC clauses”). These clauses provide the buyer with the possibility of rescinding the purchase agreement and of refusing the closing if a material adverse effect occurs that has a significant negative consequence for the target company28. A material adverse effect is sometimes described in purchase contracts as an event, fact or issue which gives rise to a material change in the financial conditions, assets, liabilities or operational results of the company as a whole that is so substantial and adverse as to fundamentally impair the company’s value to the buyer29.

MAC clauses allocate the risk of an event that is beyond the control of the parties and are deployed between the signing and the closing. Their effect is thus similar to that of a force majeure clause.

In practice, the seller is often almost forced to make further concessions and reduce the purchase price if the buyer invokes the MAC clause, as it will have difficulty in finding another buyer willing to pay the originally envisaged price.

The question of whether an event, fact or issue is of such relevance that it has substantially negatively impaired the value of a target company, may give rise to disputes and, where it hinders the consummation of the transaction, may result in a damage claim30.

If not directly addressed by MAC clauses, other issues may arise due to an unforeseen and material change of circumstances with a disruption of the

28 Patrick Schleiffer, No Material Adverse Change, in: Tschäni op. cit. (footnote 13), 54 et seq.

29 Article 16 of the Ordinance of the Swiss Takeover Board on Public Takeover Offers of 21 July 1997 (Takeover Ordinance; SR 954.195.1) provides buyers with the possibility of withdrawing the offer if he or she has expressly reserved such right by inserting one or more suspensive conditions pursuant to Article 13 of the Takeover Ordinance. The offeror may not have a decisive control over the suspensive conditions. If the suspensive conditions require a contribution from the offeror, he or she must take all reasonable steps to ensure that the condition is fulfilled (Article 13(1) of the Takeover Ordinance). With the approval of the Takeover Board, the offer may also be made subject to resolutory conditions (Article 13(4) of the Takeover Ordinance). See also Schleiffer, op. cit. (footnote 28), 81 et seq.

30 Such disputes may be avoided or at least the risk that they end up in litigation may be mitigated by providing in detail what would constitute a relevant negative impact on the business of the target company (e.g. a decrease of gross revenues of more than 30%) and provide an expert with the authority to make a determination thereon. See infra Section 4.3

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contractual equilibrium providing a party with the remedies stemming from the clausula rebus sic stantibus rule31.

3.4.2 Post-signing Due Diligence Satisfactory to Buyer

More recent developments show a tendency to split the due diligence process into three stages:

– before the first bidding offer, to enable a realistic bid;

– before the signing to negotiate the purchase agreement;

– before the closing, to enable the determination of the final purchase price.

In many situations, there is an inherent conflict within the signing with respect to the determination of the final purchase price and the due diligence. The seller wants to set a definite purchase price as early in the process as possible, while the buyer’s intentions are to keep the determination open as long as possible and to obtain from the seller as much information as possible before a final agreement is reached on the price.

Parties generally include a price adjustment clause if a due diligence is to take place after the signing. Frequently, disputes on price adjustment clauses are due to a lack of clear descriptions of accounting methods, to discrepancies in methods and concepts applied in asset and share deals, to insufficient time allowed for compliance with certain obligations, or to vagueness in the delimitation of accounting methods from legal methods32.

3.4.3 Summary of Post-signing / Pre-closing Conflicts

As outlined above, post-signing / pre-closing conflicts may involve a whole range of different issues, such as

– buyer’s satisfactory demonstration of available financing;

– final determination of the purchase price;

– failure to obtain merger clearance, or other vital concessions, licences, or authorisations. Parties often argue over who has to bear the consequences of such a failure;

– conflicts over the ways in which the seller manages its business up to and including the closing, and individual business decisions, such as the payment of

31 E.g. due to a devaluation of a currency, a collapse of an economy; see in general Martin Burkhardt, Vertragsanpassungen bei veränderten Umständen in der Praxis des schweizerischen Privatrechts, Bamberg 1996; Wolfgang Wiegand in: Honsell / Vogt / Wiegand, op. cit. (footnote 19), N 95 et seq.; Jacques Bischoff, Vertragsrisiko und clausula rebus sic stantibus, Zurich 1983, 184 et seq.; and Peter Jäggi / Peter Gauch, Zürcher Kommentar zum schweizerischen Zivilgesetzbuch, Obligationenrecht, Teilbd. V1b, Art. 18 OR, Zurich 1980, N 577 et seq.

32 Wolfgang Peter, Arbitration of Mergers and Acquisitions: Purchase Price Adjustment Disputes, Arb. Int’l. 19/4 (2003), 494; see also Jakob Höhn, Einführung in die Rechtliche Due Diligence, Zurich 2003, 32.

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dividends or of “golden parachute” compensation to the management or the sale of parts of the business;

– consequences of material adverse changes affecting the business of the target company;

– abandonment of the transaction due to negative information discovered in the due diligence process;

– non-compliance with covenants.

In many M&A contracts, parties provide for the ongoing validity of certain provisions (e.g. confidentiality, applicable law and jurisdiction / arbitration), even if the transaction ends up not being consummated and the parties ultimately withdraw from the M&A project.

4. Different ADR Methods to Solve Pre-closing Conflicts in Merger and Acquisition Transactions

The above non-exhaustive enumeration of randomly picked conflicts shows that there is considerable potential for disputes during any M&A transactions prior to the consummation of the deal. Given this, M&A lawyers would be well advised to anticipate these potential conflicts and to provide for instruments to solve them in a fast and efficient way that will not endanger the entire transaction. With this in mind, it is important to choose an appropriate dispute resolution mechanism that is tailored to the possible incident.

Dispute resolution clauses are often discussed and negotiated at the very end of lengthy M&A negotiations and their drafting does not always get the degree of attention it should. Considering what may be at stake, not only time wise and with respect to the costs involved, but also the fact that a divergence of opinions may jeopardise the entire transaction, it should be the duty of the negotiators or their advisors to provide for the appropriate dispute resolution mechanism(s).

4.1 Conciliation

Many M&A agreements provide for a conciliation mechanism to resolve potential conflicts – either alone or in combination with other dispute resolution instruments33.Often, such clauses provide that parties may only file a request for arbitration or initiate court proceedings after they have undergone conciliation or mediation. Such conciliation efforts may be conducted in a variety of ways, such as with a neutral conciliator, a dispute resolution board, or by turning to a higher management level within both parties34.

33 Borris, op. cit. (footnote 1), 76.

34 For a description of the various ADR procedures, see e.g. Marc Blessing, ADR (Alternative Dispute Resolution), in: Stephen Berti (Ed.), International Arbitration in Switzerland, Basel/Geneva/Munich 2000, N 962 et seq.

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Conciliation procedures are particularly useful in long-term construction projects where they are used to settle conflicts speedily and efficiently without jeopardising the completion of a project. In the M&A context, and especially with regard to disputes before closing, the same benefits can apply. When the parties are, in principle, in agreement, the potential for conflict may be limited and a well-drafted conciliation provision providing for a process in a short time frame may be helpful. On the other hand, conciliation should not be misused and the initiation of arbitration or court proceedings should not be delayed where successful conciliation appears to be unrealistic35.

If a share purchase agreement or a preliminary document (LOI, or other) provides for conciliation prior to adjudication, the question arises as to whether or not an arbitral tribunal is bound by such a clause should a party initiate arbitral proceedings without having undergone conciliation (or some other ADR procedure). Where there is a clear obligation for the parties to attempt to settle their disputes first through conciliation, the arbitral tribunal will have to decline jurisdiction36 or to suspend arbitral proceedings for a defined period of time to allow the conciliation to take place37.

4.2 Mediation

Mediation is a dispute resolution method which may, in specific situations, lead to an acceptable outcome within a short time frame. In contrast to arbitration, in which the tribunal adjudicates over conflicting interests, mediation is aimed at establishing the parties’ common interests in order to find a solution based thereon. In M&A transactions in particular, it might be helpful and efficient to initiate mediation, with a mediator who has expert knowledge in the area of the disputed issue, which might add another dimension to the discussion in which the two negotiators are mired.

As the solution proposed by the mediator is not legally binding, the parties may be inclined to agree to such a process. Especially when the parties are partners and intend to remain so, irrespective of whether the merger or acquisition goes through, mediation may be less disruptive to their relationship than arbitration, even if the mediation fails38.

35 Borris, op. cit. (footnote 1), 76 – 77.

36 See cases reported by Bernardo M. Cremades, Multi-Tiered Dispute Resolution Clauses, in: CPR Institute European Committee, Better Solutions for Business: Commercial Mediation in the EU, The Hague 2004, 7.

37 See also Nathalie Voser, Sanktion bei Nichterfüllung einer Schlichtungsklausel, ASA Bull. 20/2 (2002), 376 et seq. (providing an overview of the jurisprudence on this issue in Switzerland, France and Germany).

38 See further Corinna Klaus / Manuel Liatowitsch, Mediation, in: Gabrielle Kaufmann-Kohler / Blaise Stucki (Eds.) International Arbitration in Switzerland: A Handbook for Practitioners, Kluwer Law International, 2004, 223 et seq.

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Where mediation is contractually foreseen prior to litigation or arbitration, the same consequences as referred to in the preceding Section (4.1) apply if a party submits its claim directly for adjudication39.

4.3 Expert Determination

Expert determination can be a very efficient and time effective way to solve a conflict about a factual issue, such as a valuation, the examination of financial statements, whether a material adverse change has occurred, and, in general, on such issues where a state court or an arbitral tribunal would also have to rely on an expert40. The purpose behind calling upon third parties as experts is, first of all, to benefit from their expert knowledge and, secondly, to engage the services of a neutral person who enjoys the confidence of both parties. In many cases, the appointed experts are chartered accountants or professionals with a technical, environmental, financial, or construction background41.

Unless otherwise agreed on by the parties, experts have the power to make binding determinations regarding a particular fact42. However, as a rule, expert determinations do not result in an enforceable decision, in contrast to the situation with an arbitration award43. In subsequent court or arbitration proceedings, however, expert determination can only be challenged if they have been affected by deliberate misinformation or were unduly influenced by fraudulent practices of one of the parties, or if the result is obviously inequitable or incorrect44.

Given that there are effectively few, if any, statutory45 or institutional46 provisions governing the role of the procedure to be followed by the expert, it is important that

39 See also Christopher Newmark, "Agree to mediate… or face the consequences” – A review of the English courts' approach to mediation, SchiedsVZ 1/1 (2003), 23.

40 Anke Sessler / Corina Leimert, The Role of Expert Determination in Mergers and Acquisitions under German Law, Arb. Int’l, 20/2 (2004), 151; see also Peter, op. cit. (footnote 32), 501.

41 The same qualification(s) should apply to a mediator, although the mediator, in addition, should have specific mediation experience in order to conduct the process efficiently.

42 This is in contrast to determinations made by experts appointed by a tribunal or a court which are not binding; see Thomas Rüede / Reiner Hadenfeldt, Schweizerisches Schiedsgerichtsrecht nach Konkordat und IPRG,Zurich 1993, § 5 II, 21.

43 For Swiss law, see Decision of the Swiss Federal Tribunal 117 Ia 365 (expert determinations are not enforceable judicial awards); Kurt Siehr, Zürcher Kommentar zum IPRG, Zurich 2004, N 9 ad Art. 194; and Jean François Poudret / Sébastien Besson, Droit Comparé de l’arbitrage international, Zurich 2002, N 15, 14.

44 For Switzerland, see Decision of the Swiss Federal Tribunal 129 II 535, 538; see also Wiget / Sträuli / Messmer, Kommentar zur zürcherischen Zivilprozessordnung, 3. Ed., Zurich 1997, § 258 N 6; Rüede / Hadenfeldt, op. cit. (footnote 42), § 5 III, 25; Blessing, op. cit. (footnote 34), N 978; and Sessler / Leimert, op. cit. (footnote 40), 154.

45 In Switzerland, the institution of expert determination is governed by cantonal civil procedure law (e.g. § 258 of the Zurich Code of Civil Procedure) and unwritten Federal law, see further Wiget / Sträuli / Messmer, op. cit. (footnote 44), § 258 N 2 et seq.

46 The ICC offers the services of the ICC International Centre for Expertise, which provides binding or non-binding expert determination and other “expertise” service according to the parties' wishes and the ICC Rules

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the task of the expert, the subject matter of the expert determination, the procedure and other elements (remuneration, time frame, access to information, submission by the parties) be clearly set out ahead of time in the expert determination clause. Likewise, the terminology used should be so clear as to prevent any possible misunderstanding with regard to the nature of the process47.

To avoid issues which might derail or prolong the expert determination process in M&A transactions, the following precautions or measures might be helpful:

− Selection of the expert: the appointment procedure should be designed so that an expert is appointed by a third party in the event that the parties cannot agree on one.

− The expert should not be the auditor of one of the parties, as this may raise issues of independence and impartiality at a later stage48.

− The standards which are to be applied by the expert should be defined in advance, e.g. US GAAP.

− Parties should be given a fair opportunity to express their views within a strict time frame49.

4.4 Arbitration

As the number of arbitral awards referred to in this article show, there is a small but increasing number of pre-closing conflicts which are dealt with in arbitration. This is undoubtedly connected to the fact that, nowadays, arbitration agreements in international and national M&A transactions are more the rule than the exception.

The general advantages of arbitration50 compared to state court litigation also apply to pre-closing dispute resolution. In international cross-border transactions, the

of Expertise; see also W. Laurence Craig / William W. Parker / Jan Paulsson, International Chamber of Commerce Arbitration, 3. Ed. 2000, § 38.02, 701 et seq.

47 For an expert determination, the terms “final” or “conclusive” should be avoided, as these are characteristic of an arbitration. On the other hand, it should be stated that the expert determination shall be binding on the parties. See also Sessler / Leimert, op. cit. (footnote 40), 157, and Norman Katz v. Herbert Feinberg, 290 F.3d 95 (2nd Cir. 2002) (concerning a transaction where the Agreement provided that the “Final Share Price” for the sale was to be determined by the company’s accountants and specified that “the determination by the Company’s Accountants of the final purchase price of the Shares… shall be final and binding on Seller and Buyer and shall not be subject to any appeal, arbitration, proceeding, adjustment or review of any nature whatsoever.” The Agreement also provided that all disputes arising under the agreement were to be resolved by arbitration. After an arbitral tribunal overturned the accountants’ price determination upon request of the seller, the seller tried to have the award approved by the District Court. However, the District Court (and the Court of Appeals) vacated the award on the basis that the tribunal had exceeded its authority by overturning the expert determination).

48 An expert determination may be denied binding effect if the expert could have been challenged as an arbitrator (see e.g. § 258(2) Zurich Code of Civil Procedure and also a decision of the Zurich Court of Appeals (ZR 94 Nr. 100) holding that the audit company appointed by the parties for an expert determination was not independent and impartial since the buyers subsequently appointed it as auditor for the acquired company and its affiliates).

49 Blessing, op. cit. (footnote 34), N 974.

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parties prefer an institutional or ad-hoc arbitration based on defined procedural rules to the jurisdiction of a state court in the country of the defendant. Since the parties can choose the arbitrators, they can be confident that the adjudicating panel has the desired expertise and the international know-how. An important element for the parties is also confidentiality. When M&A transactions are under the close scrutiny of competitors, the press, and the general public, the parties do not wish to have their dispute and the reasons for their failure to close a deal dealt with in public51.Other advantages are the possibility of providing for a tailor-made procedure and the enforceability of the award on a broader international level.

The resolution of pre-closing conflicts, as already mentioned above52, must occur in a rather short time frame. In particular circumstances, this may constitute a real challenge to the arbitration process and the arbitrator(s).

In light of the tight time frame available for arbitration, the following should be taken into consideration when drafting the arbitration agreement:

− Preference should be given to institutional arbitration, with the appointment of the chair or the sole arbitrator by the institution, if the parties or the party-appointed arbitrators cannot agree on the chair or the sole arbitrator. Short deadlines for the nomination and appointing procedure should be specifically stated.

− In certain instances, a sole arbitrator (appointed by an institution) will usually be able to render a decision more rapidly, in particular where interim relief is sought.

− Procedural rules should be avoided which do not grant the parties and the arbitrators the flexibility to optimise the process, to limit the number of submissions by the parties, and to condense the presentation and hearing of evidence.

− Appeal possibilities should be excluded or limited as far as possible; the seat of the arbitration should be chosen with this in mind.

− For further ways of expediting the procedure, see comments in Section 5.4 infra53.

50 See e.g. Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration, 4th Ed., London 2004, 1-41/44; Ehle, op. cit. (footnote 17), 3.

51 Borris, op. cit. (footnote 1), 80.

52 See supra Section 1.

53 See also proposals and recommendations in Marc Blessing, Arbitrating Antitrust and Merger Control Issues,Zurich 2003, 183/184.

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5. Particular Aspects of Arbitration of Pre-closing Conflicts

5.1 Agreement to Arbitrate

As in any arbitration, the basis of the arbitration proceedings is an agreement by the parties to arbitrate. The arbitration clause must be in writing, either in a signed contract or contained in an exchange of unsigned letters or telegrams (Article II of the New York Convention54)55. To cover pre-signing conflicts, the arbitration clause should be contained in the letter of intent, the memorandum of understanding or the invitation to submit an offer and determined to be binding upon the parties. In the latter case, the invitation to submit an offer must be accepted and returned to the sender in order to fulfil the requirement of an exchange of documents56.

Under Swiss law, it is sufficient if the agreement to arbitrate is stated in text form57,which does not necessarily require a signed contract58.

The issue of the validity of an arbitration clause in a M&A agreement may arise if a dispute starts before the agreement is signed. If a party in bad faith aborts the transaction and refuses to sign, can the other party rely on the arbitration clause which, in the opinion of the parties, had been conclusively negotiated? Insofar as it is possible to prove that the parties intended to be bound by the concluded negotiations on the arbitration clause, even if a subsequent signing of the agreement did not occur, there might be a case, depending on the substantive law

54 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958), U.N.T.S, vol. 330, 38 No. 4739 (1959) (the “New York Convention”).

55 Redfern and Hunter, op. cit. (footnote 53), 3-07/9. Currently, there are attempts underway to amend the writing requirements of Article II(2) of the New York Convention. It was proposed to revise Article 7(2) of the UNCITRAL Model Law and to add an interpretative instrument regarding Article II(2) New York Convention so as to include (electronic) data messages. A further suggestion was to include a reference to the New York Convention in the Draft Convention on the Use of Electronic Communications in International Contracts, so as to provide legal recognition to electronic communications. Such a reference would provide a “uniform definition of ‘writing’,… more consistent with developing technological practices in international commercial arbitration, and would contribute positively to uniformity in the interpretation and application of Article II(2)”. To date, a decision has not been taken, but completion and approval of the draft convention is intended to take place in July 2005 (Note by the Secretariat of the UNCITRAL Working Group II (Arbitration) (26 July 2004), UN Doc. A/CN.9/WG.II/WP.132 ; Report of the UNCITRAL Working Group on Arbitration and Conciliation on the work of its 41st session (Vienna 13 – 17 September 2004), UN Doc. A/CN.9/569, 21 et seq.). See also Pieter Sanders, Has the Moment Come to Revise the Arbitration Rules of UNCITRAL?, Arb. Int’l, 20/3 (2004), 243.

56 Ulrich Haas in: Frank-Bernd Weigand (Ed.), Practitioner’s Handbook on International Arbitration, Munich / Copenhague 2002, Part 3 N 38.

57 Article 178(1) PILA.

58 As a general rule, Article 178(1) PILA is applicable to the form of an agreement to arbitrate in two situations: (i) if an arbitral tribunal sitting in Switzerland examines the formal validity of the arbitration clause, or (ii) if the Swiss Federal Tribunal re-examines this issue during a procedure challenging the award pursuant to Article 190(2b) PILA. Article II New York Convention determines the formal validity of an agreement to arbitrate in the course of enforcement proceedings of an award rendered by an arbitral tribunal outside of Switzerland (see Zina Abdulla, The Arbitration Agreement, in: Kaufmann-Kohler / Stucki, op. cit. (footnote 38), 16 et seq. and also Werner Wenger in: Berti, op. cit. (footnote 34), N 10).

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applicable to the share purchase agreement59, to assume a valid arbitration agreement60. In most cases, however, it might not be easy to prove such an intent by the parties, and any lack of consent with regard to the main agreement usually leads to the arbitration clause also being invalidated61.

5.2 Scope of the Arbitration Clause

Once the parties’ consent to arbitrate has been established, the arbitration agreement is deemed to cover all disputes between the parties, provided that they are arbitrable and originate from the relationship referred to by the arbitration agreement62. Most jurisdictions with a substantial arbitration practice assume that parties opting for arbitration wish the arbitral tribunal to have an all-embracing jurisdiction63.

In M&A transactions where conflicts may occur during different phases of the transaction and may consequently relate to different agreements or documents (LOI, pre-contract, final agreement), questions with respect to the scope of the arbitration clause may arise, depending on the wording of the clause. One issue may be whether the arbitration agreement also applies to pre-contractual liabilities, such as damages for culpa in contrahendo ("c.i.c.")64. Attention must therefore be paid to the careful drafting of the arbitration clause to cover all aspects from the very first moment the M&A transaction process has started through to its completion65. If several documents contain arbitration clauses, they should be coordinated or consolidated so as not to be in conflict with one another. Earlier clauses should be replaced by subsequent ones with an extended scope. Where the M&A agreement contains an "Entire-Agreement Clause", the arbitration clause must be drafted carefully to comprise all possible disputes related to the transaction.

As already stated above, it is not uncommon in M&A transactions for the parties to provide for expert determination and for this to be applied successfully and

59 For Swiss law see e.g. Decision of the Swiss Federal Tribunal 121 III 38, 45; see also Redfern and Hunter, op. cit. (footnote 54), 134 et seq.

60 Marc Blessing, The Arbitration Agreement – Its Multifold Critical Aspects, ASA Special Series No. 9 (1994), 13; see also the UNCITRAL case referred to in Section 5.6 infra [is it not the section 3.3.4 above?], where the arbitral tribunal assumed jurisdiction without an arbitration clause in the sale and purchase agreement, but on the basis of a shareholders’ agreement.

61 Haas, op. cit. (footnote 56), N 73.

62 In M&A disputes, arbitrability is usually not an issue, as these cases involve pecuniary rights that are freely disposable. For Switzerland, see Article 177(1) PILA; on the general criteria of arbitrability in the various jurisdictions, see Poudret / Besson, op. cit. (footnote 43), N 337 et seq.

63 For Switzerland, see Decision of the Swiss Federal Tribunal 116 Ia 56 and Rüede / Hadenfeldt, op. cit. (footnote 42), § 13 I, 74.

64 See Rüede / Hadenfeldt, op. cit. (footnote 42), § 13 II, 74.

65 See e.g. Poudret / Besson, op. cit. (footnote 43), N 307, 281 – 2 (suggesting the wording “all disputes in connection with the contract” to cover, in addition to contractual claims, those based on tort, culpa in contrahendo, etc.).

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efficiently, either separately or in combination with subsequent arbitration. Where both dispute resolution methods are anticipated, it is important to draw a clear line between the task and competence of the expert, on the one hand, and the scope of the jurisdiction of the arbitral tribunal, on the other66.

5.3 Applicable Law

Most M&A transactions documents contain choice of law clauses. Typically, they provide for the law at the seat of the target company or a neutral law to be applicable67 to the exclusion of conflict of laws rules and the Vienna Convention on the International Sale of Goods68.

If the parties have not made a choice for the applicable law – which realistically is conceivable only in preliminary transactional documents – arbitrators have to look at the applicable arbitration rules69 or, absent a chosen set of arbitration rules, at the lex arbitrii to determine the applicable lex causae70.

If the seat of the arbitration is in Switzerland and the parties have not chosen any set of arbitration rules to apply, the arbitrators are called to apply the law with which the dispute has the closest connection71. The same applies if the arbitral tribunal works under the Swiss Rules of International Arbitration72. To determine the closest connection, arbitrators must weigh various factors and circumstances and the presumptions set out in Article 117 PILA do not apply directly. Nevertheless, the place of performance of the characteristic obligation under the contract will be one of the most important factors to determine the applicable law, unless there are important other facts that favour another solution73. In the M&A context, it is generally conceivable that the share purchase agreement has a much closer

66 See supra Section 4.3.

67 Sachs, op. cit. (footnote 2), 125.

68 United Nations Convention on Contracts for the International Sale of Goods (Vienna 11 April 1980) U.N.T.S. vol. 1498, 3; the explicit exclusion of the Vienna Convention is not necessary for share purchase agreements because it is not applicable in such cases (Article 2(d); see also Christoph Brunner, UN-Kaufrecht – CISG,Bern 2004, Art. 2 N 12; Award of an arbitral tribunal under the Zurich Chamber of Commerce of 31 May 1996 (stock corporation), N. 146 and 149; and Award of an arbitral tribunal under the Hungarian Chamber of Commerce and Industry Court of Arbitration of 20 December 1993 (Limited Liability Company), both available at www.unilex.info). Asset deals fall under the CISG if more than 50% of the assets are characterised as goods as per the CISG (Brunner, Art. 2 N 5).

69 E.g. Article 33(1) UNICTRAL Rules, Article 17(1) ICC Rules of Arbitration, or Article 33(1) Swiss Rules of International Arbitration.

70 The practical relevance of a choice of law provision is sometimes overrated. With the exception of international "commodity arbitration" cases, the agreements in M&A transactions are usually so detailed and complex that they provide most of the provisions which an arbitral tribunal will have to interpret and apply.

71 Article 187(1) PILA.

72 Article 33(1) Swiss Rules of International Arbitration.

73 Pierre Karrer, in: Berti, op. cit. (footnote 34) N 133 ad Art. 187, see also Article 117(2) stipulating a (disputable) presumption for the law of the state where the party providing the characteristic performance is domiciled.

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connection to the law at the seat of the target company than to the law at the seller's seat.

Under the UNCITRAL Rules, the arbitral tribunal applies the law determined by the conflict of laws rules which it considers applicable74. Pursuant to the ICC and the LCIA Rules, the arbitral tribunal is called to apply the substantive law which it deems to be the most appropriate75. The above rules provide an arbitral tribunal with a wider range of discretion than Article 187 PILA or other conflict of laws rules76. ICC arbitral tribunals may thus apply the conflict of laws rules at the seat of the arbitration, apply several conflict of laws systems cumulatively, apply general principles of conflicts of laws, or even make a free choice of the substantive law without reference to any conflicts of laws rules77.

If an arbitral tribunal applied the presumption set out in Article 117(2) and (3) PILA to determine the applicable law, share purchase agreements would fall under the law at the seat of the seller as the law of the party that provides the characteristic performance under the contract. For merger agreements, the revised PILA provides that they must comply with the mandatory rules of both laws applicable to the merging companies and sets a presumption for the law at the seat of the company that takes over the other company as having the closets connection to the contract78. Consortium contracts between consortium members in different countries, as well as letters of intent or memoranda of understanding between buyers and sellers in different countries would likely be considered to have the closest connection to the law at the seat of the target company79.

5.4 Expedited Procedure

As mentioned above80, the need for efficiency and timeliness in M&A transactions can often be met by providing for fast-track arbitration (or expedited proceedings) for some or all conflicts arising out of the agreement. Expedited proceedings enable a quick decision on a specific issue to be reached and, thus, to save costs for both parties while at the same time providing them with an enforceable decision81. Fast-track arbitration may also be appropriate for more complex disputes, such as conflicts arising from a bidder consortium or a shareholders' agreement, since this

74 Article 33(1) UNCITRAL Arbitration Rules.

75 Article 17(1) ICC Rules of Arbitration, Article 22(3) LCIA Rules.

76 Poudret / Besson, op. cit. (footnote 43), N 683, 613.

77 Craig / Park / Paulsson, op. cit. (footnote 46), § 17.02, 323 et seq.

78 Article 163c(2) PILA.

79 In analogy with shareholders’ agreements, see Keller / Kren Kostkiewicz, Zürcher Kommentar zum IPRG, op. cit. (footnote 43), N 188 ad Art. 117.


81 For instance with regard to the determination of a share price, see Joachim G. Frick, Arbitration and Complex International Contracts, Zurich 2001, 206-7, and Emmanuel Gaillard / John Savage, Fouchard, Gaillard, Goldman On International Commercial Arbitration, The Hague 1999, N 1248, 682.

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allows parties to maintain their relationship much better than in “normal” arbitration, in which relationships over the full length of the proceedings can deteriorate. However, speeding up the proceedings comes at a certain cost: there is less time for the parties to present their case and evidence and for the arbitrators to consider the dispute. It is important, therefore, to carefully consider all aspects of the procedure and to carefully balance the different interests of speed and justice82.

There are various ways of speeding up the arbitral procedure in order to save both time and money. A decision on procedural instruments that will expedite the proceedings may be taken before or after a dispute has arisen. Both possibilities have their advantages and disadvantages; the latter clearly depends more on the parties’ willingness to cooperate in the event of a dispute. For pre-closing disputes, where completing the transaction is an important objective of the parties, it may be recommended to sub-divide possible disputes in the share purchase agreement and to specifically provide procedural instruments that accelerate the arbitration83.

When providing for expedited procedures, parties may choose between ad-hoc arbitral proceedings with individually designed fast-track rules and institutional arbitration with rules that provide for fast-track expedited proceedings84. The acceleration of arbitral proceedings can be achieved – inter alia – via the following provisions:

− Number of arbitrators and determination of deadlines for the appointment85;

− Time limits agreed upon by the parties: parties may either set a single deadline by which the arbitral tribunal is to render its award or – preferably – a series of deadlines for the individual steps in procedure (exchange of written briefs, hearings, rendering of the award, etc.). These deadlines may be stated either in the agreement to arbitrate or may be set with the arbitrator(s) in the terms of reference or the time-table for the proceedings86;

− Determination of issues that may unnecessarily prolong the process, unless these have already been determined prior to any dispute (e.g. place and language of the arbitration, applicable law).

Despite the above-mentioned advantages, there are certain risks involved in pre-agreed fast-track arbitration. One can never predict how a dispute may turn out or

82 See also Eva Müller, Fast-Track Arbitration: Meeting the Demands of the Next Millennium, J. Int’l Arb. 15/3 (1998), 5 et seq; Benjamin Davis / Odette Lagacé / Michael Volkovitsch, When Doctrines Meet – Fast-Track Arbitration and the ICC Experience, J. Int’l Arb. 10/4 (1993), 69 et seq.

83 Frick, op. cit. (footnote 81), 253 and Note on Expedited ICC Arbitration Procedure, ICC ICArb. Bull. 13/1 (Spring 2002), 31.

84 See e.g. Article 42 of the Swiss Rules of International Arbitration, the Rules for Expedited Arbitrations of the Arbitration Institute of the Stockholm Chamber of Commerce, or the WIPO Expedited Arbitration Rules.

85 See e.g. Article 9 of the LCIA Arbitration Rules.

86 See e.g. Articles 15, 18(4), and 32 of the ICC Rules of Arbitration (see also Article 24 setting a deadline for the award).

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develop, and fast-track arbitration may raise concerns regarding due process or the parties’ right to be heard. Therefore, arbitration rules should allow for some flexibility in the expedited procedure87 and the chosen solution should at least leave room to the arbitrator(s) for a certain amount of discretion. Furthermore, attention must always be paid to mandatory provisions of the lex arbitrii or of the jurisdiction where the award will possibly be enforced.

5.5 Interim Relief

As is the case in other commercial arbitrations, obtaining interim relief swiftly and effectively in M&A disputes is frequently of crucial importance to parties whose interests are exposed to irreparable damage by the conduct of the adverse party. In such situations, it may be of vital importance to obtain interim measures in order to stabilise matters on a provisional basis, to regulate the terms of an ongoing relationship and to prevent any further deterioration of the situation for the duration of the arbitral proceedings, and to avoid frustration of the enforcement of the final award.

The authority of arbitral tribunals to grant interim relief stems from the arbitration agreement or from the arbitration rules that are referred to in the arbitration agreement. All commonly used institutional arbitration rules and the UNCITRAL Rules grant the arbitral tribunals the authority to order interim measures88. Unless the parties have explicitly excluded the possibility of interim measures, the arbitral tribunal may order such interim relief as it deems necessary at the request of either party89.

Generally, to obtain interim relief, the requesting party must satisfy the following requirements:

– Prima facie jurisdiction of the arbitral tribunal;

– Prima facie evidence of exposure to irreparable harm or injury to the applicant, i.e. a prejudice that cannot be adequately remedied by a subsequent award on damages90;

– Reasonable chances of success on the merits, prima facie evidence that the party holds the rights and entitlements that the interim measure is supposed to protect;

87 See e.g. Article 32(2) ICC Rules of Arbitration, Article 42, 1(d) Swiss Rules of International Arbitration.

88 For an overview of the various rules and jurisdictions, see Donald Francis Donovan, The Scope and Enforceability of Provisional Measures in International Commercial Arbitration: A Survey of Jurisdictions, the Work of UNCITRAL and Proposals For Moving Forward, in: Albert Jan van den Berg (Ed.), ICCA London 2002, 103 – 4.

89 Article 26 UNCITRAL Arbitration Rules; Article 23 ICC Rules of Arbitration; Article 26 Swiss Rules of International Arbitration; Article 21 AAA International Arbitration Rules; Article 25 LCIA Rules.

90 To which extent this requirement needs to be satisfied depends on the circumstances of the specific case. Damages should only be a remedy of last resort; contracts are made to be performed and the primary remedy should be specific performance.

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– The urgency of the measure, i.e. if it is likely that a threat to the party’s rights and interests is imminent;

– If deemed necessary by the tribunal, provision of appropriate security91.

Within the requests submitted by the parties, the arbitral tribunal may, as a rule, order whatever measures it deems to be necessary, lawful, and suited to protect the rights of the requesting party, subject to the above requirements being met. Within this framework, arbitral tribunals may consider a number of sources of law in their evaluation of the appropriate interim measure. They will, in any event, certainly look at the contract from which the dispute has arisen.

In M&A transactions, parties often list detailed obligations for the seller regarding how to conduct the target company’s business until closing. Such obligations are then the foundation on which an order for interim relief by an arbitral tribunal can be based. Where, for instance, the seller does not comply with its obligation to continue its business in the usual way, as it did in the past, and tries to shift certain activities to other entities which are not controlled by the target company, a buyer may want to interfere by means of a request for protective measures ordering the seller to abstain from any activity which violates its obligations under the merger or acquisition agreement.

Depending on the nature of the relief sought, different types of interim measures may be available to the arbitral tribunal. Without going into detail, two general types of measures, which are predominantly relevant in relation to pre-closing disputes, shall be dealt with here; protective measures and measures seeking performance.

5.5.1 Protective Measures

In the course of arbitration proceedings, the effective enforcement of a future award may be imperilled by the impending actions or conduct of a party, which, in the early stages of M&A transactions may jeopardise the consummation of the transaction as anticipated in the agreements and may thus call for an early intervention through interim relief in order to save the deal. To this end, the arbitral tribunal may be approached with a request to secure the status quo or to order the respondent to abstain from a specific action or behaviour.

Specific examples of protective measures include an order to refrain from disposing of the shares which are the object of a transaction92 or to respect an exclusivity

91 Redfern and Hunter, op. cit. (footnote 53), 7-29; Georg von Segesser / Christoph Kurth, Interim Measures, in: Kaufmann-Kohler / Stucki, op. cit. (footnote 58), 69 – 87; Markus Wirth, Interim or Preventive Measures in Support of International Arbitration in Switzerland, ASA Bull. 37 (2000); Blessing, op. cit. (footnote 34), N. 857; Ali Yesilirmak, Interim and Conservatory Measures in ICC Arbitral Practice, ICC ICArb. Bull. 31 (2000), 34; B. Peter, in: Axel Bösch (Ed.), Provisional Remedies in International Commercial Arbitration, Berlin 1994, 691 et seq.

92 See e.g. the Decision of the Ontario Superior Court of Justice of 23 March 2001, case cit. (footnote 11) (concerning a joint venture agreement that provided for an automatic purchase option on the occurrence of one of the listed trigger events. When one of the companies was sold, the other gave notice of the exercise of its option and set a closing date as provided in the joint venture agreement. The former company did not

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agreement93. In certain circumstances, parties may need their relationship to be officially regulated until a final decision on the merits can be rendered. In corporate settings, there could be orders regarding the payment of dividends, the entering, terminating, varying, or withdrawing from important agreements, or prohibiting the waiving of claims or other rights.

In the ICC arbitration referred to above in the context of conflicts which may arise about whether a buy/sell mechanism has been triggered94, the arbitral tribunal was requested to issue an interim award to ensure that the respondent, as the potential seller, would follow and respect a code of corporate governance provided for in the agreement between the parties. The arbitral tribunal ordered interim measures such as:

– The shares in dispute were to be deposited with a receiver, or in an escrow, or in trust;

– the principal place of business of the company in dispute and its subsidiaries, and the books and records of those entities were to be maintained in situ;

– the target company and its subsidiaries were not to purchase new assets, nor sell existing assets, in excess of a total aggregate amount of USD 500’000 without prior written acceptance of any such transaction by claimant;

– the target company was not to refinance its assets in excess of a total aggregate amount of USD 500’000 without prior written acceptance by claimant;

– the company was to provide claimant, amongst others, with monthly statements and financial reports and, at least 20 days prior to the closing with notice, of any proposed purchase, sale, exchange, refinancing, or any other transaction not occurring naturally in the ordinary course of business, along with a statement disclosing the terms of the transaction, any past or present relationship between the parties, and a detailed account of the proposed use of funds.

The arbitral tribunal considered that, in the situation at hand, such interim measures “were required to protect the subject matter in dispute and to regulate the conduct of and the relations between the parties as partners in disagreement”, pending the arbitration.

5.5.2 Measures Seeking Performance

Can a party, by recourse to measures of interim relief, secure the consummation of a transaction and have an arbitral tribunal decide subsequently on the question of whether the parties were under an obligation to close? Many arbitral tribunals might be reluctant to go this far, unless the circumstances are sufficiently clear and all the

agree and filed a request for arbitration and sought interim relief before state courts to prevent its shares from being purchased. The court granted the interim measures and suspended closing of the purchase until the decision of the arbitral tribunal became final).

93 Andreas Bucher / Pierre-Yves Tschanz, International Arbitration in Switzerland, Basel 1988, 87.

94 See supra Section 3.2 and footnote 10.

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required criteria for the closing have been met. One could, for example, imagine that in a case where one party had, in bad faith, prevented the occurrence of a condition precedent, the arbitral tribunal could rule that the condition had nevertheless been met95 and order the exchange of the shares against the purchase price on a preliminary basis (or have them put in escrow), subject to pending arbitration on the merits.

Interim measures ordering performance may also prove to be a helpful remedy against a party which in a prima vista violation of contractual obligations has not made an advance payment or adduced a performance, an essential prerequisite for the consummation of the M&A transaction.

In the above-mentioned arbitration under the UNCITRAL Rules96, the tribunal issued interim measures upon request by claimants and ordered an auction of the shares in dispute to determine which party would be the buyer of the shares and at what price should the tribunal approve the main claim for the transfer of the shares under the disputed agreement97. The transfer of shares and payment were postponed until the tribunal rendered a decision on the merits with regard to the principal claim.

In an ICC case decided in the spring of 200098, a pre-closing conflict arose between sellers and buyers with regard to warranties provided by the sellers relating to information disclosed and the preservation of the consolidated net financial position. The share purchase agreement provided that three-quarters of the purchase price was to be paid upon signing, the remaining amount in several instalments. The arbitral tribunal was asked to issue three interim awards covering the last three instalments. The buyers, in principle, did not oppose a provisional payment of the instalments, but requested that these be paid to a deposit account and only on the condition that the sellers provide a bank guarantee for possible reimbursement, should the decision on the merits favour such an outcome. With regard to the second instalment, the buyers requested that the provisional payment be made by means of a bank guarantee which would be payable upon the presentation of a final award. The arbitral tribunal ordered the provisional payment of both instalments without granting the buyers the securities they had asked for. It held that the provisional payment was already guaranteed to up to two-thirds of the amount, and that the buyers had not presented a convincing argument that it might be difficult to recover the provisional payments should an award to that effect be granted. In the view of the arbitral tribunal, the same risk already existed under the share purchase agreement, which did not provide for security. With regard to the third instalment, the arbitral tribunal accepted a guarantee offered by the buyers and suspended the

95 For Swiss law see Article 156 CO.


97 Article 26(1) UNCITRAL Rules empowers a tribunal to “take any interim measures it deems necessary”.

98 Extracts of Interim Awards in Case 8670, ICC ICArb. Bull. 11/1 (Spring 2000), 77 – 80.

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provisional payment until such time as the arbitral tribunal would issue its expected award99.

5.5.3 The ICC Pre-arbitral Referee

In 1990, the ICC issued special Rules for the Pre-arbitral Referee to provide for an efficient method to apply for provisional measures before the initiation of arbitration proceedings100. These rules have rather seldom been used; recently, two cases became public as a result of ensuing annulment proceedings before the Paris Court of Appeal. Emmanuel Gaillard and Philippe Pinsolle have described these two cases and the first practical experience with the ICC Pre-arbitral Referee in their recent article in Arbitration International101. Among the examples of provisional measures granted in these two cases were an order for the respondent to continue the performance of the contract pending resolution of the conflict on the merits, and an order to maintain the status quo forbidding any modification by the respondent of a number of related contracts.

In the appellate proceedings, the Paris Court of Appeal held that the order issued by the referee was not an arbitral award102. This analysis also corresponds with the Rules, which do not envisage the direct enforcement of the order, but appear to limit the consequences of non-compliance to the allocation of damages. Because of these consequences, the number of cases where the orders made by the referees have been complied with on a voluntary basis appears to be quite high103.

5.6 Awards Ordering Specific Performance

Post-closing disputes typically deal with the award of an amount of money based on a violation of representations and warranties, price adjustment clauses, or a rescission of the purchase agreement and request for damages based on error, misrepresentation or fraud. In pre-closing disputes, in contrast, parties might attempt

99 In its deliberations on the interim measures, the arbitral tribunal reached the conclusion that, should any such measures be granted, their initial adoption should be in the form of an order to be immediately notified to the parties, rather than in the form of a draft award to be submitted to the ICC Court for scrutiny and approval pursuant to Article 21 of the ICC Rules. The arbitral tribunal’s conclusion was also in line with the ICC Commission on International Arbitration’s opinion that orders for interim measures of protection should not normally be made in the form of an award (ICC ICArb. Bull., December 1990, 25).

100 ICC Pre-Arbitral Referee Procedure (ICC Publication No. 482, 1990). The AAA has made available Optional Rules for Emergency Measures of Protection for domestic arbitration under the Commercial Arbitration Rules and Mediation Procedures.

101 Emmanuel Gaillard / Philippe Pinsolle, The ICC Pre-Arbitral Referee: First Practical Experiences, Arb. Int’l 20/1 (2004),1, 13; see also Pierre Tercier, Le référé pré-arbitral, ASA Bull. 22/3 (2004), 464.

102 Société Nationale des Pétroles du Congo et République du Congo v. Société Total Fina Elf E & P Congo, Court of Appeal of Paris (1st Chamber, Section C), Judgement of 29 April 2003, Docket No. 2002/05147.

103 Gaillard / Pinsolle, op. cit. (footnote 101), 23. Tercier op. cit. (footnote 101), 470 confirms this analysis. An example of a pre-arbitral referee clause, as well as the referee’s order, which was appealed to the Paris Court of Appeal, are reproduced in Gaillard and Pinsolle’s article.

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to bring the transaction to a close and request specific performance to this effect, i.e. ask the arbitral tribunal to order the counter-party to perform its closing duties.

Depending on what action is still required to execute the share purchase agreement at closing, an arbitral tribunal might order the performance of the main obligation, e.g. order the seller to transfer the shares against payment of the purchase price. The tribunal may also order parties to comply with a condition to closing, such as for the seller to provide financial statements, deliver the necessary corporate resolutions, obtain expert reports, notify the necessary authorities (e.g. merger control authorities), sign an escrow agreement for the execution of the share purchase, etc. The buyer, likewise, might be ordered to comply with its obligations, e.g. provide guarantees, sign an escrow agreement, notify authorities, etc.

Where a party has failed to procure the necessary corporate resolutions (e.g. board resolutions or decisions of the shareholders’ assembly), the arbitral tribunal may not render an award in lieu of the corporate resolution104, since the “parties” that would have to take the resolution (directors, shareholders) are not bound by the arbitration agreement105. On the other hand, where a request by a party stems from a joint venture or a consortium, and all the parties involved in the proceedings have agreed to arbitrate the conflict, there may be reason to assume that the arbitral tribunal has the authority to also issue an award in lieu of a missing corporate resolution.

In the UNCITRAL arbitration mentioned above106, the arbitral tribunal ordered specific performance under the confirmation letter, i.e. the sale at the price stated in the letter. Although the confirmation letter itself did not contain an agreement to arbitrate, the arbitral tribunal considered that, based on the shareholders’ agreement and the understanding of both parties, it had jurisdiction to adjudicate these claims.

5.7 Declaratory Decisions

A dispute in a pre-closing conflict may be limited to the issue of whether a specific condition to closing has been fulfilled. Where such issues are not referred to expert determination, an arbitral tribunal may render a declaratory judgment, provided the tribunal can be constituted and thereupon conduct the arbitral proceedings in the short time available107.

The advantage of a declaratory judgment by an arbitral tribunal is its direct enforceability and the fact that arbitration proceedings are better suited to resolving conflicts where not only factual issues, but also legal aspects are in dispute. Sometimes conflicts may also be brought to an end with a declaratory judgment, as the parties comply therewith and a request for specific performance or damages becomes obsolete.

104 Unlike state courts in certain instances.

105 See Rüede / Hadenfeldt, op. cit. (footnote 42), § 10 II 3 b) bb), 50.



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Declaratory judgments are frequently rendered in the form of partial awards at an early stage of the arbitral procedure after the tribunal and the parties have decided to bifurcate the proceedings. There could, for instance, be a conflict between the parties as to whether or not they had entered into a valid share purchase agreement, or whether a letter of intent, memorandum of understanding, or preliminary contract already included all obligations of the parties and was therefore directly enforceable108.

Properly used, declaratory orders can be very useful. However, claims for declarations should be scrutinised carefully to ensure they will not amount to nuisance. In looking at the utility of a particular declaration, a tribunal should balance its usefulness for the claimant against the inconvenience and embarrassment it may cause the respondent.

5.8 Confidentiality and Exclusivity

As mentioned above, parties often conclude confidentiality and/or exclusivity agreements109 prior to, or at the beginning of, negotiations or the bidding process. Most frequently, these obligations are set out in an LOI, a memorandum of understanding or in other, separate agreements. The decision to arbitrate should be stated explicitly in such a separate exclusivity or confidentiality agreement, and the parties should provide for the same type of arbitration referred to in other agreements governing the transaction, in order to avoid jurisdictional conflicts.

Compliance with confidentiality or exclusivity obligations can sometimes already be secured successfully through interim measures110.

To prevent subsequent difficulties with regard to the substantiation and proof of damages111 caused by non-compliance, it is preferable, with confidentiality and exclusivity obligations, to provide for contractual penalties or liquidated damages112.

A confidentiality clause in M&A agreements would generally also apply to dispute resolution proceedings arising under such agreements. However, parties are well advised to examine this aspect carefully and to insert the appropriate language or reference into the agreement, where needed.

Generally, the confidentiality of arbitral proceedings is cited as one of the important advantages of arbitration in commercial disputes, and parties often presume that as given. However, a number of court decisions in recent years have made clear that confidentiality is not considered to be an inherent feature of arbitration in all

108 See Redfern and Hunter, op. cit. (footnote 53), 8-18.


110 Alexander Jolles / Maria Canals de Cediel, Confidentiality, in: Kaufmann-Kohler / Stucki, op. cit. (footnote 38), 101.



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jurisdictions113. Moreover, only very few national laws and some arbitration rules grant a general confidentiality of arbitration proceedings114. Therefore, confidentiality agreements and confidentiality clauses in M&A agreements should be drafted in a way so as to cover the various aspects of confidentiality in arbitral proceedings. When choosing a set of arbitration rules, preference may be given to those that provide for a strict duty of confidentiality115.

5.9 Aspects of Competition Law / Merger Control

Under the Swiss Act on Cartels116, M&A transactions which reach the defined thresholds117 must be notified to the Competition Commission (“Wettbewerbskommission”). Within a month of notification, the Commission examines the transaction in a summary proceeding. During this one-month period, the transaction may not be consummated118. Thereafter, the Commission either issues a non-action letter (“Unbedenklichkeitserklärung”) or opens an investigation. Any investigation proceedings should last no longer than four months, during which the parties may not consummate the transaction119. Within six to eight weeks of the start of the investigation, the Commission usually submits to the parties its preliminary assessment and invites the parties' comments, as well as their suggestions on how the concerns of the Commission can be overcome.

The decision of the Commission can be appealed to the Appeals Commission (“Rekurskommission für Wettbewerbsfragen”)120 and, subsequently, to the Swiss Federal Tribunal121.

113 See e.g. the decisions United States v. Panhandle Eastern Corp. et al., 118 FDR 346, 10 Fed R Serv 3rd 686 (D. Del. 1988); ESSO / BHP v. Plowman (1995) 128 ALR 391; or Bulgarian Foreign Trade Bank Ltd. v. A.I. Trade Finance Inc. (Swedish Supreme Court Case No. T-6-111-98).

114 For on overview of the various rules and jurisdictions see Expert Report of Dr. Julian D.M. Lew (in Esso/BHP v. Plowman), Arb. Int’l 11/3 (1995), 283 – 296; see further Jan Paulsson / Nigel Rawding, The Trouble with Confidentiality, ICC ICArb. Bull (1994), 48; and, for Swiss law, Jolles / Canals de Cediel, op. cit. (footnote 110), 89 – 113.

115 See e.g. Article 43 of the Swiss Rules of International Arbitration.

116 Federal Act on Cartels and other Restraints on Competition of 6 October 1995 (SR 251; “Swiss Cartel Act”), Articles 9 et seq.

117 Pursuant to Article 9 Swiss Cartel Act, the Competition Commission must be notified of mergers and acquisitions, if (i) the enterprises concerned have reported a joint turnover of at least CHF 2 billion or turnover in Switzerland of at least CHF 500 million, and (ii) at least two of the enterprises concerned have reported individual turnover in Switzerland of at least CHF 100 million. In addition, notification is mandatory for transactions in which a company participates that occupies a dominant position in a market in Switzerland (Article 9(4)).

118 In exceptional circumstances, the Competition Commission may grant permission to execute the transaction during the summary proceedings; Article 32(2) Swiss Cartel Act.

119 Also in this case, the authority may grant, in exceptional circumstances, permission to execute on a preliminary basis the transaction under investigation (Article 33(2) of the Swiss Cartel Act; see also reference in Tschäni, op. it. (footnote 4), footnote 84, 456).

120 Article 44 Swiss Cartel Act.

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In the EU, the mechanisms of the merger control procedure underwent a significant change with the new Regulations 139/2004122 and 802/2004123.

Pursuant to Article 4 of the EC Merger Regulation, concentrations with a community dimension124 must be notified to the Commission prior to their implementation. The notification is published125 by the Commission which has then 25 working days to investigate whether to issue a merger clearance or a letter opening a second phase of investigation based on serious doubts regarding the planned merger or acquisition126. The second stage investigation must be terminated within 90 working days127, after which the Commission will either approve the merger or acquisition, prohibit it, or approve it under the condition that the parties agree to certain behavioural remedies128.

What are currently the scenarios where arbitral tribunals can play a role within these merger control proceedings?

During the notification procedure, the presentation of a case typically requires active cooperation by the parties and that they be forthcoming in suggesting solutions to address the concerns expressed by the Commission in its preliminary assessment. In most cases, this should not give rise to any conflict, as at this stage both parties are motivated to do everything to secure a timely completion of the transaction. However, where the seller may become uncooperative and the buyer needs more information from the seller regarding its strength in the market with specific products, it might be possible for an arbitral tribunal to order the seller to cooperate and to produce the necessary information which could be relevant for a reply to the Commission’s preliminary assessment.

In EU merger control proceedings, an arbitral tribunal might be requested to determine whether the buyer has omitted, in violation of its contractual duties, to offer to the EU Commission so-called “undertakings”, i.e. behavioural commitments in order to address the concerns previously expressed by the Commission in a “Serious Doubts-Letter"129.

121 Article 98 lit. e of the Federal Law on the Organisation of the Federal Judiciary (“OG”).

122 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation), OJ L 24, 29 January 2004, 1 – 22.

123 Commission Regulation (EC) No 802/2004 of 7 April 2004 implementing Council Regulation (EC) No 139/ 2004 on the control of concentrations between undertakings, OJ L 133, 30 April 2004, 1 – 39, Corrigendum to Commission Regulation (EC) No 802/2004 of 7 April 2004 implementing Council Regulation (EC) No 139/ 2004 on the control of concentrations between undertakings (OJ L 133, 30.4.2004), OJ L 172, 6 May 2004, 9.

124 For a definition of “community dimension”, see Articles 1(2), 1(3), and 4(5) of the EC Merger Regulation.

125 Article 4(3) of the EC Merger Regulation.

126 Article 10(1) of the EC Merger Regulation; this period may however be extended.

127 Article 10(3) of the EC Merger Regulation; this period may however be extended.

128 Article 8 of the EC Merger Regulation.

129 Such a case is referred to in the article by Sachs, op. cit. (footnote 2), 128.

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The arbitral tribunals' role of monitoring and enforcing such behavioural commitments imposed by the EU Commission has become quite significant in the recent past and Marc Blessing’s publication “Arbitrating Antitrust and Merger Control Issues”130 gives a very comprehensive and informative overview of 30 cases. As they refer to post-closing events, it is not appropriate, however, to deal with them in this article131.

Where a transaction cannot be closed, be it because a plea of nullity has been granted, or because the Commission has rendered a negative decision, the arbitral tribunal may have to decide on the consequences thereof.

The following case serves as illustration of how merger control aspects could become the key areas of dispute issues in M&A transactions132: the parties entered into a promissory sale and purchase agreement (“promissory agreement”) for the transfer of shares in the target company. The closing of the transaction was subject to a number of conditions precedent, including the obtaining of the necessary approval of the EU Commission under Council Regulation (EEC) No. 2407/92 of 23 July 1992 (“Council Regulation No. 2407/92”) and merger clearance in accordance with the former Council Regulation (EEC) No. 4064/89 of 21 December 1989 (the “former EU Merger Control Regulation”). After the EU Commission had raised serious doubts as to the compatibility of the contemplated transaction with EU requirements, the buyers withdrew their notification.

The dispute between the parties centered on which party had assumed the regulatory risks of obtaining, in particular the European Commission approval / clearance. Claimants’ case was that the buyers were legally bound to complete and proceed with the intended transaction and, if necessary, adapt it to the Commission’s requirements. As an alternative relief, the sellers requested compensation for damages incurred due to non-performance and insufficient diligence on the part of the buyers in their attempts to obtain the merger clearance. The buyers argued that the promissory agreement had expired, since the conditions precedent, including EU merger clearance, had not been met, and that execution of the transaction had become legally impossible. Given the position taken by the EU Commission, it would even have been illegal to close the transaction.

The arbitral tribunal had to analyse the legal nature of the promissory agreement and interpret the relevant contract provisions dealing with the regulatory risks. In addition, it had to rule on whether the promissory agreement had expired or had been renewed; it also had to consider the parties’ dealings with the EU Commission, analyse the parties’ duties in this regard, and rule on whether the buyers had acted with the required degree of diligence.

130 Blessing, op. cit. (footnote 53).

131 See Blessing, op. cit. (footnote 53), N 25, 24; Maurits Dolmans and Jacob Grierson, Arbitration and the Modernization of EC Antitrust Law. New Opportunities and New Responsibilities, ICC ICArb. Bull. Vol. 14 / No. 2, 39.

132 ICC Arbitration reported in Sachs, op. cit. (footnote 2), 126.

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Based on the wording of the promissory agreement and the intent of the parties to transfer the shares only under another contract yet to be agreed upon, the arbitral tribunal held that the promissory agreement was not a “done deal” and consequently not a final and irreversible sale and purchase contract.

With regard to the two conditions precedent concerning approval / clearance by the EU Commission, the tribunal held that under the given circumstances the buyers had not assumed the merger control risk (contrary to the risk related to the other approval under Council Regulation No. 2407/92).

Under the contract, the buyers were required to do their best to obtain the merger clearance. The tribunal considered the approach and the course of action adopted by the buyers as having been reasonable under the circumstances, it held that, since no adequate measures (behaviour) had been available, the failure to suggest such commitments did not constitute fault or negligence on the side of the buyers.

6. Damages

The categories and calculation of damages awarded by the arbitral tribunal are subject to the lex causae, and the relief adjudicated depends, notably, on whether a given transaction has been consummated or rescinded. Faced with pre-closing conflicts, both parties will have to decide between, on the one hand, the execution of the purchase agreement and, on the other hand, finding another buyer (for the seller), or abandoning the deal (for the buyer). Typically, the damaged party wants to be compensated for the losses suffered, i.e. to be put in the position it would have been in, had the purchase agreement been performed as intended. Alternatively, where it opts for the negative contractual interest, it wants to be put in the position it would have been, had the negotiations never been initiated.

6.1 Damages Requested by the Buyer

If the seller violates his contractual obligations after the signing of the share purchase agreement, the buyer, under Swiss law, can choose between requesting performance of the agreement and compensation for expenses incurred due to the late performance, or waiving late performance and requesting compensation for the loss of profits, or rescinding the contract and asking for negative interest, i.e. damages incurred due to the useless negotiations133. Should the buyer choose the performance of the transaction, it must maintain its financing in order to be in a position to pay the purchase price. Since a dispute can last for a lengthy period, a buyer’s financial flexibility could potentially reach its limits, making the request for performance in practice often unattractive.

133 Tschäni, op. cit. (footnote 4), 154, see also Urs Schenker, Rechtsbehelfe bei Nichterfüllung und Leistungsstörung im Unternehmenskaufvertrag, in: Tschäni, op. cit. (footnote 13), 109, 117 et seq.

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6.2 Damages Requested by the Seller

If the buyer breaches his duty to pay the purchase price, the seller, under Swiss law, has the option of requesting performance of the contract or rescinding the contract and claiming damages after setting an additional deadline for the buyer to comply with its obligations. Again, the calculation of positive interest, in particular lost profit (i.e. calculating the situation the seller would have been in had the buyer paid the price according to the contract) is generally difficult to achieve and support with evidence.

Where the seller insists on the completion of the transaction, it must remain in a position to fulfil its obligations. As a consequence, the target company may not be offered to a third party. Again, in view of the amount of time which a final adjudication of a performance request can take, a seller may prefer selling to a third party as the quicker solution to achieve its goal134.

6.3 Different Types of Damages

Damages, generally, include loss of profits (lucrum cessans), as well as a decrease of assets or increase of liabilities or expenses (damnum emergens). Further types of damages that an arbitral tribunal might have to decide on could include compensation for the loss of opportunity, or moral damages. In M&A transaction disputes, the difficulties which the parties normally encounter in substantiating and proving damages which go beyond costs incurred should not be underestimated.

6.3.1 Loss of Profit

While it is relatively easy to calculate and prove compensatory claims for expenses made in view of the contemplated transaction (e.g. legal fees, fees of various consultants, etc.), the standard of proof for loss of profit is more stringent and the calculation more complex, since the damaged party must adequately substantiate and document the profit it could have made, had the transaction not failed. Generally, it does not suffice to present a claim for lost profit based only on a hypothetical course of business. A difficult hurdle for a successful claim of lost profit is, often, proving that the reason for the loss was the violation of a contractual obligation or statutory duty by the other party135.

6.3.2 Loss of Opportunity / Loss of Reputation / Moral Damages

It is even more difficult for the damaged party to prove and obtain compensation for the loss of opportunity, of positive synergy effects, of reputation or for moral

134 For Swiss law, Article 107 CO: A seller can set an appropriate deadline for performance and rescind the contract if the buyer does not perform.

135 Under Swiss law, pursuant to Article 42(2) CO, an estimate of damages may be made by the tribunal in special circumstances, taking the “normal evolution of matters” into consideration, see Anton Schnyder in: Honsell/Vogt/Wiegand, op. cit. (footnote 19), N 11 ad Art. 42.

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damages. Some laws do provide compensation for such types of damages and if they do, the standard of proof is very stringent136.

6.3.3 Reimbursement of Costs

As already mentioned, the reimbursement of costs and expenses incurred in relation to a failed transaction can be the "easiest" kind of damages to claim, as parties are usually able to produce evidence and can prove that expenses were incurred in the course of the negotiations or in preparation thereof (e.g. due diligence, preparation of authorisation requests). Such costs include lawyers’, accountants’ and other outside advisors’ fees, as well as expenses incurred by the employees of the party. A request for reimbursement for employees' salaries will, however, fail in most cases, as a claimant will find it difficult to prove that this cost would not have been incurred without the transaction.

External costs related to the financing and to setting up a structure or organisation to be used for the successful consummation of the transaction, as well as costs for the preparation of a future integration process of the target company into the buyer’s organisation would constitute typical reimbursable expenses.

6.3.4 Damages in Case of Pre-Contractual Liability – culpa in contrahendo

Pre-closing disputes may include conflicts that arise even before a share purchase agreement has been signed. These claims are typically based on a breach of a memorandum of understanding or a letter of intent, or on a violation of the general duty to negotiate in good faith (culpa in contrahendo)137. If one of the parties breaks off negotiations unexpectedly and without reason or, if it delays negotiations unnecessarily, or continues negotiations knowing that it will not conclude an agreement, this kind of behaviour may qualify as a breach of the duty to negotiate in good faith, with the consequence that the other party may be entitled to compensation.

Compensation ought to cover the so-called negative interest; in other words, the party has to be restored to the same position it would have been in if the other party had not breached is duties, either if negotiations had been abandoned earlier or had never started138. Compensation consists primarily of expenses incurred due to the contemplated M&A transaction (e.g. costs for consultants, legal fees, travel expenses, etc.). Hypothetically, a tribunal could also award loss of profits or opportunity in cases where the injured party has renounced concluding another (profitable) deal because of the on-going negotiations. However, as mentioned

136 For Swiss law, see Andreas von Tuhr / Arnold Escher, Allgemeiner Teil des schweizerischen Obligationenrechts, Bd. 2, Zurich 1974, 156 et seq.; Eugen Bucher, Schweizerisches Obligationenrecht, Allgemeiner Teil ohne Deliktsrecht, Zurich 1988, 343.

137 See supra, Section 5.2.


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above, it might not be easy to prove an adequate causation between the breach of duties and the damages.

In practical terms, there is not much difference, under Swiss law, between the liability for damages under an LOI or a memorandum of understanding providing for a duty to conduct negotiations in good faith and the rule developed by jurisprudence and case law, providing for a liability in culpa in contrahendo139.

6.3.5 Penalties

Depending on the lex causae, parties may be well advised to provide for contractual penalties for the breaches of various obligations in the share purchase agreement, thereby avoiding the difficulties of calculating, substantiating, and providing evidence for their damages. It is particularly useful to secure confidentiality and exclusivity obligations in cases where it is especially difficult for the injured party to substantiate and prove the damages incurred. Where the requirements for a contractual penalty are carefully drafted, controversies over the recovery of losses and expenses can be successfully reduced.

An example of such a contractual penalty was the subject matter of the already mentioned DIS arbitration140.

6.3.6 Responsibility for Accidental Consequences

Under general principles of law, the seller is primarily liable for accidental consequences due to late performance or non-performance; in other words, the risk of the deterioration or destruction of the object of purchase rests with the seller up to the time the seller should have performed141. However, the seller is not liable for force majeure situations. In the event of an asset deal, it is relatively easy to determine whether the object of the sale has deteriorated or been destroyed before or after closing. In share purchase transactions it might be argued that the object of the sale is the shares and not the underlying company; liability for accidental consequences would therefore apply only to destruction of the shares, and not to the assets of the company at issue142.

139 Heinz Schärer, Vertragsverhandlungsvereinbarungen, in: Pierre Tercier / Roland Hürlimann (Eds.), In Sachen Baurecht, Zum 50. Geburtstag von Peter Gauch, Freiburg 1989, 28; Isler, op. cit. (footnote 13), 18.

140 See supra Section 3.4.1.1.

141 For Switzerland, see Article 103 CO. Usually, M & A agreements provide for the risk with regard to the target company to pass to the buyer at closing. If no contractual provision is made, but closing is subject to certain conditions precedent, benefit and risk with regard to the object sold pass to the buyer only upon fulfilment of the conditions (Article 185(3) CO).

142 See also Schenker, op. cit. (footnote 133), 121, and Peter Böckli, Gewährleistungen und Garantien in Unternehmenskaufverträgen, in: Rudolf Tschäni (Ed.), Mergers & Acquisitions, Zurich 1998, 59, 62 et seq.

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7. Conclusions

Pre-closing conflicts in M&A transactions can be resolved efficiently and constructively by arbitration and other means of alternative dispute resolution methods, provided that the envisaged procedure is based on an agreement which specifies, without ambiguity and with the necessary segmentation, which issues shall be dealt with by the arbitral tribunal, expert determination or in another fashion. To be efficient, it is important to define and delimit the scope of review, determination and adjudication of an individual case in a precise manner and to avoid any conflicts or unnecessary overlap of the different dispute resolution methods.

Even though conflicts in M&A transactions which arise before the closing will still, in most cases, be either resolved through negotiations by the parties or a quick termination of the project, brought about by the withdrawal of one or both of the parties, the number of arbitration cases is increasing.

A special challenge for the parties and the arbitrators will be to define and implement a procedure which allows complex issues to be resolved in the short time available, as the closing of an important transaction cannot be put on hold for too long. There are a number of substantial arbitration cases where fast-track and expedited procedures have been applied successfully to monitor and enforce undertakings in merger control proceedings and in certain EU exemption cases in very short time frames. If arbitration has worked and works in such complex circumstances as merger control issues, there are good reasons to assume that arbitration could also be tailored to satisfy the needs of the parties in solving their pre-closing disputes. Although a clear challenge, it might also be a chance to restore one of the advantages of arbitration which has gradually weakened or almost disappeared over the years due to the ever increasing introduction of methods applied in state court proceedings: i.e. the rendering of a just decision within a short time span.

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ARBITRATION OF MERGERS AND ACQUISITIONS:

PURCHASE PRICE ADJUSTMENT ARBITRATIONS

Wolfgang Peter∗

1. Introduction

Very schematically, M&A transactions can be described as processes that, frequently, after a bidding involving interested buyers, start with a negotiated letter of intent, in which the parties express their interest and usually their commitment to a deal and set a framework for the transaction. Subsequently, detailed and often complex negotiations take place between the parties, accompanied by due diligence, leading up to the execution of a purchase agreement that will state a provisional price as well as adjustment mechanisms and procedures. Generally, and ideally, full due diligence is performed before contract signing in order to assess all relevant economic and financial aspects of the target company and to draft the appropriate representation and warranty provisions. Finally, ‘closing’ of the transaction takes place. This is normally the moment when the shares or title documents are delivered against payment. Thereafter, a ‘closing balance sheet’ or other reference factors, such as the target company's earnings, will be established and serve as the basis for price adjustment.

While many transactions involve shares of several target companies (at a level that leads to their control), or assets or a combination of both, I will speak hereafter for ease of reference of ‘the target company’. Purchase agreements are generally lengthy and complex, drafted in the Anglo-Saxon style, comprising many schedules and annexes. Reading may require some experience, as the deal's specific provisions are often drowned in lengthy boilerplate language. Further, M&A deals usually involve a host of contingent or ancillary contracts. The contract terminology is highly specific, including detailed finance and accounting concepts.

This article will focus on certain issues relevant to purchase price adjustment such as valuation methods, contractual price adjustment provisions, usual adjustment methods and the nature and types of valuation and accounting issues leading to M&A price adjustment disputes.

2. How are prices of M&A transactions defined?

In reply I shall (2.1) briefly look at the role of valuation methods, followed (2.2) by a summary presentation of some company valuation methods used in the context of M&A transactions.

2.1 The role of valuation methods:

The seller of a target company will propose a certain price or price range and seek to justify his position by referring, inter alia, to accepted valuation methods. The seller’s price request is usually relying on the data provided by his Information Memorandum and Business Plan for the target company.

∗ Partner and Attorney-at-Law at Python Schifferli Peter, Geneva.

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A buyer will examine the plausibility of the requested price by using the valuation method(s) which he considers appropriate. In applying these methods, the prospective buyer will not only rely on the data provided by the seller, but also on his own assessment of the target company, its economic environment and perspectives.

Whether the price is directly negotiated between Seller and Buyer or determined in a bidding process, valuation methods play, in any event, an important role in most transactions. Furthermore, there are also strategic and “soft” elements that may influence the price. For instance, a buyer’s price approach will depend on his own situation. An industry buyer may take into account the synergies that are expected from the integration of the target company in his existing group activities; a financial buyer, who will hold the company on a stand-alone basis, cannot factor such synergies into his price assessment.

But whatever the structuring of the transaction and whoever the parties implied, valuation methods will be of importance for:

• setting an acceptable price range;

• justifying a negotiated price or a bid price.

2.2 Types of valuation methods:

Currently used valuation methods can be divided into three groups:

1. asset-based;

2. earnings-based;

3. industry or market standards.

2.2.2 Asset-based valuations include:

• book value;

• replacement value;

• liquidation value;

• net asset value (adjusted net book value) (Substanzwert / valeur substantielle).

There is general consensus that for M&A transactions the mere book value of a target company is inappropriate. The net asset value is in practice the most frequently used asset-based valuation method. It consists in adjusting to economic reality each category of the target company’s balance sheet (such as proper depreciation of assets or elimination of hidden reserves) in order to calculate the net asset value as the difference between the sum of all adjusted assets and the sum of all adjusted liabilities.

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2.2.3 Earnings-based valuations1 essentially include:

• discounted cash flow (DCF), a method which estimates future free cash flow2

generated by the target company, converted to present value on the basis of a discount rate which is determined by using a combination of target company specific financial data and financial market data;

• multipliers applied on values such as EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortisation) or EBIT (Earnings before Interest and Taxes) or even turnover or net profit.

2.2.4 Industry or market standards refer to valuations such as:

• stock market value (market capitalization);

• industry multiples (multiples based on various industry standards);

• trading multiples (comparison with listed companies);

• transaction multiples (comparison with other effective M&A transactions).

The last two methods will usually focus on such relevant multiples as Enterprise Value/Sales or Enterprise Value/EBITDA or Enterprise Value/EBIT. Ratios such as P/E (Price/Earnings) or P/CF (Price/Cash Flow) can also be used but may prove difficult due to different accounting methods, particularly between the USA and Europe.

3. How are these valuation methods reflected in price adaptation provisions?

In contracts providing for price adjustment, the price contractually stipulated is provisional and (a) specific contract provision(s) will provide for price adjustment. Clearly, the parties are free to use any method that they consider suitable for setting the provisional purchase price. The provisional price on which the parties have agreed will then be adjusted after closing pursuant to adjustment criteria provided for in the contract.

There are different types of price adjustment mechanisms, including provisions based on the variation in net assets, working capital, cash flows, or net income. These mechanisms can be used alone or combined. This article will hereafter focus on two frequently used price adjustment provisions:

3.1 Provisions dealing with the net asset value of the target company, which compare a closing balance sheet with a predefined earlier reference balance sheet, thus computing the difference of the net asset values between these two financial statements and adjusting the price accordingly.

3.2 The price adjustment may, however, also be based on earn-out provisions, based on future turnover, gross margin, EBITDA, or EBIT. These provisions usually provide that a contractually defined portion of the purchase price will be

1 While this summary focuses on most current valuations, there are other methods, such as EVA (Economic Value Added) which combines elements of net assets and earnings. 2 “Free” cash flow is the cash flow which can freely be used after deducting from EBITDA taxes, changes in working capital, and investments.

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determined by such future data, using a pre-established formula, respectively multiplier.3

A net asset value approach will be directly written into the contract, comparing an agreed balance sheet with a subsequent (adjusted) “closing” balance sheet. In the following example, the purchase price was based on the net asset value:

“2.6 Purchase Price: In consideration for the sale of the Assets and the assumption of theAssumed Liabilities, at the Closing the Purchaser shall pay the sum of DEM 295,000,000 (‘Purchase Price’), as the same may be subsequently adjusted in accordance with the provisions of this Article 2.”

As described above, the provisional price may also be calculated on the basis of the target company's earning capacity by using an EBITDA or EBIT multiplier as shown in the following example (where the provisional price is called ‘basic price’).

“1.2 Share Price: The purchase price for the Shares (hereinafter ‘Purchase Price’) shall be CHF 45,000,000 (hereinafter ‘the Basic Price’), i.e. CHF 30,000 per share, to be adjusted, as the case may be, by application of the provisions of article 1.4 below. The Basic Price has been determined on the basis of a Share value of 6.8 x EBIT for the fiscal year 1995.”

Where the price is earnings-based, it is obviously impractical to agree to a price adjustment on the basis of a guaranteed discounted cash flow over a reference period of several years. Indeed, this is not only far too long, but also unacceptable to the seller, who is quickly losing control, after the sale, of the internal development of the company including the EBITDA or EBIT determination by the buyer. Instead, a buyer will for instance seek the guarantee of a one-year EBITDA or EBIT and a multiplier that corresponds to his DCF calculation of the target company. Thus where a DCF calculation over several years would generate an entity value4 of EUR 100 mio., using an EBITDA assumption of EUR 16 mio. for the first year after closing, the buyer will want the seller’s guarantee for an EBITDA of EUR 16 mio. in the same one year reference period following the transaction, which leads to a multiple of 6.25 (6.25 x 12 = 100) for a subsequent price adjustment. Thus an EBITDA of EUR 12 mio. in the first year after closing, i.e. a shortfall of EUR 4 mio., leads to an adjustment of 6.25 x EUR 4 mio. = EUR 25 mio. in favour of the buyer.

Before analyzing the issues raised by price adjustments made on the basis of these types of provisions, we shall briefly discuss the reasons for parties to agree to subsequent price adjustments provisions and the causes of disputes resulting therefrom.

4. Why do parties include price adjustment provisions in the agreement?

Purchase price adjustment provisions based on net asset value are included in acquisition agreements for a variety of reasons. There is, in particular, the time lag between the

3 Earn-out provisions can overlap with representation and warranty provisions. Where representations and warranties guarantee the buyer that revenue or EBIT targets will be reached, these representations and warranties have the same economic result as earn-out clauses, as both are designed to adjust a purchase price and are triggered by the same financial (earnings) criteria.

4 Entity value is to be distinguished from the equity value. The latter represents the value of the company after deduction of third parties financing (debt).

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execution of the purchase agreement and the closing, often due to competition law issues or tax considerations, or the necessity of obtaining consent from third parties or from the board of directors, or the need for confirmatory due diligence. A price adjustment provision mitigates the buyer's risk of suffering from the target company's financial deterioration in the event that the seller should fail to manage the company efficiently until the closing of the transaction. Further, the balance sheet, on the basis of which the provisional purchase price is determined, is obviously drawn up well before closing and unless the target company is a static enterprise, there will invariably be changes by the time of closing.

Purchase price adjustment (earn-out) provisions based on future earnings of the company (which can be determined by EBITDA, EBIT, turnover or gross margin) are inspired by a different philosophy. Essentially, the buyer wants to ensure that the company's future income is in line with projections. If not, these earn-out provisions will adjust the provisional price accordingly, but this can obviously play in favour of either the seller or the buyer.

These two adjustment mechanisms rely on different financial data. Net asset value is calculated on the basis of the target company's balance sheet, while earn-out provisions focus on the profit and loss account. This latter approach is considered, in economic terms, a more efficient method for determining the economic value of the target company5, but it creates uncertainties if the contractual reference period is long and is thus more vulnerable to attempts to manipulate the result by the buyer who controls the company. Therefore, in my experience, the majority of transactions rely on price adjustment mechanisms based on net assets (also called net equity). Nevertheless, in a net asset-based transaction a buyer will not ignore the issue of future earnings. On the contrary, he will certainly do his own estimate of future EBIT, and he will want to be comforted during due diligence by the careful review of the past earnings record of the company, and his own estimate may influence the net asset value negotiations.

Finally, the parties may also provide in the contract for a cap on the adjustment, upwards as well as downwards, in order to limit the magnitude of adjustment and, particularly from the seller's perspective, in order to avoid a negative equity.

5. Why do M&A transactions frequently generate price adjustment disputes?

In my opinion, one particular element makes the price adjustment process potentially litigious: it is the open-ended nature of the agreement. As there is money to be gained, parties have an obvious incentive to construe the adjustment process in their favour, and in addition to use to the largest extent their policy influence in terms of accounting and management of the company in order to achieve the most favourable result. While the contract provides, formally speaking, for contractual rules to adjust the transaction price, one must bear in mind that the final determination of the price depends on two factors:

• The smooth operation of the adjustment mechanisms provided for in the agreement;

5 While net equity can be seen as a balance sheet definition of the “value of a company, it does not, as such, provide information about future earnings. However, acquisitions are in principle not made for the net asset value of a company, but its capacity to generate future income. Therefore, EBIT or EBITDA, either under a valuation of discounted cash flow or by applying an industry-specific multiple, is considered a better valuation method of a company in economic terms.

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• The potential business policies or manipulation possibilities of the parties.

A few words on each of these two factors.

5.1 Adjustment mechanisms provided for in the agreement

The agreement provides for criteria pursuant to which the final price of the transaction is determined, resulting in a difference with the provisional price that will have to be settled between the seller and the buyer. But the adjustment process is not necessarily smooth. Some recurrent grounds for disputes are: lack of clear definitions of accounting concepts, lack of co-ordination between ad hoc (contractually agreed) and statutory accounting rules, inconsistencies in methods and procedures to be applied in mixed (assets and shares) deals, unrealistic time-periods in order to complete certain steps, blurred lines between legal and accounting concepts, different cultural backgrounds of the parties regarding accounting and reporting practices.

5.2 Policies and manipulations

Depending on the nature of the deal, both the seller and the buyer can be tempted to use their influence on the running of the company in order to ‘prepare’ for the adjustment ground, the seller in the period leading up to the transfer and the buyer after taking control. While the contract language supposedly anticipates and prohibits such attempts, in practice, measures which are effectively manipulations are not always easy to prove and often raise complex accounting and valuation issues.

6. Adjustment based on a change in net assets

Contracts where the purchase price is based on the net asset value of the target company at closing generally provide that the price will be adjusted pursuant to the net asset value resulting from the closing balance sheet. As a rule, it will be established after closing and will be compared with a reference net asset value. The precise terminology will obviously vary from agreement to agreement and may for example read as follows:

“In the event that the net asset book value of the Total Sold Business established in the Transfer Balance Sheet pursuant to Art. 5.4 (the ‘Actual Net Asset Value’) exceeds the Target Net Asset Value, the Second Installment shall be increased by any such excess amount plus contractual interest and in the event the established Actual Net Asset Value of the Total Sold Business is less than the Target Net Asset Value the Second Installment shall be decreased by any such amount, provided that if the shortfall exceeds the amount of the Second Installment, Seller shall refund the difference to the Purchaser plus Contractual Interest.”

The closing balance sheet is often established by the buyer because he usually has control of the books and records after closing. This task is carried out in conformity with contractually agreed conditions, using the services of defined auditors and applying the target company's past accounting practices (principles of continuity and materiality).

The seller generally ensures that the contract grants it access after closing to documents allowing him to control how the financial statements are established by the buyer. This contractual regulation should be detailed, and provide that the seller will have access to all

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documentation relating to the drawing up of the closing balance sheet, including the auditors' working papers, as in the following example:

“Seller and Seller's auditors shall have reasonable access to the books and records used by Purchaser in the preparation of the Balance Sheet and Seller's auditors shall have reasonable access to the working papers of Buyers' auditors prepared in connection with the audit and to the books and records of Purchaser to the extent used for the preparation of the Balance Sheet and not in possession of Seller at that time.”

However, some agreements also provide for the seller to prepare the closing balance sheet. An example of a contractual provision to this effect is set out below:

“Purchase Price Adjustments. As soon as practicable, but not later than 90 days following the Closing, Seller shall prepare, or cause to be prepared, and deliver to the Purchaser the Closing Date Balance Sheet, which shall fairly and accurately set forth the Assets (other than the Spare Parts outside Italy and the Excluded Consigned Inventory) and the Assumed Liabilities as of June 30, 1998 and which shall be certified by the Seller's independent certified public accountants and be prepared in accordance with applicable generally accepted accounting principles, in accordance with Seller's past accounting methods, policies, practices and procedures in the same manner, and with consistent classification, in which the Business Balance Sheet was prepared.”

Where the closing balance sheet is established by the buyer, he may try to decrease the company's net asset value, in order to obtain a reduction of the price. The net asset value can be reduced, for example, by decreasing receivables and inventories, and by increasing depreciation of fixed assets and by creating provisions for contingent liabilities (risks linked to environment, personnel, contract projects and so forth). Where, on the contrary, the seller establishes the closing balance sheet, he might try to increase the net asset value by seeking to justify an evaluation of balance sheet items in the opposite direction.

Experience shows that almost any target amount proposed either by the seller or the buyer will be supported by the relevant party's accounting experts, a fact which creates huge discrepancies among the parties and explains why, in the same transaction and relying essentially on the same documentation, the seller's experts will often justify a substantial upward price adjustment while the buyer's experts will hand in a report explaining that the circumstances warrant a considerable price reduction.

If someone is not familiar with accounting and valuation issues, they may be surprised to see such divergence in a field which is supposedly governed by objective and specific rules. The fact is that it is not bookkeeping but valuation which is at issue. In other words, judgmental questions play a decisive role.

7. Adjustment based on earn-out clauses

If the purchase price is adjusted by way of an earn-out clause, the price depends, entirely or in part, on future defined events, as a rule on the future results of the company. An earn-out

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clause therefore entails, at least to some extent, a variable price. One may also speak of earnings-based price adjustment6.

An earn-out clause has the advantage for the buyer to adjust the price based on future performance, something a net asset based price adjustment cannot achieve. It will not only comfort the buyer, it can also assist a good-faith seller, who did not try to overrate the target company or was unable to negotiate successfully its target price to benefit from an upwards adjustment, if it was right in anticipating increasing performance. Consequently, an earn-out provision, such as the clause below, may prove attractive to both sides:

“If the difference in the EBIT guarantee provided by Seller in Article 3 and the actual EBIT as of December 31, 2000, as reflected on the basis of the Audited Combined Income Statement based on US GAAP is favourable or unfavourable to Purchasers by an amount greater than five (5) percent, then an adjustment of the purchase price for the Total Business shall be made by multiplying such difference by the factor five point seven (5.7), but in any event will not result in a purchase price of greater than CHF 70 (seventy) million.”

These clauses sometimes indicate specific deal conditions and the clause below may reflect different bargaining powers of the parties, given the different downward and upward trigger level (respectively 5 per cent and 9 per cent):

• If the Consolidated EBIT is lower by 5% or more than the Initial EBIT, the Provisional Price shall be reduced by a maximum amount of USD 12,5 million where the Consolidated EBIT is lower by 15% or more (hereinafter the ‘Adjustment Amount’). The Adjustment Amount shall vary proportionally between USD 0.- and USD 12,5 million for a Consolidated EBIT between –5% and –15% of the Initial EBIT.

• If the Consolidated EBIT is higher by 9% or more than the Initial EBIT, the Provisional Price shall be increased by a maximum amount of USD 4 million where the Consolidated EBIT is higher by 20% or more (hereinafter the ‘Adjustment Amount’). The Adjustment Amount shall vary proportionally between USD 0.- and 4 million for a Consolidated EBIT between + 9% and +20% of the Initial EBIT.

The EBIT relevant for the price adjustment will be determined by drawing up the profit and loss account for the contractual reference period. The original EBIT calculation will give rise to detailed scrutiny, as will the subsequent EBIT calculation made by the buyer after it has taken control of the target company.

6 One may wonder if there is a distinction between earn-out clauses and ‘mere’ earnings-based price adjustment provisions. Obviously, where the entire price would be entirely subject to an earn-out clause over a long reference period, without any guaranteed price portion and without any trigger levels and caps, the deal is, financially speaking, a far more open-ended transaction than if only part of the price is subject to earn-out and where adjustments are further limited by various contractual parameters. However, in both instances the price is, at least to some extent, subject to the future earning capacity of the target company. In my practical experience, earn-out clauses usually only determine a part of the purchase price, since it is obviously in the strong interest of the seller to secure a fixed portion of the price and to negotiate a short contractual reference period. There seems to be no defined line between earn-out and earnings-based price adjustments, and I believe that whatever the terminology, from an economic point of view it is reasonable to consider that earn-out clauses are in the realm of price adjustment provisions.

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The contract will usually provide that for accounting purposes EBIT is determined under the principle of continuity in order to ensure that extraordinary income or charges do not distort the result and that, as a fundamental rule, there is no departure from the seller's past accounting practices.

The use of an earn-out clause furthermore requires continuity of management procedures, in order to prevent a buyer from manipulating the results, in particular by modifying the business plan in order to increase charges in the earn-out reference period or push income into the follow-up period. Thus, for example, the buyer may decide to initiate a price discount campaign, officially, for instance, to attract new customers or to reduce inventory. But any income amounts so lost by the target company will reduce the purchase price by the EBIT multiplier of such amount. The buyer may also engage in large marketing expenses, which, while decreasing the earnings of the reference period to the detriment of the seller, will be beneficial to the buyer in subsequent periods. Clearly the buyer may seek to justify all sorts of allegedly necessary management policies such as early discontinuation of low-profit product categories or of increased expenses, always to the detriment of the reference period for EBIT. It may be difficult for the seller to monitor the buyer's actions and to prove a deliberate profit-reduction policy. As suggested above, earn-out clauses can give rise to numerous disputes concerning the buyer's obligations. For a good-faith buyer who, depending on the circumstances, cannot necessarily stick to the initial business plan, it can also raise real issues: what is the acceptable level of the investments to be made to properly support the business and how to deal with the possible cost impact of acquisitions or divestments which, following good business practices, should be carried out during the earn-out period.

Earn-out clauses can also give rise to disputes when they are not drafted in enough detail, for example as to which type of performance indicator is to be taken into consideration (EBIT or EBITDA?), what the reference period will be, which accounting principles should be used in a multi-jurisdictional transaction, or whether specifically defined GAAP (Generally Accepted Accounting Principles of a particular reference country, for instance UK GAAP or French GAAP) will prevail under any circumstances over seller's past accounting practices.

This last issue of GAAP v. past accounting practices is a recurrent issue in price adjustment disputes. As an example, one may consider that a seller practises so-called pre-invoicing(invoicing products which will only be shipped in the next fiscal year), which would not be acceptable under most applicable GAAP. The purchase agreement will require that the adhoc financial statements established for the transaction must be drawn up in accordance with GAAP, but the contract usually also provides for consistency with the seller's past accounting practices. The buyer may consider that it is entitled to eliminate pre-invoiced sales from the financial statements by relying on the principle that GAAP rules prevail over the seller's incorrect past account practices. But then, the seller may argue that the buyer's accounting experts had noted and reported the seller's pre-invoicing practice to the buyer in the due diligence prior to the signing of the agreement. The buyer may then possibly only argue that not the entire pre-invoicing, but only any material increase over past years' pre-invoicing practice should be eliminated.

In conclusion, numerous issues can impact on adjustments based on earn-out clauses and in particular where a DCF calculation has been used to value a company, it involves

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computation of numerous data connected with corporate strategy, company operations, investment policy and financing issues. Numerous value drivers can therefore impact on the final value, and such value drivers can change significantly between the moment the target price was set and the time of the closing, or even the date set for post-closing adjustments. Among value drivers are following : planning horizon, that can change final value even without any other change in the forecasts, sales growth, margin, tax rates, that may alter the expected results, changes in working capital that may generate or consume cash flow, cost of capital and Equity ratio, that will impact the discount rate.

8. Objections to adjustment calculations

Contracts provide for a party's right to object to the balance sheet drawn up by its counterpart or to the EBIT calculation presented by the buyer at the end of the earn-out reference period. The objection phase is in general contractually regulated:

“In the event Purchaser does not agree with the delivered Transfer Balance Sheet it shall deliver to Seller a written objection (the ‘Objection Notice’) within a period of five weeks after receipt of the Transfer Balance Sheet.”

This is the moment when a possible dispute comes out into the open. As mentioned before, it is not unusual for the seller to request an increase of the purchase price, while the buyer demands a price reduction, so that the value in dispute is obviously equal to the sum of both adjustment claims.

9. Frequently disputed issues

When proceeding to establishing the closing balance sheet or the profit and loss account in order to adjust the price, frequently disputed issues include:

• governing accounting rules and principles;

• principle of continuity, in practice difficult and highly litigious;

• materiality standards;

• revenue recognition issues (at which point in time must the revenue be recorded? how to handle pre-invoicing?);

• amortisation and depreciation issues, particularly inventory and receivables;

• deferred income and expenses;

• percentage of completion method in evaluating long-term projects;

• consolidation issues;

• impact of exchange rate fluctuations; and

• basis of provisioning for litigation or contingencies;

• more generally any issue involving accounting estimates or judgmental decisions.

However, disputes are clearly not confined purely to accounting and valuation questions but are frequently legal in nature as the following example shows. Where a seller wishes to obtain a certain minimum price level for the target company it can initiate a bidding procedure involving several potential buyers. I have experienced disputes where one of the bidders

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makes a high offer and secures the deal, although it does not wish - or intend - ultimately to pay the bid price. After closing, this buyer purports to obtain a substantial price adjustment by pointing out certain accounting practices of the seller which were made in violation of applicable GAAP. This would normally lead to a price adjustment. If the auditors' working papers reveal that this buyer had knowledge of these facts it is relying on to reduce the price prior to placing its bid, it should be precluded from claiming a price reduction.

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POST-CLOSING DISPUTES ON REPRESENTATIONS AND WARRANTIES

Rudolf Tschäni

1. Introduction1

The clauses dealing with representations and warranties are the most hotly debated clauses in an M&A-transaction. This is so regardless of the applicable law and regardless of whether the shares of a company are bought (share deal) or directly the assets of a company (asset deal). In the following, the emphasis will nevertheless be on share deals and hence on share purchase agreements ("SPA").

Representations and warranties in M&A-contracts have become rather extensive. However, it is fair to say that the scope still varies depending on the governing law. Of the more important jurisdictions, representations and warranties in England and the United States have probably become the most elaborate and detailed ones. As a result of the considerable influence of the Anglo-American practice, representations and warranties are laid out in much detail in M&A-contracts generally, though. Frequently, the clauses containing representations and warranties are contained in the purchase agreement as such;sometimes - but not very often - they are listed in a specific exhibit to the contract.

In international transactions the parties attempt to include all their rights and obligations in the SPA, thus trying to fully create their own legal framework; they do not want to rely on statutory provisions and/or case law.

M&A-contracts are often made subject to arbitration. There are a number of reasons for this trend, mainly the desire to have particular M&A-expertise available, and because the international background of the arbitrators is appreciated.

In recent years, the number of cases going to arbitration has substantially increased.Arbitration would regularly be started by the buyer, while it is rare that the seller would be the plaintiff. There are a number of reasons to resort to litigation. Companies are often sold by way of an auction which results in rather high prices being paid. Accordingly, the buyer has precise expectations on which he bases the calculation of the purchase price. Should his expectations not be fulfilled, the buyer will be ready to initiate arbitration proceedings. Further, M&A-processes have become professionalized. Hence, costs and time spent to undertake an acquisition have become considerable. The process is driven by the desire to eliminate unexpected results. Risks are investigated (due diligence) and allocated between the parties. In line with this process, the buyer does not accept deviations which frustrate his economics of the transaction.

Against the above background I will give an overview of representations and warranties commonly agreed between parties. Furthermore, typical difficulties to be encountered by

1 I would like to thank my colleagues Matthias Wolf and Hans-Jakob Diem for their valuable input.

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party representatives in arbitration proceedings as well as the perspective of an arbitrator will be highlighted.

The presentation will be made from the view of a practitioner (both arbitrator and M&A-advisor) and is not aimed at being a dogmatic and comprehensive overview of the subject. An international approach is chosen with some emphasis on Swiss law. The focus is on representations and warranties used in negotiated M&A-transactions involving privately held companies.

2. Representations and warranties

2.1 Preliminary Remarks

The parties are at liberty to define the representations and warranties in the SPA. Conceptually, representations and warranties relate to characteristics of the company and the business being sold. Technically, representations on the one hand and warranties on the other hand have to be distinguished. According to American sources, representations are statements of past or existing facts, while warranties are promises that existing or future facts are or will be true2. However, in practice the difference has proven unimportant. Under Swiss law the term "Representations" would most suitably be translated into "Zusicherungen", while the term "Warranties" would be equivalent to "Gewährleistungen" or "Garantien". Under Swiss law there is a difference between "Gewährleistungen" und "Garantien", though. "Garantien" would rather amount to indemnities.

Indeed, representations and warranties must be distinguished from indemnities which are normally agreed upon separately. Indemnities are given in respect of future facts regarding which the parties agree on the (financial) consequences. On the other hand, representations and warranties (Gewährleistungen) relate to facts existing at the time of signing and/or closing. According to the Federal Supreme Court of Switzerland, representations and warranties could also relate to facts at a later time, provided that the seller is contractually obligated and in a position to bring about those facts3. If future facts warranted are beyond the influence of the seller the representation and warranty must be deemed to be an indemnity, although indemnities sometimes also relate to present (known or assumed) facts, with the parties agreeing on which party shall bear the (negative) consequences that might arise from these facts. The exact definition will depend on the applicable law, but practically speaking indemnities are used where the parties agree that the consequence of a problem they have identified will be borne by the seller, regardless of the knowledge of the buyer.

Representations and warranties must further be distinguished from covenants which define actions to be undertaken, or abstained from, by the parties in the future, i.e. from the time of signing or closing of the SPA.

The parties in an M&A-deal agree that representations and warranties are given as of the time of signing and usually - at least in a qualified form - of closing. This means that the risk

2 J. C. Freund, Anatomy of a Merger, New York 1975, 153; American Bar Association (ABA), Model Asset

Purchase Agreement with Commentary, Chicago 2001, 69.

3 BGE 122 III 426, 428 et seq.

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of the representations and warranties becoming untrue between signing and closing is borne by the seller.

Representations and warranties are ascribed to have three purposes. First, they constitute the starting point for due diligence. Second, they are the basis for any claims the buyer might have after the transaction has been closed because a representation and warranty was not accurate. Third, the buyer might be entitled to refuse to close a transaction should it prove that the representations and warranties are no longer accurate at the time of closing, particularly if the accuracy of the representations and warranties is made a condition precedent to closing.

Below some of the more important representations and warranties are commented upon. The overview is confined to representations and warranties given by the seller, although the buyer will customarily be asked to give a limited number of representations and warranties as well.

2.2 Title, Existence, Organisation

Almost always the seller represents and warrants that he is the legal and beneficial owner of the shares being sold, and that the shares are free and clear from any encumbrance. This is a very standardized representation and warranty which does not give rise to much discussion during the negotiations. In most laws, this representation and warranty would be deemed to be implied even if not explicitly given. Depending on the situation, the clause may vary, e.g. in a situation where prior to closing the shares are pledged with a third party and will only become free at the time of closing. Usually, the representation includes the target company having title over the shares of its subsidiaries. Similar to title warranties, representations and warranties in respect of existence and due organisation of the target company and its subsidiaries are usually not disputed and given by the seller in the SPA.

2.3 Financial Statements

It is customary for the seller to represent that the financial statements of the company being sold are accurate and complete, established in accordance with a certain set of accounting principles, and that they truly and fairly represent the financial position, the results of operations and the cash flows of the company.

Lawyers tend to over-estimate the protection that this representation gives a buyer. First of all, the degree of protection depends on the referenced accounting principles. It is obvious that financial statements established in accordance with US GAAP or IFRS constitute a more reliable basis than other principles might (e.g. Swiss GAAP-FER). Even then, particularly for IFRS, there are a number of choices and a certain discretion in many instances on how to account for particular occurrences.

In addition, the exact language of this representation will depend on the applicable accounting principles. For instance, financial statements established pursuant to Swiss statutory rules only will not necessarily represent a true and fair view.

Further, more comfort can be obtained from financial statements that have been audited.Both the seller and the buyer will be more comfortable to rely on audited financial statements. In the US, it is rather customary to represent and warrant the financial

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statements for the preceding three fiscal years, while in Europe the clause is in many cases restricted to the last financial year. It should not be forgotten, in any event, that the buyer does not have a direct claim against the auditors, even if the buyer should base his decision to buy the target company on, inter alia, the auditors' report and such report turns out to be incorrect. There is no contractual relation between the auditors and the buyer on which to base a claim. The claim could only be brought on the concept of tort or some other concept, but ultimately this will depend on the applicable law. On the other hand, in a share deal the buyer will indirectly be able to hold the auditors liable after the deal is closed. Then, the buyer might claim as a shareholder, or the target company, once it is under control of the buyer, might claim from the auditors. Nevertheless, a claim will only lie where the auditors have been negligent.

In any case, accounting and auditing require an assessment to be made in many instances. Therefore, should it turn out that a provision was insufficient to cover a risk when the risk ultimately materializes, the buyer will not have a claim for a breach of representation if the provision - at the time it was made - is defendable under applicable accounting principles.

It is against this background that this representation is sometimes not only extended to be specific on certain positions of the balance sheet and the income statement, but the seller is also asked to warrant that the respective position is in fact correct. For instance, the seller confirms that the accounts receivable are all collectible and that he will make good for any difference between the accounts receivable (after allowing the provision for bad debt) as stated in the balance sheet and amounts actually collected. Or, one might find a warranty that the inventory can actually be used or sold and that the seller will cover any difference. In this way the value of a particular position is warranted and the representation becomes a warranty rather close to an indemnity.

The same consideration applies to liabilities, particularly contingent liabilities. The buyer will ask for a specific representation and warranty that the company does not have any such liability, regardless of whether the liability would have to be recorded under applicable accounting principles.

Usually, it is the audited statutory financial statements, in particular the consolidated financial statements, which are asked to be represented and warranted. However, sometimes the buyer requests the representation and warranty to extend to unaudited interim statements or even management accounts. It goes without saying that in this case the seller's risk of becoming liable will be significantly higher.

Generally speaking, this is an area where the legal advisors in an M&A-transaction will have to work closely together with the accountants or auditors. Likewise, arbitrators will have to be literate in reading financial statements in order to comply with their task. In many cases, party-appointed experts are involved or court experts will have to be appointed.

2.4 No Material Adverse Change

In this clause, the seller represents that from a particular time on the company being sold and its subsidiaries have not suffered any changes which would result in a material adverse effect. The reference date is usually the end of the last financial year for which audited financial statements are available. The no material adverse change-representation would

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thus cover the period from the financial year end up to closing. The material adverse change is defined as an occurrence or event having a substantial negative impact on the business, assets, income or financial situation and, from time to time, prospects of the company and its subsidiaries. In some cases, the parties quantify the adverse change in terms of turnover or income or limit or extend the scope of the clause by defining more specifically or excluding certain causes for the material adverse effect.

If the parties do not quantify the negative impact, the arbitration panel is confronted with the necessity to interpret the contract. Certain guidance can be found in cases decided abroad4.In those cases, the courts have rejected the applicability of the no material adverse change-clause. They held that the change must be analyzed from the long term perspective of a strategic investor. Accordingly, a short term hiccup in earnings was not considered to suffice. However, when referring to those cases, it must be borne in mind that the clause had a different function there, namely it would have allowed the buyer to abstain from consummating the transaction. In the context of a representation and warranty the interpretation might be different.

The no material adverse change-clause is of great importance. It protects the buyer to a certain degree for a period of uncertainty from the end of the last financial year for which audited financial statements exist up to closing.

In many M&A-contracts the no material adverse change-clause has been transformed into a clause named "Absence of Certain Changes". It is not only stated that the business of the company and its subsidiaries has been conducted in the ordinary course consistent with past practices, and that there has been no material adverse change, but rather certain specific events are singled out and listed, such as absence of dividend payments and like payments, changes in the financial position (such as incurrence of new debt or security), absence of material new commitments to employees, no change of accounting practice, etc. Accordingly, this clause is extensively debated in the process of negotiations. Given that this representation and warranty must also be true at the time of closing it puts considerable constraints on the seller in his running of the business from the time of signing up to closing. The exact definitions of the changes, therefore, vary from case to case.

2.5 Taxes

The representation regarding taxes includes a number of points, namely:

• timely and proper filing of tax returns as well as timely payment of the taxes due;

• no proceedings pending or threatened with the tax authorities;

• full provision of taxes in the financial statements;

• dealing at arm's length, thus no hidden distributions giving rise to withholding taxes.

Such representations are usually common place although they differ from case to case depending on the points identified as presenting a particular risk of giving rise to payment of additional taxes. They may be linked with an indemnity on a Franc for Franc or Dollar for

4 See the summary in P. Schleiffer, No Material Adverse Change, in: R. Tschäni (ed.), Mergers &

Acquisitions VI, Zurich/Basel/Geneva 2004, 71 et seq.

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Dollar basis. The representation and warranty concerning taxes is usually subject to a separate (longer) term as compared to the other representations and warranties.

2.6 Pension

This is a standard representation to be found in practically every SPA. The seller represents and warrants that:

• he has fully informed the buyer of the pension scheme and any premiums have been paid;

• the pension scheme is in compliance with the law and the applicable regulations;

• the pension scheme is fully funded to meet its obligations;

• there are no pension obligations other than as disclosed.

2.7 Environment

The representation regarding environment and its scope is likely to be controversial between the parties. This is the result of a substantial uncertainty that the seller himself might have regarding his exposure. Also, the seller is concerned that the buyer might clean up the premises at the expense and cost of the seller although there might be no immediate need to do so. Against this background, it is no surprise that this clause varies substantially from case to case. The following points are considered and, depending on the outcome of the negotiations, included in the contract:

• The business is being operated in compliance with environmental laws;

• All necessary permits related to environmental law have been obtained and no proceedings are pending with, or threatened by, the competent authorities;

• There are no substances present on, in or under a real property owned or leased by the target company and there are no off-site waste deposits for which the company would be liable;

• The company has no liability with respect to clean up.

Frequently, this representation and warranty is subject to a longer term than the general term of the representation and warranties. The seller agrees to this in order to prevent that due to time constraints the buyer will investigate environmental matters aggressively by sampling and testing the soil and water.

2.8 Legal Compliance / Regulatory Approvals

The seller is often asked to represent and warrant that the company is not in material breach of any applicable law, governmental permit or order and has obtained all the permits and authorizations material to carry on its own business as presently being conducted.

Given the recent tendency of governmental agencies to enforce compliance with laws, particularly in regulated areas, this is a representation and warranty which is becoming increasingly important. In light of this trend, it is also becoming more difficult for a seller to refuse to give such a representation and warranty.

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The clause needs to be interpreted as regards the term "material". The parties sometimes agree that a breach of applicable law must amount to a material adverse change that they define and quantify. Otherwise, it will be up to the arbitrators to rule whether the breach is material. Depending on the case this might prove to be rather difficult. If the parties have agreed on a minimum threshold amount generally, does this mean that the breach has to be material (however defined) and then a claim is solely available if in addition the minimum threshold amount is met? The answer will depend on the particulars of the case. In some cases, the seller tries to restrict the clause by referring to his knowledge, on the argument that he cannot possibly be aware of breaches of any law. If accepted at all, the buyer will require that the knowledge of the management of the target company be attributed to the seller. Such an agreement will generally be valid.

2.9 No Litigation

It is standard for the seller to represent that no actions, suits or other proceedings are pending before state courts or authorities or arbitration courts, or have been threatened in writing, except as disclosed and/or as provisioned against in the financial statements of the company. It is conceivable that a particular litigation is so substantial that it has an impact on the purchase price. In those instances the parties will deal with the respective litigation and its outcome specifically in a separate clause.

2.10 Disclosure

As will be set out further below, it is customary for the buyer to investigate the company and the business prior to entering into the SPA. Since he takes his purchase decision on the basis of the documents and information supplied to him, he asks for a representation stating that the information given is accurate, complete and not misleading. In the negotiations this request sometimes constitutes a considerable bone of contention. If the clause is included at all, which is probably more often done in Swiss law agreements than in Anglo-Saxon documents, the parties quite frequently will try to come to some kind of compromise. The seller will be concerned that an unrestricted representation on disclosure might become the basis for the buyer to bring a claim in respect of matters not considered in the other representations and warranties. The buyer, on the other hand, will want to have some comfort that the information on which he bases his purchase decision is accurate.

2.11 No Further Representations and Warranties

Quite often the parties agree on a clause stating that the representations and warranties made by the seller in favour of the buyer are limited to those contained in the SPA and that all further representations and warranties are excluded. This is usually accepted by the buyer. In this case it will be difficult for the buyer to argue that there are further (implied) representations and warranties. This clause is another reflection that the parties mean the SPA to be an exhaustive and exclusive legal framework of the rights and obligations between them. In some instances, the clause goes further to state that the seller makes no representation or warranty as to the accuracy of any business plan, budgets or the like. For the seller this clause is particularly important under Swiss law. As will be shown below the buyer might bring an action for fundamental error ("Grundlagenirrtum") as an alternative remedy apart from a claim for breach of a representation and warranty. This will be more

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difficult if the parties explicitly state that no representations and warranties are given except for those set forth in the SPA.

3. Breaches of representations and warranties

3.1 Duty to Investigate

Under Swiss law, the buyer has an immediate duty to investigate the business after closing failing which he will have no remedy for breaches that could have been detected in a customary examination. The holding of the Federal Supreme Court has been quite strict on this point5 imposing a rather short time period on the buyer to investigate the company after closing. In M&A-practice this has been found to be unpractical. Therefore, in a SPA governed by Swiss law the parties regularly waive the duty to investigate.

In an arbitration, the purchase agreement provided that the buyer shall "as soon as reasonably possible" investigate the business. The agreement was subject to German law. The buyer carried out the investigation approximately one month after the closing. Due to a settlement the case did not have to be decided but the arbitral tribunal was leaning towards assuming that the one month period would have been sufficient to meet the requirement "as soon as reasonably possible". Ultimately, this is a question of interpretation, taking into account all circumstances.

3.2 Duty to Object

If a breach has been found, the buyer has the duty to report the breach to the seller. This is an area regulated in the contract in detail. The parties agree that the buyer reports the breach within a certain defined period (30/90 business days) after detection. Alternatively, they agree that the duty to object is sufficiently fulfilled if the objection occurs within a certain time period after the representations and warranties have lapsed, regardless of the time when the breach was detected. Frequently, the parties agree that the claim for a breach of representation is forfeited if the duty to object has not been fulfilled. Increasingly, however, the parties concur that the claim is not forfeited but that the buyer must bear the consequences of his late notifying (such as, for instance, increased costs), which seems in general more appropriate.

In the case mentioned above the buyer had to meet a 45 days' notice period following discovery. Obviously, the day on which the period starts to run is not easy to determine. It would appear that it can only start to run from the time that the buyer has sufficient knowledge of the facts and circumstances to come to the conclusion that there was a breach. This would have enabled him to give an explanation of the facts and circumstances in the notice, as required by the provisions of the purchase contract. A further question arose from the fact that the parties had not spelt out what the consequences were if the duty to give notice had not been complied with. Either, the meaning must have been that any claims are forfeited as a result, or that the buyer could not claim for damage caused by the late notice. In the case at hand the arbitral tribunal would probably have denied forfeiture.

5 BGE 107 II 419, 422 et seq.

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3.3 Survival of Representations and Warranties

The parties regularly define the term of the representations and warranties. Usually, the term is fixed to be between one to three years except, in particular, for title, taxes and environment where a longer life is agreed upon. On the other hand, the parties have a desire to force the buyer to bring an action within a certain time period after the breach has been notified and the seller has objected. In case the buyer does not bring the action within such period, his claim will be forfeited.

3.4 Significance of Due Diligence

3.4.1 Factual Background

In a due diligence procedure, the target company and its business will be examined by the prospective buyer. Due diligence covers a number of areas (business due diligence, legal due diligence, tax due diligence, financial due diligence, insurance due diligence, environmental due diligence, etc.). It has become common place to allow the buyer to carry out a due diligence prior to buying a business. For this purpose, the buyer will not only involve his own staff but also counsel and advisors, such as auditors, attorneys, environmental experts, etc. For the purpose of due diligence, documents and data are compiled and made available to the buyer. The question arises immediately whether the knowledge the buyer has gained from the due diligence can be held against him, i.e. that a buyer cannot bring a claim for breach of a warranty if such breach has already been apparent from the due diligence.

3.4.2 Contractual Agreements

In M&A-contracts it is customary to deal with this issue explicitly. This is done in a number of ways. In certain cases, the parties agree that all the knowledge obtained as a result of the due diligence will prevent the buyer from claiming for breach of representations and warranties ("general disclosure" concept). The buyer will try to resist this, particularly in large transactions where a limited time period is allocated for due diligence. At least, he will request that the relevant facts must have been fairly disclosed. If the parties agree on this concept, they occasionally define when an information is deemed to have been disclosed fairly. In other cases, the parties agree that only certain specifically disclosed or defined facts are deemed to be known by the buyer (concept of "specific disclosures"). Those facts are disclosed and attached to the contract as exhibits and as exceptions to the representation and warranty. In England, it is customary to do this in the form of a disclosure letter which describes in more detail and in narrative form the areas of concern, i.e. those points that might constitute a breach of a representation and warranty. Finally, the parties might agree that the knowledge has no impact at all on the remedies available to the buyer. This is rarely done, except if confined to certain specific points where the facts are fully disclosed and, nevertheless, the seller is asked and agrees to bear the consequences of the particular breach. Usually, this is dealt with in the form of an indemnity. Typically, uncertainties relating to tax assessments are solved in this way.

The parties are at liberty to agree in any of the before-mentioned ways. This is subject to fraud, of course. In case of fraud, the buyer will be able to bring a claim against the seller in any event.

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3.4.3 Questions of Proof

To prepare for possible litigation/arbitration it is important for the parties to establish what the knowledge has been at the time they entered into the transaction. For this reason, due diligence is customarily based on a detailed index of documents. In a more cautious approach, the parties seal all of the relevant documents and lodge them with an independent depository. In case of need, the documents can be retrieved and filed with the arbitral tribunal. Oral information is more difficult to handle when it comes to prove facts. Occasionally, the parties establish minutes for this purpose or they tape conversations. The seller will want to reduce any important information into a document.

Where none of the above ways have been used, the parties will have to rely on witness testimony. It is usually the seller's burden to prove that the alleged information has been provided. Given the nature of witness testimony, i.e. the unpredictability, the risk for the seller is rather substantial.

On the other hand, the buyer must be aware that knowledge obtained by his representatives (such as outside counsel and auditors, etc.) will be imputed on him regardless of whether the representatives have actually passed on the information.

3.4.4 Cases

In one case, the purchase agreement provided that the buyer shall have no remedy if he or any of his advisors prior to the signing date had actual knowledge of the breach because the breach became "obviously and doubtlessly apparent at first sight from the documents provided to the buyer". This is a relatively rigid standard to meet. In this case, the arbitral tribunal had to review the documents and to come to a conclusion whether the breach had become apparent as contractually stipulated. For instance, is it sufficiently disclosed that the IT-system needs a rehaul if the budget lists investments for a new server? The arbitral tribunal tended towards denying the question. The circumstances also play a certain role, namely how voluminous the documents were, how much time was granted to review them, whether the buyer was a commercial party familiar with due diligence procedures, etc.

In another case, the buyer claimed that the seller had breached the representation that the total net inventory value as reflected on the company's financial statements was not higher than the lower of cost or market value. The seller had agreed that no investigation by the purchaser shall prevent the purchaser from claiming under the representations and warranties, except for matters which were disclosed in the documents listed on the schedules and exhibits to the SPA. The seller claimed that the methods of valuing the inventory had been disclosed to the buyer and actually followed from one of the schedules to the SPA. The buyer objected and asserted that the respective representation and warranty obligated the seller to make up the difference between the accounted value of the inventory and the actual value.

4 Consequences of breaches of representations and warranties (remedies)

4.1 Consequences are Embodied in the SPA

It is not surprising that parties also address the consequences of a breach of a representation and warranty in the SPA in detail. In M&A-contracts subject to Swiss law, the

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parties might provide for the right of the seller to put the target company in the position in which it would if no misrepresentation or breach had occurred. It is questionable whether this is meaningful in all cases. Furthermore, they might agree that the seller has to pay the purchaser or, at the election of the purchaser, the target company an amount necessary to put the target company in the position in which it would be if no misrepresentation or breach had happened.

It is fair to say that the concepts vary. In certain cases, the parties stipulate that the indemnification obligation is not confined to the target company but also relates to the purchaser; in other words, the purchaser (in addition to the target company) has to be put in the position it would be if there were no misrepresentation or breach. Further, some agreements provide that the claim of the purchaser is restricted to a reduction of the purchase price ("Minderung"), although this has become relatively rare. Other agreements contain language relatively similar to language used in the US or England (see below).

4.2 No Negligence or Knowledge Required

The mere fact of the breach of a representation or warranty triggers the seller's liability. Therefore, a remedy exists regardless of whether the seller has been negligent or not. It is not even necessary for the seller to be aware that the representation and warranty is not accurate.

Sometimes the parties agree that the seller makes the representation only to "the best of his knowledge". This qualification raises various questions. First of all and particularly among corporate parties, the qualification does often not seem appropriate. Representations and warranties are a device to allocate risks between the buyer and the seller. The buyer makes the argument that in pricing the deal he has assumed unqualified representations and warranties. In many cases, he might also argue that the seller is in a much better position to verify and find out whether the representation and warranty is accurate. The remaining uncertainty, so the buyer argues, should not be on him. Linked to this is the question whether the seller can simply rely on his present knowledge or whether he has a duty to make inquiries first. To remove the uncertainty it is normally agreed that any knowledge qualification must be coupled with the obligation of the seller to make due inquiries. Therefore, the text reads "to the best of the knowledge of the seller after having made due inquiry". Finally, the question arises whose knowledge must be allocated to the seller. Clearly, the knowledge of its board and management will be imputed to it. It is a different question, though, whether the knowledge of the target company will be ascribed to the seller. In view of this uncertainty the parties might want to define specifically whose knowledge will be imputed to the seller.

Swiss law makes a distinction between reduction of the purchase price ("Minderung") and further damage. The reduction of the purchase price is itself a compensation for part of the damage, namely the reduced value of the target company and its business resulting from the breach. Under Swiss law, further damage can only be claimed by the buyer if the seller has been negligent6. Likely, this does not apply and no negligence is required if the indemnification obligation agreed by the parties also relates to the buyer, i.e. that the buyer

6 Art. 97 CO.

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must be put into the position he would be had no misrepresentation or breach of warranty occurred.

4.3 Minimum Amount, Threshold, Cap

It is customary for the parties to agree on a minimum amount for claims on a stand-alone basis (de minimis). They further provide that the (minimum) claims taken together must reach a certain threshold for the seller to become liable. The threshold becomes a deductibleif only the amount above the threshold becomes payable in case of breach. Finally, it is quite common to agree on a cap, meaning that the seller will not bear unlimited liability but will only be liable up to a certain amount. Agreements on the minimum amounts, thresholds (deductibles) and caps are generally valid and enforceable, but may be subject to certain restrictions depending on the applicable law. Under Swiss law, these agreements would basically hold even in cases of gross negligence7. The amount of the cap differs in the various jurisdictions. In Switzerland, the cap would frequently be below 50% of the purchase price, while in the US the cap - if agreed at all - would tend to be 100% of the purchase price. The parties normally agree on further restrictions. Particularly, they agree that the buyer may not claim to the extent provisions in the financial statements of the target company have been specifically created for the respective occurrence, or to the extent that the damage is covered by insurance. It is no surprise that the seller would like to exclude consequential damages, in particular loss of profit, from his indemnification obligation. The buyer will have to be aware that he has a duty to mitigate damages. This applies regardless of whether this is explicitly set forth in the SPA or not.

4.4 Practice in the US and England

The clauses dealing with indemnification in agreements subject to US or English law are more detailed and elaborate as compared to contracts subject to Swiss law. They usually list the various positions for which the seller will be liable, such as damage, loss, liability and expense and sometimes diminutions in value, and include also reasonable expenses of investigation and reasonable attorneys' fees and expenses. The indemnification is owed not only to the buyer, but also to the target company and the subsidiary companies of the target. Furthermore, the seller is held liable generally for breaches of covenants or agreements made or to be performed by the seller pursuant to the SPA, in addition to breaches of representations and warranties. Despite of the more detailed indemnification language, the unpredictability of claims in case of breach is equally deplored as for SPAs under Swiss law.

4.5 Third-Party Claims

In practically all M&A-contracts the situation is specifically addressed of a third party (including authorities) bringing a claim against the target company after closing date which claim, if successful, is likely to qualify for a claim of the buyer against the seller for breach of representations and warranties. In this case, the buyer has to notify the seller of the third-

7 Art. 199 CO. This would be different if the representation and warranty amounts to an indemnity

("Garantie") in the meaning of Art. 111 CO (see Art. 100 CO). For separate indemnities, the parties agree

in many cases on stand-alone minimum amounts, thresholds (deductibles) and caps which do not count

against the amounts agreed generally in respect of breaches of representations and warranties.

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party claim. The purchaser or the target company has the right to defend the claim, while the seller is consulted and assists in the defence. The parties agree on who may appoint counsel defending the claim. Subject to certain conditions, the seller might be accorded the right to take over the defence of the claim altogether. Furthermore, the parties allocate the costs and agree on the requirements for a settlement with the third party.

More generally, the issue at stake is who should have control over third-party litigation. Depending on the situation the clause in the SPA on this point may vary.

Third-party claims might pose difficult questions for the purchaser. To be able to claim from the seller the buyer might have to bring an action at an early stage in order to meet the term of the representation and warranty which is allegedly breached. In many cases, the third-party claim at that time is not precise enough and also the third-party claim needs to be adjudicated first. In such cases, the buyer may have to apply for a stay of proceedings by the tribunal until the court has ruled on the third party-claim.

4.6 Exclusive Remedies?

4.6.1 Qualification of Contractual Remedy

Under Swiss law, the SPA would fall under the ambit of the general law governing purchases. Accordingly, claims for breaches of representations and warranties qualify as claims based on defects in the object of the purchase ("Gewährleistungsklagen")8. The question arises whether remedies might be available in addition and outside of the SPA.

4.6.2 Claims for Non-Performance or Fundamental Error

The Swiss Federal Supreme Court has held that apart from the Gewährleistungsklagen other remedies are available if the respective requirements are met. Those remedies concern claims for non-performance ("Erfüllungsklage")9 and fundamental error ("Grundlagenirrtum")10. The action for non-performance is not of great practical relevance, particularly as the same requirements have to be met as for a claim for defects ("Gewährleistungsklage"). However, this is different in respect of a claim for fundamental error. A buyer could rescind or - according to the practice of the Swiss courts - partially rescind (i.e. claim a reduction of price) for fundamental error without having met the duty to investigate and to object. Such a claim can be raised even when the term of the representations and warranties has already lapsed. From the time that the buyer realises the error he has a term of one year within which to object to the sale.

In view of this, in many cases the parties agree that the remedies set forth in the SPA are to be exclusive. From time to time the parties even explicitly exclude the right of the buyer to rescind the SPA. For lack of a court precedent, it is not entirely certain whether such

8 Art. 197 et seq. CO.

9 Art. 97 et seq. CO.

10 Art. 24 al. 1 item 4 CO.

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exclusion is valid in respect of a claim for fundamental error11. Against this background, it is not astonishing that in most arbitrations introduced under Swiss law the buyer will not only claim for a breach of representations and warranties, but he will also base his claim on the theory that there has been a fundamental error. Depending on the particulars of the case, especially when the term of the representations and warranties has lapsed, the remedy for fundamental error might even be the only possible basis on which the buyer proceeds against the seller. The Federal Supreme Court of Switzerland has held that indeed the buyer may "partly rescind" share purchases; this effectively results in a reduction of the purchase price12.

The effect of this practice can be illustrated on the basis of two cases which I will shortly describe.

Case 1

In one case the term for bringing a claim for breach of representations and warranties had lapsed. The buyer, therefore, brought a claim on the theory of fundamental error alleging that, in determining the purchase price, he was relying on financial data, in particular on the EBITDA and a certain amount of liquidity not needed for operating purposes. According to the buyer, those facts and assumptions proved to be wrong. The buyer, therefore, claimed a reduction of the purchase price using his formula for calculating the purchase price. The seller alleged that the purchase price had been arrived at regardless of the EBITDA and the liquidity. In fact, a representation regarding the income statement in the running year and regarding the liquidity had explicitly been refused.

Case 2

In another case, the transaction was preceded by an auction procedure. In his bid letters the buyer indicated that he was calculating the purchase price on the basis of the DCF-method. For this purpose, he allegedly relied on indications contained in an information memorandum, particularly on the EBITDA and CAPEX forecasts for the running year. Those forecasts ultimately proved to be wrong by some margin. On the other hand, the EBITDA and CAPEX final figures were not represented and warranted in the purchase agreement. The purchase agreement also contained a statement that no further representations and warranties were given and that the seller expressly disclaimed any representation regarding future business development, profits and business plans of the target company and its subsidiaries. The parties had further agreed that the SPA shall supersede the information memorandum and the bid letters as well as any other prior agreement.

By correcting the EBITDA and CAPEX and inserting the corrected figures into his formula the buyer arrived at the amount of CHF 81 million which was the difference between the actual purchase price paid and the purchase price calculated on the basis of the corrected parameters.

11 In favour: B. Schmidlin, Berner Kommentar, Band VI, 1. Abteilung, Teilband 2 1b, Bern 1995, Art. 31 CO

note 123 et seq., including a summary of authors arguing against the exclusion.

12 BGE 108 II 102; 107 II 419; 81 II 213.

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Alternatively (in the case that the main claim for CHF 81 million would be dismissed), the buyer claimed some CHF 45 million arguing that a number of representations and warranties had been breached. In other words, the buyer brought the action based on fundamental error because this would have translated into a higher amount as compared to the breaches of the representations and warranties.

An error is deemed to be fundamental if based on the circumstances the party in error would not have entered into the contract at all or only on different terms if that party had known the true facts. The error must relate to a set of facts which the party in error could take as the necessary basis for the contract pursuant to the principle of good faith in commercial transactions. Not only a subjective but also an objective test is applied to determine whether this requirement is met.

Particularly in international M&A-transactions between sophisticated parties the non-exclusivity of the contractual remedy has been questioned. When the claim has lapsed because the representations and warranties have expired, it is considered inadequate to give the buyer an additional remedy. It is argued that for breaches of representations and warranties the parties have defined the term, and in most cases have stated that the breach once detected has to be notified within a defined period (30/90 business days). In such cases it is viewed to be inappropriate that the buyer, after having detected a fundamental error, be free to wait for a year before he notifies the seller, and still be able to claim for fundamental error.

Further, after an intensive and professional due diligence and negotiation period the parties carefully define together the subject of the representations and warranties in the SPA. In view of this - so the argument goes - the buyer should not be able to claim that certain factual assumptions were fundamental although they were not made the subject of representations and warranties13. This is viewed to be particularly true for earnings expected for the current year (EBIT or EBITDA) or for future profits of the target which have not been represented and warranted by the buyer.

Finally, for breaches of representations and warranties the parties agree on minimum amounts, thresholds (deductibles) and caps. They might also have agreed on provisions having to be dissolved first before the buyer may claim any amount. Conceivably, all these limitations do not apply in respect of claims based on fundamental error.

4.6.3 Fraud

For the sake of completeness a claim for fraud should be mentioned. Such a claim is always reserved and is available apart from any claim for breaches of representations and warranties.

Further Claims

A claim sometimes brought is the claim for culpa in contrahendo which is, however, rarely invoked in Switzerland14.

13 See BGE 91 II 275, 279.

14 P. Böckli, Gewährleistungen und Garantien in Unternehmenskaufverträgen, in: R. Tschäni (ed.), Mergers

& Acquisitions, Zurich 1998, 77 et seq.

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Moreover, in auction proceedings there are a number of legally relevant documents exchanged between the parties before they proceed to a SPA. The prospective bidder is supplied with an information memorandum and a procedure letter describing the procedure. The bidder then submits an indication of interest (preliminary offer) quoting a preliminary price. Afterwards, the successful bidder(s) undertake(s) a due diligence whereupon he/they submit(s) a final bid which again quotes the price and contains certain assumptions. During the ensuing negotiations additional due diligence might occur before the SPA is entered into. Under Swiss law, there is a theory that the exchange of letters, information memorandum and bids amounts to a contractual agreement between the parties, itself giving rise to possible claims. While this might be true if the parties subsequently do not sign an agreement, this will usually be different in case a subsequent agreement is entered into. In the information memorandum and the procedure letters it is repeatedly stated that representations and warranties are reserved and are only applicable to the extent regulated in the SPA. Furthermore, there is a standard clause (entire agreement) stating that the SPA constitutes the entire agreement between the parties and supersedes all previous agreements.

Despite the entire agreement-clause, previous negotiations, discussions, correspondence, undertakings and agreements will still have their importance when it comes to interpreting a SPA. This applies regardless of whether an auction procedure is chosen or not. It is important that the parties leave a paper trail, particularly the various drafts of the contract. Correspondence commenting on the changes of the drafts will also be important. Given the rule that the real intent of the parties is decisive to arrive at the meaning of any particular clause, testimony of witnesses may become important, too. However, establishing facts on the basis of testimony is not without difficulty because - apart from the general limits to prove facts on the basis of witness testimony - contacts between the parties in the course of the negotiations take place at many levels. Numerous details are discussed intensively during a short time period. The witnesses are likely not to recall the details with sufficient clarity. As a result, the arbitral tribunal will in many cases have to resort to constructive interpretation rather then be able to establish the real intent between the parties.

4.6.4 Indemnity

Depending on the applicable law, specific indemnities in a SPA might be subject to different rules and could amount to a different course of action. Such indemnities are normally regulated in detail in the SPA.

4.6.5 No Rescission

Normally, a buyer will not be entitled to rescind a contract for breach of representations and warranties after the deal has been closed. In contracts governed by Swiss law this possibility is explicitly excluded most of the time. On the other hand, if there is a breach of representation and warranty at the time of closing, this might entitle the purchaser to refuse to close the transaction, particularly where the parties have agreed as a condition precedent to closing that the representations and warranties must be true and correct in all material respects. In this case, interpretation of what is deemed to be "in all material respects" will be

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indispensable. Some guidance might be found in similar court cases decided abroad15.Finally, for the sake of completeness a claim for fraud resulting in rescission should be mentioned.

4.6.6 On the Quantum

The amount of the claim will depend on the consequences of a breach contractually agreed upon. If the seller has to put the target company in the position in which it would be but for the misrepresentation or breach of warranty, then he is liable in the amount of missing assets or for costs necessary to repair the particular asset. He would also be liable for liabilities not contained in the balance sheet. This would even be the case where the buyer has calculated the purchase price on the basis of future income according to the DCF-method16.

If the breach impacts on the income of the target company, the situation becomes more difficult. If the impact is extraordinary and, therefore, not recurrent, the seller has to make good for the difference. If, however, the income is affected on a continuing basis and if the price has been calculated taking into account the expected income stream, the buyer wants the seller to be liable for the capitalized difference resulting from the lower income. In most M&A-transactions the calculation of the purchase price is not explicitly agreed in the SPA, though. Accordingly, the buyer will have to allege and prove that both parties have relied on the target company’s income for the calculation of the purchase price which is a difficult burden of proof to meet.

On the whole, the outcome on the quantum of a claim will be difficult to predict in most instances. This is the result of the complexity of the purchase object and the multiple ways that the breach of a representation and warranty impacts on the value of the target company and its business, as well as on the buyer. In SPAs providing for a purchase price adjustmentthe parties will usually state that a matter taken into account for the purchase price adjustment, which could at the same time qualify as a breach of representation and warranty, will be taken into account only once. In those cases where this is not specifically addressed, the arbitral tribunal will refuse to award an additional amount on the theory that the buyer should not be enriched.

The seller will not always sell or be in a position to sell all of the shares of the target company. In this situation, the parties usually agree that the seller is only liable for that part which corresponds to the percentage of shares he has sold. In the absence of such an agreement, the SPA will be interpreted according to what the intention of the parties was. If the indemnification obligation is towards the target company, the full amount will be owed.

4.6.7 Securing the Remedy: Escrow Arrangements

The buyer will be concerned that he can in fact collect the amount owed by the seller following a claim awarded for breach of a representation and warranty. The parties could

15 See the summary in Schleiffer, (note 4), 71 et seq.

16 U. Schenker, Risikoallokation und Gewährleistung beim Unternehmenskauf in: R. Tschäni (ed.), Mergers

& Acquisitions VII, Zurich/Basel/Geneva 2005, 259.

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agree for the purchase price to be paid in instalments and on the right of the buyer to set offclaims he may have against the seller. They could also agree on a bank guarantee to be provided by the seller. Corporate buyers might ask for such a guarantee if the seller is an individual.

Another - more frequent - way is to provide for part of the purchase price to be paid into an escrow account with a third party (escrow agent). This is particularly appropriate where there is a large number of sellers. After a certain period (usually the survival period of the warranties), the escrow agent will release the funds automatically as foreseen in the escrow agreement. In addition, the amount will be released upon joint instruction. The funds will be blocked if the buyer introduces an action in court or arbitration against the seller of which the escrow agent is notified. The escrow agent will release the funds after the court decision/arbitration award has been rendered. Usually, the parties provide in the escrow agreement that the funds will be released upon submission of the court decision/arbitration award. Sometimes, however, the buyer when bringing a suit requests the court/arbitral tribunal to instruct the escrow agent to release the funds. Whether this request can be upheld will depend on the particulars of the escrow arrangement. If the claim is only based on the SPA (to which the escrow agent is not a party), the court/arbitral tribunal might find itself in a position to dismiss the claim because the escrow agent is a party over which it might not have jurisdiction.

5. Conclusion

On the whole, the number of post-closing disputes on representations and warranties tends to increase. Given the international context and the complexity of M&A transactions, arbitration is a particularly adept mechanism for dispute resolution, with a trend for M&A disputes to become a specialized subpart of arbitration.

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ARBITRATION OF MERGER AND ACQUISITION DISPUTES – THE USER’S PERSPECTIVE –

Jürgen Reul

1. Introduction

The task to present “The User’s Perspective” on the practice of arbitration of merger and acqui-sition disputes is nearly an impossible one – there simply is no such thing as “The User”. The need for arbitration varies considerably between the different markets and industries. While abi-tration is the norm in certain areas of dispute resolution (e.g. international sport disputes) it re-mains an exception in other areas. In addition, the reality of arbitration proceedings is quite dis-similar in the various jurisdictions. An ICC arbitration under Swiss law in Switzerland is not eas-ily comparable to an arbitration under local laws in Asia, South America or Africa. Since the dif-ferent experiences of the various users tend to shape a varying perspective of arbitration as a tool for dispute resolution, every generalisation of one’s own experience is difficult.

Therefore, the following presentation does not purport to give a universally applicable user’s perspective on arbitration, but should be understood against the background of the experience of an international automotive company in disputes within or related to the automotive industry in Europe. 1

2. The Particular Situation in M&A Disputes

2.1 Successful Arbitration of an M&A Dispute

Any arbitration of an M&A-related dispute should be based on a deeper understanding of the underlying situation: any M&A transaction is an existential, disruptive experience for the parties involved. This is obvious for the target company, but it holds also true for the buyer – at least in situations where the target company is of a considerable size.

Managing an M&A transaction is definitely not “ordinary course of business”. In such a situation the nerves of the responsible managers are tense – even without a dispute.

The risks in M&A transactions are relatively high. Anecdotal and statistical evidence sug-gests, that about 50 % of all M&A transactions are failures. One of the crucial elements of success is a quick and smooth integration of the target company. The first year after com-pletion is therefore often crucial for the success of the transaction. It is exactly in this phase that most disputes arise. Unfortunately, at the same time often key-managers (and potential witnesses) leave the acquired company. The whole process is accompanied by high media attention.

While a hundred million Euro purchase decision rarely attracts attention in the national newspapers, a fifty million acquisition certainly will. There are two major consequences of this particular situation for arbitration proceedings:

1 The Author is Head of the Corporate and International Legal Department of BMW AG and responsible for interna-tional litigation and arbitration. He has also acted as an arbitrator.

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• Speed is of the Essence

The need for speed is apparent in pre-completion disputes, as for instance on the issue whether any post-signing event can be qualified as a MAC (Material Adverse Change), but it is equally present in post-completion disputes. The expectation of a quick decision of the issues in dispute is an important reason for parties electing arbitration in an M&A context.

• Need for Confidentiality

The second major consequence is a particular need for confidentiality. In particular, if a transaction has not been fully appreciated by the press, the management of the involved companies needs to avoid any rumours of potential disputes between the parties. In such cases it does not help if the fact of an arbitration is broadcasted in the press, possibly even mentioning names of arbitrators and details of the proceedings. On the other hand, particularly in cases where high media attention is to be expected, it is useful to agree a media policy and reaction modes in case of possible leaks and approaches by the press.

3. Advantages of Arbitration compared to Litigation

Nothing shapes a user’s perspective more than expectations held and experiences made. A better understanding of the expectations of the users can help both arbitrators and ad-vising counsel to improve the arbitration proceedings.

3.1 Expectations

Textbooks on arbitration usually cite a long list of advantages of arbitration compared to litigation. The advantages mentioned are usually the following:

- Shorter duration of arbitral proceedings;

- Choice of arbitrators by the parties allows to elect a tribunal with the required qualifi-cation and experience for the case at hand;

- A neutral forum will decide the case without bias for or against one party;

- Transparency of proceedings (in particular if compared to court proceedings in a for-eign jurisdiction);

- A cooperative atmosphere that allows finding a mutually agreed solution to end the dispute;

- “Just results” – meaning not only fair and equitable, but also in accordance with appli-cable law;

- The results are final, i.e. comparable to the decision of a state court of last instance;

- Enforcement is easy due to the New York Convention;

- The costs are lower than in comparable proceedings before a State Court.

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This is the ideal world of arbitration. This ideal is based on a couple of assumptions that may or may not hold true in a specific case.

A first assumption is, that the parties know what they are doing when they sign an arbitra-tion clause. Of course the arbitration clause should be valid, workable and complete. If a dispute arises, both parties should want the arbitration to succeed. Finally, both parties should have knowledgeable and experienced counsel (both in-house and outside) and, of course the arbitral panel should be up to its task. If those prerequisites have been met, the arbitration is bound to be successful.

While the above advantages appear to be valid and mostly compelling reasons to prefer arbitration to litigation, those advantages unfortunately do not always stand up in practice.

3.2 Reality

Even leaving aside arbitration in exotic jurisdictions and concentrating on arbitration in Europe, some of the theoretical advantages do not survive well in reality:

The promise of a shorter duration of arbitration proceedings, which is one of the main rea-sons for industry practitioners to agree an arbitration clause in particular with respect to an M&A dispute, is often disappointed. At least with regard to Germany, a decision of a court of first instance appears to be quicker to get than the award of an arbitral panel. This is true in particular in the case of less-than-perfect arbitration clauses and inexperienced parties.

On the other hand, the choice of arbitrators by the parties actually allows to select a panel that is – at least in my experience – superior to the average court.

From the available anecdotal evidence, the quality of arbitrators in European-based M&A arbitration appears to justify a preference for arbitration. The same cannot be said, unfor-tunately, of arbitrators in some more exotic jurisdictions.

Given the quality of the average arbitral panel, neutrality of the forum is also mostly a given in European-based arbitration.

The picture becomes less clear with regard to the alleged greater transparency of arbitra-tion proceedings. If the completeness of the arbitration clause leaves to be desired, op-posing counsel may start a case with the whole array of procedural sideshows. Clarifying those procedural issues that may bury the real issue of the case, may take many months if not years. During this time, the user may lose orientation and also trust in the arbitral process.

A cooperative atmosphere that is conducive to a consensual settlement is in fact one of the strength of the arbitral process. Some arbitrators are particularly gifted in this respect and manage to create an environment that allows the parties to reconcile their positions. However, the ability to create a cooperative atmosphere is not universally found in all arbi-trators respectively in all arbitral panels. The real problem in practice, however, is that it may take unduly long until the first live meeting with the parties takes place.

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If the parties are lost in procedural quarrels and reject the offer of a hearing on such is-sues, it may in fact take many months or even years until a face-to-face meeting on the subject matter occurs.

The results in the European-based arbitration proceedings that I have seen have always been “just” in a sense that they have obviously strived to come to what the arbitral panel perceived to be a fair and equitable solution. However, in some cases it appears difficult to reconcile such “fair and equitable” results with the underlying law. Sometimes decisions that rely heavily on somewhat opaque notions as “ex-aequo-et-bono” or “lex mercatoria” can come as a surprise to the lawyers who have evaluated and prepared the case.

A final award does not necessarily coincide with the end of the dispute. In particular in major arbitrations the less successful party almost routinely looks for potential grounds for challenge in the award. While the grounds for challenge are limited, challenges are not rare.

Enforcement of arbitral awards is usually relatively easy – at least as long as the en-forcement takes place in Europe. This does not mean, however, that parties do pay or perform voluntarily after a final award has been rendered in arbitration. Astonishingly, sometimes even major market players try to ignore an award until the intent to enforce it has been very clearly announced. In more exotic jurisdictions, enforcement of an arbitral award becomes less simple. It certainly helps if the respective country is a signatory of the New York Convention of 1958, but even in those cases the proceedings to receive a writ of execution are often long and onerous. Those proceedings may be coupled with a chal-lenge of the award in the jurisdiction of the arbitral proceedings. In the worst-case sce-nario, the decisions of the state court in the jurisdiction of the arbitration and of the court that has to decide on the writ of execution differ.

The claim that the costs of arbitration are lower than that of a comparable litigation is one of the myths of arbitration – but that does not matter very much in M&A disputes. Com-pared to the decision of a first instance court, the costs of arbitration are (at least in Ger-many) in most cases higher than those of litigation.

Such costs of arbitration may further increase if one has to take the costs of the possible challenge of an arbitral award into consideration.

The good news is, however, that the costs of arbitration are not the major concern of the typical user in industry. The major concern in an M&A-related dispute is to get a quick and correct decision.

4. The Experienced Users’ Attitude towards Arbitration of M&A Disputes

Since some of the textbook promises do not always materialise in the real work of arbitra-tion, the experienced users’ attitude towards arbitration of M&A Disputes is therefore not

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one of unfettered enthusiasm. The user, who has had his fair share of experience of M&A-related arbitration, will know that such an arbitration requires more attention than a court case before the national courts and may also not necessarily be quicker. The experienced user will also know that the proceedings are not always as a clear cut as in his home ju-risdiction. Finally, the experienced user will be aware that the outcome of the arbitration may be somewhat more uncertain than that of a comparable litigation if the arbitral panel has recourse to extra-legal notions of “lex mercatoria” or “ex aequo et bono”. On the other hand, the user will also be aware and will appreciate the undeniable advantages of arbi-tration.

All in all, those who have experience in M&A arbitration will value arbitration for all its positive aspects, but their enthusiasm towards arbitration will not be as great as it could be.2

5. How to make it work better

The way the arbitral process is working in practice can be easily improved in the three ar-eas where it is often lacking the most:

• Awareness

• Communication

• Acceleration

Awareness of one’s own role in arbitration as well as of what the parties actually want greatly improves the working of the arbitral process as such. More and better communica-tion between the players in arbitration improves the speed of the process and the quality of the outcome.

Acceleration of the whole process finally leads to a quicker award (or settlement) and sat-isfies one of the fundamental requirements of the parties in an M&A dispute.

5.1 The Role of In-house Counsel

In arbitration, in-house counsel assumes the role of enabler and supervisor of the pro-ceedings.

In most cases, in-house counsel who has negotiated the transaction will be the one who is also in charge of complaints and litigation/arbitration arising out of the transaction. He is the one who is usually asked to “take action” against the other party. The first task of in-house counsel should be to find out whether his management really wants to start arbitra-tion proceedings or rather wants to send one or two letters with demands in order to achieve an early settlement. In that stage of the process he should clearly advise his own management of the chances, costs and duration of the arbitration until an award.

Once the decision to start the arbitration proceedings has been taken, in-house counsel has to explain the facts of the case to the outside counsel of his choice and prepare to-gether with outside counsel the request for arbitration. In many, but not in all cases he will give input with regard to the selection of an arbitrator.

2 For the differences of opinion between practising attorneys in Germany see Thomas Mahlich, „Die Büchse der Pandora“, JUVE Rechtsmarkt 11/04, Seite 34 ff and Klaus Sachs, ibid., Seite 39.

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During the proceedings, the task of in-house counsel is to prepare all factual information necessary for outside counsel in a digestible form and to select witnesses for a hearing, if appropriate. In-house counsel should stay in constant contact with outside counsel and take the trouble to actually read the briefs sent by both parties to the arbitral panel as well as the written reactions of the arbitral panel. Only such an ongoing reality check allows in-house counsel to stay in control of the case and to remain in a position to inform his man-agement on the current situation in the arbitration. In addition, in-house counsel should receive the briefs of his outside lawyers before they are actually sent out to the arbitral panel. With such pre-active control some unnecessary fights on procedural issues may be prevented.

5.2 The Role of Outside Counsel

The role of outside counsel can be best characterised as that of a translator and a facilita-tor. Outside counsel is the intermediary between a party and the panel. He translates and presents the facts that he has been given by his client and the requests of his clients to the panel. Due to his knowledge of arbitration proceedings and his direct contact to the arbitral panel, outside counsel is the facilitator in this process.

The first step for outside counsel should always be to define the goal of the proceedings together with in-house counsel. Does the client want to threaten with the prospect of arbi-tration or really start the arbitration now? Does the client expect the arbitration to lead to a settlement or rather to an award? The consequences of unclear instructions in this re-spect can be very costly for the client and also have negative repercussions on the out-side counsel.

After this first step has been taken, the foremost task of outside counsel is to attend to all legal issues with a particular emphasis on procedure. While outside counsel should be able to assume that in-house counsel has full grasp of the substantive legal issues of the dispute, the same can often not be said with regard to the procedural issues – regardless of whether this is an ICC arbitration or an ad hoc arbitration under local procedural law. Outside counsel is also well advised not to rely on his knowledge of ICC cases in an ad hoc arbitration in a foreign jurisdiction and vice versa.

In arbitration with arbitrators from different countries especially, outside counsel should always be well aware of the different legal background of such arbitrators and present the arguments in a way that does not run counter to the legal training those arbitrators have received. As an example, an English barrister relying on the old English rule of strict inter-pretation of contract recently lost a case before a panel of predominantly continental arbi-trators, who were simply willing to look at the intention of the parties instead to sticking only to the wording of the contract.

Outside counsel should always prepare clear and conclusive arbitration documents. If a letter is meant to be a request for arbitration, it should be named so. If a list of claims in a

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letter should not be understood as a statement of claims, it should be better said so. If an amount has been specified as damages out of a breach of warranty, there should be some understandable basis to actually calculate this amount. Incomplete, unclear and in-conclusive briefs are one of the most common hindrances to quick and efficient arbitration proceedings.

Outside counsel should always monitor the progress of the arbitral panel and pass any relevant information and any feedback from the panel and their own view of the proceed-ings to the in-house counsel.

A further task of the outside counsel is the preparation of party representatives in the pro-ceedings and of witnesses for a hearing.

Outside counsel should always present his parties’ case convincingly and with a desire to win – but without antagonizing the other party and/or the arbitral panel. Briefs that appear to be written rather for the benefit of one’s own party than for the arbitral panel are not helpful. By the same token, harsh words and aggressive insinuations are not a good sub-stitute for arguments. If an outside counsel can see no arguments for his party to win the case, he should rather advise his client to settle the case quickly than to waste the time of the arbitral panel and of the other party.

5.3 The Task of the Arbitral Panel

The arbitral panel has the task to either resolve the case efficiently and correctly through an award or to bring the case to a mutually acceptable settlement between the parties. Even if a settlement is envisaged the proceedings should be geared to allow preparation of an award in due course.

5.3.1 Prerequisites

In order to complete its task, every arbitrator should fulfil certain prerequisites.

The most obvious one is legal expertise. The arbitrator should be knowledgeable in the area of the substantive law of relevance in a dispute and in the area of the procedural law of the arbitration.

The second prerequisite is experience. Experience in this respect does not mean that every arbitrator in an M&A case should have worked as an arbitrator in similar M&A cases since many years. Everybody has to begin once. However, in arbitrating a complex M&A case it is important to have a rich personal experience in M&A situations, regardless of whether this experience was gained in prior cases as an arbitrator or in another function in M&A transactions. In this context it can certainly help if an arbitrator has personal experi-ence with drafting and negotiating M&A transaction in practise. Equally, an arbitrator should at least have been involved in arbitration before taking on the role of an arbitrator for the first time.

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The third prerequisite is an understanding of the particular economic environment of the transaction. Was the transaction the sale of a high priced crown jewel, of a failing firm or rather a merger of equals? In what kind of market did the transaction take place? Are there particular conditions for transactions in such market (defence, public utilities)? Knowledge of the economic background of the transaction helps to better understand the intentions of the parties when they negotiated the agreement. Certain clauses in the agreement may be correctly understood only on the basis of such particular economic background.

Since nobody is perfect, an arbitrator should also be aware of his own limitations. Even if one has been involved in many M&A transactions, this does not imply that one has also the necessary expertise to decide a balance sheet warranty dispute in a foreign jurisdic-tion.

Finally, the last prerequisite is time. An arbitrator who accepts a new case should have sufficient time to deal with the case even if the case suddenly becomes somewhat more time consuming than originally foreseen. This point is closely related to the prior point, the awareness of one’s limitations. The user will very much appreciate openness in this re-gard.

5.3.2 Case and Time Management

Case and time management are, particularly in complex arbitration proceedings, an area with room for improvement. Problems usually arise if one party to the proceedings does not want the arbitration to go forward – which happens more often than one might think –but also if the members of the arbitral panel have very busy schedules, and/or reside in different time zones.

While in ICC cases the ICC rules give a certain framework for the proceedings, the arbi-trators in an ad-hoc arbitration are on their own. In both institutional and adhoc arbitrations the arbitrators should act like a judge and assume an active role in the proceedings. Some experienced arbitrators start the arbitral process by a meeting of all parties, others prefer to prepare such a meeting by an exchange of the statement of claim and the re-sponse. Whichever approach is given preference, the members of the arbitral panel should first agree on a timetable of the proceedings that is based on the risk of having to arbitrate the case until a final award. In doing so, the members of the panel should also set out the Terms of Reference, together with the timetable setting deadlines for the vari-ous steps of the proceedings, which should then be brought to the attention of both out-side and in-house counsels of the parties.

During the proceedings, it is helpful not only to set deadlines for some parties, but also to have the parties observe them. In particular, procedural issues should be dealt with in a short time span and the parties should be asked to present their facts together

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and not in ten briefs over a period of two years. Of course the opportunity to be heard should always be given before coming to a decision, but this requirement does not stand in the way of a stringent control of the proceedings. Delaying tactics by one party should be openly addressed and resisted.

5.3.3 Substance and Quality Management

Substance and quality of the arbitration proceedings and the final award (if any) will largely determine the users’ attitude towards any future arbitration. It should always be borne in mind that most users – and also many outside counsels – are not arbitration ex-perts and require guidance and explanation. The shortcomings or deficiencies of some particular arbitration proceedings will not only be blamed on the specific arbitrators but will (rightly or wrongly) often be seen as deficiency of arbitration as such.

Every single arbitrator and every member of an arbitral panel should be aware that their handling of the current arbitration may be instrumental for a future decision of the users in that case for or against another arbitration.

This means in practice that the arbitral panel should guide the parties through the pro-ceedings. All interim decisions and the way forward should be explained to the parties. All hearings should be prepared well in advance. It is very helpful for the parties if they know what the arbitral panel actually expects from a hearing.

Key witnesses of a party should be called well in advance – the longer the hearing and the higher the witnesses in the hierarchy of the party, the earlier. The old litigation strategy to call board members of the opponent as witnesses in order to push the other party to a settlement cannot be recommended for arbitration. This strategy often backfires even in litigation and mainly serves to annoy the party whose board member has been called.

Nevertheless, in a few cases it may be helpful if a very experienced chairman of an arbi-tral panel calls board members of each party at the very beginning of a high profile arbitra-tion in order to explore the positions of the parties and any settlement possibilities. How-ever, this should be the exception, not the rule, and should in general be handled with great care.

Consistency between written proceedings, oral hearings and the award should always be maintained. If the position of the arbitral panel that has been expressed to the parties once changes at a later point in the proceedings, the change has to be explained to the parties. Surprises in the final award will do nothing for the acceptance of arbitration as a dispute resolution tool.

It should go without saying that every decision in the final award needs to be explained in detail. The award should relate to the facts and the arguments of the parties. If one argu-ment has not been convincing or has been beside the point, it is better saying so than just ignoring the argument.

It is very important that the award is based on the applicable law and not on “ex-aequo-et-bono” or “lex mercatoria” considerations beyond the applicable law. As a general rule, the

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parties do not expect decisions that are based on extra-legal considerations and would be greatly surprised by such a decision. If the in-house counsel of a party that has lost its case in an arbitration due to extra-legal “ex-aequo-et-bono” considerations has to explain to his management that the decision was not based on the applicable law, he will probably never ever get permission to enter into another arbitration. This does not mean, however, that the arbitral panel has to follow a strict interpretation of the law.

Every continental and Anglo-American legal system includes legal concepts like estoppel, good faith, “Treu und Glauben” etc. that allow an arbitral panel to come to an equitable so-lution within the framework of the applicable law. This framework can be fully used; its boundaries, however, should never be left.

Finally, costs are a non-negligible element of the dispute and should not be forgotten in the final award. The award should be specific enough to allow its execution by a local court if such execution becomes necessary.

6. A Case for Arbitration in M&A Disputes ?

The preceding presentation of problems and pitfalls in arbitration might be misinterpreted as a case against arbitration. Such an interpretation would be short-sighted. Since arbitra-tion is a voluntary alternative to litigation, its acceptance and its selection depend more on the quality of the arbitration than litigation. If arbitration has been selected by the parties over litigation, the parties expect arbitration to be quicker, fairer, more opportune – in short “better” – than litigation. It is up to all arbitration practioners to not disappoint these expectations.

Provided there is an appropriate legal groundwork (i.e. arbitration clause, arbitration agreement) for the arbitration and the proceedings are efficiently and well managed, arbi-tration can and will be the superior tool to resolve M&A disputes.

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THE IMPORTANCE OF BEING EARNEST - TOUGHENING UP ON EXPERTS

John Ellison1

Quite rightly, the Courts are toughening up on experts who do not follow their duties to the Court. Indeed, with cot death and MMR cases in abundance, the topic is very much now in the popular press.

Perhaps the most extreme and unusual example of inappropriate evidence is the recent case of a taxi driver who built up a practice of giving “expert” evidence as a doctor. He had an impressive list of (fictitious) medical qualifications – and membership of the Expert Witness Institute. That gentleman is now in prison as a guest of Her Majesty.

1. Costs orders

Arguably a more important precedent is that in Phillips v Symes [2004] EWHC 2330 (CH). The Court (Peter Smith J) ruled that it has the power to make a costs order in appropriate circumstances against an expert who, by his evidence, causes significant expense to be incurred and does so in flagrant disregard of his duties to the Court. It remains to be seen how frequently such a remedy will be applied, but it is a salutary reminder of the importance of complying with the spirit and letter of CPR 35. Research has only uncovered one previous case where a witness was ordered to pay the costs of a party (see Locabail v Bayfield [unreported], 20 December 1999) so this is interesting new law. Given that the objective is to increase the standards of expert evidence, it is clearly to be welcomed.

2. Immunity

Another issue raised from time to time is whether experts should lose their immunity from suit when testifying. The scope of this immunity has been narrowed and clarified in recent years. It applies to work closely connected with the evidence, such as the process in a meeting of experts: in Stanton v Callaghan [2000] QB 75, it was held that an expert witness could not be sued for agreeing to a joint experts’ statement in terms which the client thought detrimental to his interest. It does not, however, apply to advice given to the client on the prospects for the case.

Some commentators have suggested that this immunity should be abolished, as it has been by the House of Lords for advocates: Hall v Simons [2002] 1AC 615 HL. However, this ignores the fact that the immunity is there not to help the negligent expert but so that witnesses can give their evidence fearlessly. It

1 John Ellison is Chairman of KPMG Forensic, based in London. This article relates to UK law; the same principles should apply in international arbitration.

KPMG’s policy is to insist that when acting as a party-appointed expert in an arbitration, the report is addressed to the Tribunal (not the instructing lawyers) and that a declaration is given including saying that all matters that might undermine the opinions have been set out in the report.

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is essential that a witness owes no duty of care to anyone in respect of the evidence he gives in Court.

It should not be assumed that expert witnesses are not pressurised. Usually one has a good and professional relationship. But regrettably, pressure sometimes is still applied (although no longer by reputable Counsel or solicitors, where we have seen a marked change in approach over the last 15 years). I have had one case where, during the trial, new evidence came to light showing that the client who had instructed me had no case. The matter concerned a disputed share valuation. Unbeknown to the client’s lawyers or experts, or the Court - and indeed contrary to affidavits - the client had been involved in takeover discussions which fundamentally altered the valuation. In agreement with Leading Counsel but against the client’s wishes, I immediately withdrew my report. In another case, a client advised me that unless I took a certain line, we would be sued. In a third, I was replaced as an expert as the client did not like my views: he instructed his lawyers to find a “more robust”expert!

3. Experts’ views

In one case in the nineteenth century, a client obtained 76 expert opinions before he found an expert who supported his case. Nowadays such a route is unlikely to work as the Courts are ordering the other reports to be disclosed as a condition of allowing a new expert to be called, as in Beck v Ministry of Defence [2004] PIQR P1.

But one still comes across experts who arguably do not fully appreciate their duties to the court. Here is an extract from the transcript of a recent case in which I gave evidence: I hasten to add that the cross-examination was that of the other side’s expert:

“Q. Did you not consider it part of your duties to the Court necessary for you to obtain copies of [the prospectuses] to look at them in detail or did you just decide to ignore them as irrelevant?

A. That was a matter between me and my instructing solicitors, I think.

MR JUSTICE LANGLEY: No. With respect, it is not. You are an independent expert helping the Court.”

We were pleased that in the judgment, the Court accepted our evidence in its entirety, commenting that the other expert “appeared in some important respects to have as his target sustaining [his client]’s case with whatever arguments he could muster”.

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4. Conclusion

There has been much discussion about the duties of experts, with cases such as The Ikarian Reefer [1993] 2 Lloyds Rep 68 codifying the law in 1993, Lord Woolf’s report “Access to Justice” in various drafts, and now CPR 35 itself. In 1981, Lord Wilberforce stated in Whitehouse v Jordan [1981] 1 WLR 56, a medical negligence case:

“ It is necessary that expert evidence presented to the Court should be, and be seen to be, the independent product of the expert uninfluenced as to form and content by the exigencies of the litigation. To the extent that it is not, the evidence is likely to be not only incorrect but self-defeating”.

Life has moved on, and the Courts themselves now lay down requirements about the form of expert evidence (e.g. the declarations required in civil cases, and the fact that reports must now be addressed to the Court). But the final point remains as valid as ever. If an expert is seen to be transparently fair, he is doing the client the best service he can, as well as complying with his duties to the Court and his conscience.

The combination of costs sanctions against experts who disregard their duties to the Court, coupled with continued immunity from suit for witnesses complying with that duty, is in my opinion the best blend of law to assist in eliciting the truth.

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ARBITRATION AND EU MERGER CONTROL

Marc Blessing1

Structure of the Report:

1. Executive Summary

2. EC Merger Control Under the New Regulation 139/2004 At A Glance 3. Arbitration Provisions as Used in 35 Past Commission Decisions 3.1 5 Cases under articles 81/82 EC 3.2. 14 Phase I Merger Cases under Art. 6 (1)(b) ECMR 3.3 6 Phase I Merger Cases under Art. 6 (2) ECMR 3.4 12 Phase II Merger Cases under Art. 8 (2) ECMR 4. Summary: The Major Striking Elements in the Arbitration Provisions Used So Far5. Elements of the Arbitration Commitment

5.1 General Comments 5.2 Elements Not Reflected in the Proposed Model Arbitration Commitment

6. Proposed draft Model Text of the Arbitration Commitment

7. Proposed draft Model Text of the Arbitrator’s Mandate

8. Concluding Remarks

1. Executive Summary

1.1 "No Sanctions Please: Promised - We will behave well !"

This is what children promise their parents. It is also what major enterprises may promise, or have to promise, to the European Commission in response to the Commission's concern of an anti-competitive behaviour vis-à-vis third parties. The only difference is that the European Commission will not be satisfied by a vague promise, but will require a firm undertaking (in the sense of a behavioural commitment); and, moreover, where a third party alleges that the promise had not been honoured, the Commission will want to make sure that a speedy procedure will be available to determine the issue and to adjudicate any claims.

This is where arbitration comes in.

Basically, we need to distinguish two different areas of commitments: commitments relating to Articles 81/82, and commitments relating to merger control.

1 Dr Marc Blessing; he is a partner of the Law firm Bär & Karrer, Branschenkestrasse 90, CH-8027 Zürich; Honorary

President of ASA.

*****

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1.2 Commitments in the Framework of Articles 81/82 EC

Assume that Party A, a major enterprise for manufacturing “widgets” has made certain price-fixing arrangements with competitors and distributors, and assume moreover that Party A, a dominant market player in some specific markets, has allegedly abused its dominant position. And assume further that a third Party X has filed a complaint to the European Commission. Alternatively, assume that the Commission has acted on its own initiative and has discovered an infringement of Articles 81 and 82 EC.

What happens? What can Party A do?

The answer is simple:

• First, the Commission may consider to order interim measures on the basis of a prima facie finding of infringement (see Article 8 of Regulation 1/2003).

• Second, Party A, in negotiations with the Commission, may offer the Commission certain commitments so as to meet the Commission's concerns, thereby avoiding an infringement decision (see hereto Article 9 of Regulation 1/2003, cited hereinafter).

• Alternatively, if the Commission decides to issue a decision, it may impose, in the framework of the decision, behavioural or structural remedies necessary to bring the infringement effectively to an end.

All of the above is reflected in Council Regulation (EC) No. 1/2003, in Recitals 12 and 13 as well as in Articles 7 and 9:

"Recital 12:

This Regulation should make explicit provision for the Commission's power to impose any remedy, whether behavioural or structural, which is necessary to bring the infringement effectively to an end, having regard to the principle of proportionality. Structural remedies should only be imposed either where there is no equally effective behavioural remedy or where any equally effective behavioural remedy would be more burdensome for the undertaking concerned than the structural remedy. Changes to the structure of an undertaking as it existed before the infringement was committed would only be proportionate where there is a substantial risk of a lasting or repeated infringement that derives from the very structure of the undertaking.

Recital 13:

Where, in the course of proceedings which might lead to an agreement or practice being prohibited, undertakings offer the Commission commitments such as to meet its concerns, the Commission should be able to adopt decisions which make those commitments binding on the undertakings concerned. Commitment decisions should find that there are no longer grounds for action by the Commission without concluding whether or not there has been or still is an infringement. Commitment decisions are without prejudice to the powers of

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competition authorities and courts of the Member States to make such a finding and decide upon the case. Commitment decisions are not appropriate in cases where the Commission intends to impose a fine.

Article 7

Finding and Termination of Infringement

1. Where the Commission, acting on a complaint or on its own initiative, finds that there is an infringement of Article 81 or of Article 82 of the Treaty, it may by decision require the undertakings and associations of undertakings concerned to bring such infringement to an end. For this purpose, it may impose on them any behavioural or structural remedies which are proportionate to the infringement committed and necessary to bring the infringement effectively to an end. Structural remedies can only be imposed either where there is no equally effective behavioural remedy or where any equally effective behavioural remedy would be more burdensome for the undertaking concerned than the structural remedy. If the Commission has a legitimate interest in doing so, it may also find that an infringement has been committed in the past.

2. Those entitled to lodge a complaint for the purposes of paragraph 1 are natural or legal persons who can show a legitimate interest and Member States.

Article 8

Interim Measures

1. In cases of urgency due to the risk of serious and irreparable damage to competition, the Commission, acting on its own initiative may by decision, on the basis of a prima facie finding of infringement, order interim measures.

2. A decision under paragraph 1 shall apply for a specified period of time and may be renewed in so far this is necessary and appropriate.

Article 9

Commitments

1. Where the Commission intends to adopt a decision requiring that an infringement be brought to an end and the undertakings concerned offer commitments to meet the concerns expressed to them by the Commission in its preliminary assessment, the Commission may by decision make those commitments binding on the undertakings. Such a decision may be adopted for a specified period and shall conclude that there are no longer grounds for action by the Commission.

2. The Commission may, upon request or on its own initiative, reopen the proceedings:

(a) where there has been a material change in any of the facts on which the decision was based;

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(b) where the undertakings concerned act contrary to their commitments; or

(c) where the decision was based on incomplete, incorrect or misleading information provided by the parties."

1.3 Structural and Behavioural Commitments under Articles 81/82 and under Merger Control

The enforcement of Articles 81/82 EC is primarily focused on behaviour; hence, behavioural remedies take the centre-stage in the framework of any commitments to be offered by the investigated enterprise, whereas structural remedies should only be considered on an exceptional basis. This is very clearly spelled out in the above cited provisions of Regulation 1/2003.

Under the scope of merger control, however, this is significantly different: Merger control is much more about structure, its shaping or re-shaping, so as to clearly and definitively remove the Commission's concerns for the future.

Structural remedies, in most cases, will mean divestitures of some areas of the business. Divestiture is akin to the “amputation” of an arm or a leg of a human body. True: An amputated arm can do no harm and thus may "solve the problem" in an ideal way as far as the Commission is concerned. The only question is whether such radical "surgery" is really necessary, whether there would be softer - but equally efficient - means; and the trouble, in any event, is that amputations exercised on a body, whether a human body or corporate body, tend to be extremely painful and moreover extremely costly.

1.4 Remedies Under the EC Merger Control

Remedies (in the sense of commitments offered by the merging parties aiming at removing the Commission’s competition concerns) are an important tool in the framework of merger control. References to commitments are made in the recitals 30, 31 and 35 to the ECMR 139/2004, and in its Articles 6 (2), 8 (2), 10 (1) and (3), 19 (1) and 23 (1)(c); moreover, Regulation 802/2004 defines the timeframes within which commitment will have to be offered; see recital 17 and the subsequent Articles 19 (2) and 20.

So far, the Commission has clearly favoured structural remedies in many of its decisions.2 However, the Commission has also recognized the necessity and usefulness of imposing behavioural remedies.

The Commission had to recognize behavioural remedies particularly in those cases where an amputation (in the sense of a structural remedy) would "kill the patient". For instance, one cannot break up a network (such as a pipeline, or a telecommunication network and the like) without destroying the structure as such; and key technology owned by an

2 See for instance also the speech of Commissioner Mario Monti of 18 January 2002 at the CERNA Conference in Paris, commenting on the Commission’s Notice on Merger Remedies.

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enterprise cannot simply be divided into parts. Hence, in such cases (typically in cases of access to a network or to another essential facility, and in cases of access to key technology) there is no other solution than to impose a behavioural remedy, in the sense of requiring the owner or operator of the facility or network to grant access to third parties (typically to competitors) on fair and non-discriminatory terms.

Otherwise, however, the Commission has so far shown some reluctance to simply accept behavioural commitments, even though such "softer" commitments would have been much more appropriate than the "hard and fast" amputation by means of an obligation to divest, e.g. an entire business-line.

The reason for the Commission's hesitation, in the framework of merger control, to more frequently and more readily accept behavioural commitments is quite simple:

• First, behavioural commitments need to be monitored over the period of time during which such commitments are imposed, and these might be a timeframe of many years. This task is incumbent on, and accomplished by, the Enforcement Unit of DG COMP. Human resources for fulfilling such task are limited.3

• Second, particular problems will arise where a third party (typically a competitor, or a supplier, buyer or licensee) would stand up, submitting a complaint, arguing that a behavioural commitment had not been correctly honoured.

• Such a complaint, addressed to the Commission, is likely to involve a very considerable workload for an individual business matter, and the Commission might not be overly enthusiastic to devote its limited human resources to deal with that matter.

• Hence, the Commission, in many decisions, has provided for a submission of such matters to an arbitral tribunal for dealing with such complaints by third parties.

A review of the many references to arbitration so far adopted in Commission Decisions reveals particular characteristics which are required by the Commission. The trouble also is that many references to arbitration, reflected in past Commission Decisions, were flawed, and their workability in case of need might be doubtful, unless the parties in dispute reach a solution to overcome certain defects.

It is highly illustrative to examine all of these references to arbitration in some detail. This is done in Part 3 of this Paper. The review of these arbitration commitments, so far accepted by the Commission:

3 At the IBA Conference in San Francisco, it was reported that the monitoring of behavioural commitments imposed on Microsoft, during years, absorbs the time of 50 case-handlers at the DOJ.

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• on the one hand do indicate clearly some very particular features of the process which are important to the Commission (quite in the sense of a condition sine qua non), and

• on the other hand prompt reflection on how to shape a proper Model Commitment which, in future cases, may serve the Commission and the parties in drafting a proper arbitration commitment.

The review in Part C will also show that the Commission has very significantly improved its approach, as can be seen from the most recent Commission Decisions reflected in this Paper, for instance in the Decisions Newscorp/Telepiù, General Electric/Instrumentariumand Air France/KLM, except that the Piaggio/Aprilia arbitration commitment, accepted by the Commission in November 2004, appears to be a retrograde step.

Yet, these most recent arbitration commitments have prompted the author of this Paper to submit the proposal for a draft Model Arbitration Commitment, which was discussed with the members of the enforcement unit of DG COMP during 2004.

This Model Arbitration Commitment, and its particular elements, are explained herein below in Part 4, and the Model Arbitration Commitment is reflected in Part 5.

1.5 Why Should Such a Model be Established at All?

The answer is rather simple. Experience has shown that commitment packages in the framework of merger control have to be submitted on a very tight time-schedule, and ever so often negotiations will take place up to the last minute. As discussed in the next following Part B, in some cases time was indeed too short for the Commission to at all sufficiently consider a commitment package within the statutory timeframe, hence leaving the Commission with no other option than to reject the package (or part of it) and to prohibit the concentration.4

The arbitration clauses quoted in Part 3 show considerable defects; many of them are of a truly pathological nature, and will not work in practice, unless the parties will reach separate agreements to “rescue” the situation. Moreover, a systematic “thinking” of what is required for the purpose of this special type of arbitration has not so far been done. My proposal, earlier made to the Commission, to work out a Model Commitment, also intends to initate a structured debate on how this matter should be handled, and a number of basic parameters need careful thinking on both sides, i.e. on the part of the European Commission, as well on the part of the arbitration community and arbitral institutions.

4 Of course, this impact has given rise to a very extensive debate in the framework of the fundamental revision of merger review, and the new EC Merger Regulation No. 139/2004 has addressed this matter by relaxing the timeframe where the merging parties are submitting/offering commitments to the Commission (for the details see the discussion in Part B).

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Moreover, parties as well as the Commission will be helped if a Model Arbitration Commitment is in place in the sense of a basic proposition which will then only require minor adaptations in each individual case, for instance for defining the particular scope of review which will be subjected to the arbitrator's decision.

The availability of a carefully considered Model Arbitration Commitment may also encourage the Commission to more readily accept behavioural commitments, as opposed to requiring "amputations" (in the sense of a structural divestiture). In this context, the Commission must be satisfied:

• of the reliability of arbitration as a process leading to a very thorough examination and adjudication of the matter;

• of the competence of the arbitral tribunal (as to its proper understanding of the context, of the particular Commission Decision, and its ability to carry out a thorough examination, and its ability to render a carefully reasoned decision);

• of the speedy resolution of this matter (which is particularly important to the Commission, for good reasons);

• of the availability of some means of overseeing the arbitral process, and of being kept informed;

• of the possibility for the Commission to make its views known, if deemed appropriate or necessary, through an amicus curiae brief;

• of quite a number of further aspects which are specific to this process, or will be of particular importance, as further discussed in Part 4.

The Commission intends to work out its own Model Arbitration Commitment, accompanied by an Explanatory Memorandum (or a Best Practices Notice).5

Once the Commission will have accomplished its "homework", the Commission's proposal will be published, with the usual public consultation process to follow. Certainly, the arbitration community as well as competition lawyers will wish to then study the Commission's proposal and to provide assistance for the shaping of the definitive text.

5 At the occasion of discussions in March 2004, it was indicated that a first internal draft would be submitted for further internal discussion within the Commission by summer 2004. We now understand that delays have occurred (also occasioned by the very significant absorption of all human resources within the Commission as a consequence of the fundamental changes which took place as of 1 May 2004, and the very significant changes of the regulatory framework in almost all areas of competition law).

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1.6 The Contributions of Arbitral Institutions and the Arbitration Community at Large

While arbitrations regarding behavioural commitments may certainly, and probably without any difficulty, be held as ad hoc arbitrations (without the involvement of any institution), it is nevertheless this author's view that it would be much preferable to provide for institutional arbitration. The institutional framework would enhance the importance/weight of the process and would moreover, through the institutional arbitration rules, provide a procedural framework which has stood the test of time in thousands of arbitral proceedings.

My suggestion is that, for practical purposes, only a few leading arbitral institutions should be chosen, for two reasons: First, cases will not be numerous in any event and, second,institutions will be required to adapt some of their procedures so as to perfectly respond to the specific needs of this type of arbitration which, as we will see, is an arbitration suigeneris. It would not be reasonable that more than two or three arbitral institutions within the European landscape would devote particular energy to this matter.

Needless to say that the ICC and the LCIA appear to be best placed from their importance and impeccable standing. Both of them have been referred to in Commission Decisions rendered in the past; see the details in Part 3 below.

1.7 The Studies Undertaken by the ICC Taskforce

In early 2003, the ICC has mandated a particular Taskforce to study the parameters of arbitrating antitrust matters, one topic being arbitrations involving Articles 81/82 EC issues, and the second topic being the type of "regulatory arbitration" dealing with behavioural commitments under the purview of the Commission, i.e. based on commitments pursuant to Regulation 1/2003 and /or the ECMR 139/2004.

One particular aspect which the Taskforce is considering will be a Note or Recommendation, to the ICC Court of Arbitration, as to specific needs and requirements for properly handling this type of arbitrations on the institutional level. This debate will be put on the agenda as soon as the Commission will have published its proposal for further public consultation.

1.8 The Overall Goal and Ambition is to Provide a Significant Amelioration to the Present Situation

The use of an arbitrator or arbitral tribunal mandated to monitor behavioural commitments offers significant advantages and improvements to the merger control process:

• Less rigidity: Structural remedies, as in past practice preferred by the EU Commission (and preferred as well by the US DOJ and FTC), impose rigid and indeed drastic measures cutting out, almost like a de-membratio, operative parts

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of an enterprise. Hence, the availability of less rigid and less drastic solutions would be highly welcomed by merging enterprises.

• More flexibility: Behavioural commitments, in contrast, will not cut out parts of an enterprise, will not amount to a de-membratio, but will require the enterprise to use its market power with full respect for the businesses of other or weaker competitors, suppliers, licensees, customers and consumers. As such, behavioural measures are more flexible and more responsive to market structures and changes that inevitably will occur over time.

• More dynamics: Behavioural commitments, therefore, offer a dynamic approach with a view to ascertaining a workable competition. Where the need occurs, they can be reviewed by the Commission upon a request of the parties; see the review clauses in numerous Commission decisions. In the framework of an arbitration (initiated against the merged party by a claiming third party), the request for a review may possibly be supported by an opinion submitted by the arbitrator or arbitral tribunal; hence, behavioural commitments will allow an adaptation to changed and changing circumstances; no such cure or remedy is available where a divestiture had to be implemented.

• Less speculation over the future: The merger review requires the Commission to predict the future, almost like a fortune-teller, and - although the Commission takes an impressive care in this regard when making its ex ante assessment of the likely impact of a proposed concentration on future competition - its assessment may not always prove to be right. Hence, the Commission might get it wrong; for instance, market predictions in the field of commercial air-crafts (as stated in the Boeing/McDonnell Douglas Decision) were superseded by the down-turn since 2001. And, more recently, the CFI had to put the Commission to a more exacting and indeed higher standard of proof not only regarding actual market shares and market dynamics, but – very particularly and explicitly – also regarding its prognosis of future behaviour and effects on the market, for instance in respect of anticipated co-ordinated effects (CFI in Airtours v/Commission), unilateral effects or portfolio effects (CFI in Schneider v/ Commission and BaBylissv/Commission), conglomerate effects (CFI in Tetra Laval/Commission), range effects (CFI in BaByliss/Commission), estimated economic power of the merged entity (in Schneider), bundling and leveraging (in Tetra Laval).

• The imposition of behavioural commitments, however, would provide a flexible solution and would remove from the Commission’s shoulders the painful duty to speculate over the quite unpredictable future.

• Uncertain future market developments, therefore, rather call for a flexible approach in terms of requiring behavioural remedies, instead of imposing “hard and fast” structural remedies in terms of a divestiture.

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• A more demanding monitoring tasks: Behavioural commitments, however, require an effective monitoring over time, sometimes a period of 10 or more years, and such a monitoring may be an exacting task for the Commission’s Enforcement Unit.

However, where a third party raises a complaint and claims against the merged entity, such a matter will not need to be examined by the Commission, but willbest be entrusted to an arbitrator or arbitral tribunal experienced in both, antitrust matters and arbitral case management.

• More thoroughness: An arbitrator or arbitral tribunal missioned to examine compliance with behavioural commitments in the framework of a dispute which has arisen between the merged entity and a third party may have to devote a very significant effort and time to analyse the matter in arbitral proceedings, and such proceedings will have to respect the “rule of law”, ascertaining the requirements of the so-called “due process”. Quite in the sense of former Commissioner Mario Monti’s explanations regarding Regulation 1/2003, an outsourcing of this task to competent arbitrators in those cases where a dispute between the merged entity and other parties has arisen, will set free considerable human resources within the Commission, allowing it to concentrate on its core function as regulator, rather than absorbing significant energies in accomplishing a judicial or quasi-judicial function for which it is not equipped. Hence, the Commission sets the pace in its Decision on the concentration, and the arbitrator [the arbitrator or the arbitral tribunal?] - where a dispute has arisen between the merged entity and other market players - the arbitral tribunal [or the arbitrator?] will adjudicate proper compliance.

• Co-operation: For the purpose of monitoring compliance in the framework of a dispute, the arbitrator will have to examine compliance by the merged entity in “actual life”, against the yardsticks set by the Commission in its Decision.

• Yet, the judicial/arbitral independence will be maintained: The arbitrator or arbitral tribunal is not at all the “slave” of the Commission; the arbitrator will make an independent decision, and on the other hand the Commission remains entirely free to make its own assessment as the Regulator, and may draw its own independent conclusions from the arbitrator’s findings and determinations, for instance under Article 8 (4) and 8 (5) ECMR 139/2004.

• Keeping control over the arbitral process: The Commission will not lose control over the arbitral process, but will be able to oversee the same and will be free to act or to react. The Commission has clearly required to be kept informed of the process before the arbitral tribunal, and such request can be accommodated while at the same time keeping legitimate concerns of confidentiality of the parties.Hence, a Model Arbitration Commitment should address this matter. See hereto below in Parts D and E.

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• Quasi Regulatory function: For a large part, the arbitrator will have to carry out a delegated regulatory function in those cases where market players are in dispute; nevertheless, the advantage and benefit for the arbitrating parties is that he will do so respecting the usual procedural standards and guarantees.

• Overall solution: Unlike the task of a mere expert, the mission of the arbitrator will not stop at determining whether or not certain behavioural commitments have been complied with, but the latter will carry the matter further by offering the aggrieved party an effective remedy, in that the arbitrator or arbitral tribunal will have the judicial powers and authority to determine all civil law claims, such as claims for specific performance (for instance opening up of a network and granting access on non-discriminatory terms, effectuating supplies or granting licenses on non-discriminatory terms and the like) as well as claims for damages. Hence, the arbitrator (unlike the expert) is able to carry out a judicial task.

• It is this solution of the outsourced judicial task, to be accomplished by a competent arbitrator, which – in future – will hold the key for an effective and dynamic adjudication in the framework of merger review, in so far as “soft”commitments (in the sense of behavioural commitments) are concerned. This judicial review provided by an arbitrator or arbitral tribunal will be the mostefficient tool to carefully examine and, if need be, sanction through civil law remedies any anti-competitive behaviour arising out of a concentration, and to install in the business practices between the arbitrating parties the objectives which the Commission aimed to achieve through its merger control.

2. EC Merger Control Under the New Regulation 139/2004 At a Glance 6

2.1 Concentrations

The new ECMR 139/2004, as did the former ECMR 4064/1989, applies to concentrations in the sense of a merger of two or more previously independent enterprises, or the acquisition of direct or indirect control of the whole or part of another undertaking7 (whether by way of share-deal or an asset-deal) which creates a durable (not only transitory) change in the structure of the enterprises concerned. An essential factor is the criterion whether or not the transaction will lead to a lasting change in the control(direct or indirect) over one or more undertakings.

6 In his earlier publication, the author had described the merger control procedure prior to the entry into force of ECMR 139/2004: MARC BLESSING, Arbitrating Antitrust and Merger Control Issues, Helbing & Lichtenhahn, 2003, ISBN 3-7190-2226-9, (Swiss Commercial Law Series Volume 14, 215 pages); the book is also available on the Bär & Karrer website, under “Swiss Commercial Law Series”, at www.baerkarrer.ch.; the summary report herein delivered is updated to take into account the developments up to January 2005.

7 Mostly, the term “undertaking” is used to denote an enterprise; “undertaking”, however, also means a commitment, and is frequently used in that sense by the Commission; hereinafter, in order to distinguish the two terms, I may use the term “undertaking” or “enterprise” when referring to a company or party, and to use the term “commitment” in the framework of remedies offered to address competition concerns.

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Since 1 March 1998, the ECMR also regulates full-function joint-ventures8 (whether concentrative or co-operative)9, whereas non-full function joint-ventures (such as strategic alliances) will remain to be governed by the provisions of Articles 81/82 EC.10

2.2 The Regulatory Materials

A number of Notices were published by the European Commission for the purpose of assisting in the interpretation of a number of important issues:

• Council Regulation (EC) No 139/2004 of 20 January 2004 on the Control of Concentrations Between Undertakings (“ECMR 2004”), replacing the earlier Council Regulation (EEC) 4064/89 (as amended by Regulation 1310/97, of 30 June 1997)

• Commission Regulation (EC) 802/2004 Implementing Council Regulation 139/2004, and its Annexes: Form CO, Short Form CO, Form RS

8 A full-function joint-venture is one that qualifies as an autonomous economic entity resulting in a lasting (and not only temporary) structural change on the market (regardless of any coordination of the competitive behaviour of the parent companies). Compare Article 3 (4) ECMR 139/2004. Autonomy in this sense will require that the joint venture disposes of sufficient assets, personnel and financial resources so as to enable it to operate its business activity independently; it also requires that the joint venture be allowed to pursue its own commercial policy. Moreover, the joint venture must not be tied to significant purchase or supply arrangements with its parent companies which, as such, would restrict its commercial autonomy. And finally, the contemplated duration of the joint venture must be such as to bring about a lasting change in the structure of the parties concerned. Where a joint venture is confined to take over only certain specific tasks within the scope of business activities of the parent companies (for instance a joint venture confined to engage in R&D or confined to produce certain goods without having direct access to the market or where a joint venture company does not engage in R&D and production but simply acts as a sales agent for the parent companies), will not qualify under the “full-function-test”.Hence, it will be caught by Articles 81/82 EC. Thus, wherever a joint venture is tied to contractual arrangements with their parents, those will have to be reviewed very carefully so as to determine whether the joint venture’s full-function-character, and its autonomy, would not be affected thereby. – Since March 1998, more than 65 Commission Decisions assessed joint ventures under Article 2 (5) ECMR. A particularly remarkable decision was the first Phase II investigation of a joint venture in the BT/AT&Tcase, where the possible co-ordinating effects of the proposed joint venture (particularly in the UK) had to be examined.

9 It should be noted that, however, those full-function joint ventures that give rise to a co-ordination of the competitive behaviour of their parent companies will not only be examined under the ECMR, but also under the Article 81/82 test, in order to assess their compatibility with the common market. Hence, a dual test will be applied: the ECMR test to the joint venture itself, and the Article 81/82 test with respect to the coordinating effects. An exemption may be granted on the basis of Article 81(3) EC, where the advantages of the joint venture, in balance, outweigh the anti-competitive impact of the co-ordination on the level of the parent companies.

10 Non full-functional joint-ventures which are caught by Articles 81/82 EC are subject to different jurisdictional criteria, different substantive tests and procedures different from those under the ECMR. For instance, a cooperative joint-venture falling under Art. 81 EC and which falls outside any relevant block exemption may entail serious consequences, in that any restrictive provisions might be void and unenforceable, entailing the risk of fines. Such joint-ventures, since 1 May 2004, can no longer be notified to the Commission for the sake of applying for an individual exemption under Article 81 (3) EC; instead, the self-assessment has to take place. The yardsticks to be applied in a substantive test in respect of a non full-functional joint-venture is more onerous than the dominance test under the ECMR 1989 or the new SIEC-test under the ECMR 2004: parties will essentially have to make sure that the economic benefits of the agreement outweigh any anti-competitive effects. And finally, non full-function joint-ventures will not benefit from the one-stop review afforded to notifications under the ECMR, and therefore may have to be cleared under national competition laws as well.

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• The Commission Guidelines on the Assessment of Horizontal Mergers (OJ 2004 C31/5)

• the Commission Notice on Remedies acceptable under Council Regulation EEC No. 4064/89 and under Commission Regulation EC No. 447/98 (OJ 2001 C68/3),

• the Commission Notice on the Concept of a Concentration (OJ 1998 C66/5),

• the Commission Notice on the Concept of Full-Function Joint Ventures (OJ 1998 C66/1),

• the Commission Notice on the Distinction between Concentrative and Co-operative Joint-Ventures (OJ 1994 C385/1),

• the Commission Notice on the Concept of Undertakings (OJ 1998 C66/14),

• the Commission Notice on the Calculation of Turnover (OJ 1998 C66/25),

• the Commission Notice regarding Restrictions Ancillary to Concentrations (OJ 2001 C188/5),

• the Commission Notice on the Definition of the Relevant Market for the Purposes of Community Competition Law (OJ 1997 C372/5),

• the Commission Notice on Restrictions Directly Related and Necessary to Concentrations (OJ 2001 C188/5),

• the Commission Notice on Alignment of Procedures for Mergers (OJ 1998 L66/36),

• the Commission Notice on a Simplified Procedure for Treatment of Certain Concentrations, and Explanatory Note thereto (OJ 2000 C217/32),

• the Commission Notice on Access to Files (OJ 1997 C23/3)11, and

• the DG Competition Merger Control Best Practices Guidelines on the Conduct of Merger Control Proceedings, and Best Practice Guidelines for Divestiture Commitments.

• Moreover, the website of DG COMP offers a very helpful 20-page “Merger Notification and Procedures Template”.

On the reform process, which took place between 2001 and 2004, see in particular:

• The Commission’s Green Paper on Review of the EC Merger Regulation,12

presented on 11 December 2001.

11 This Notice is currently under revision (December 2005), and a new draft may be expected to come out in spring of 2005.

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• Exactly one year later, on 11 December 2002, the Commission launched its Proposal for a new ECMR (Council Regulation on the Control of Concentrations Between Undertakings; containing significant amendments to jurisdictional issues in its Section II.A., to substantive issues in Section II.B., procedural issues in Section II.C. and a number of other amendments in Section II.D.; these two documents lead to the Council Regulation 139/2004, and the Implementing Regulation 802/2004).

• On the same day, 11 December 2002, the Commission published its draft Notice on Horizontal Mergers and Efficiencies, inviting comments by 31 March 2003; this lead to the Guidelines on Horizontal Mergers.

• Further, a Commission Notice on Vertical and Conglomerate Mergers, is due to come out very shortly in 2005.

2.3 The Genesis of ECMR 2004: The Green Paper and Discussions in 2002

The Green Paper of 11 December 2001 was followed by a wide-ranging consultation process within the business and legal communities. Essentially, the focus was (i) on proposals to modify the jurisdictional thresholds, (ii) on the procedural rules for the review,13 and (iii) on the substantive test (dominance or SLC) to be applied. Moreover, (iv) it was expected that there should be more recognition on merger-specific efficiencies which ultimately are to the consumers’ advantage.

A slightly different topic (which nevertheless gave rise to extensive debate during 2002) was the concern regarding the length of time required by the judicial review procedure at the level of the Court of First Instance (CFI).

For instance, the Commission’s decision in Airtours/First Choice was reversed by the CFI,14 but the judgment by the CFI came 33 months later, hence at a time where the momentum for the merger was gone a long time ago; the CFI decisions in other cases took a similar amount of time, such as 33 months in Gencor, 35 months in Kesko, 41

12 COM (2001) 745 final. See Götz DRAUZ, Reform der Fusionskontrollverordnung, Wirtschaft und Wettbewerb WuW 2002, 444–449. A summary of the feedback in respect of the Green Paper can be found on DG Competition’s website at http://europa.eu.int/comm/competition/merg-ers/review/comments.html.

13 For instance the introduction of a „stop the clock“ request for three or four weeks in connection with the offering of remedies in Phase I or Phase II of the investigation. Other matters deal with the parties’ right of defence and access to judicial review. Moreover, the DG’s economic capabilities will need to be improved, having regard to the ever increasing complexities of merger cases, and a peer review „Panel“ system in Phase II investigations should be introduced. The Panel, composed of experienced officials, should monitor all in-depth investigations and scrutinize the case-handlers‘ work with fresh eyes. Other reform proposals deal with a earlier access to files by the merging parties, particularly to critical or opposing third party submissions, and the possibility for a confrontation at a meeting is discussed. A consumer liaison function is being considered, thus giving the consumers a voice in the process. Also the Hearing Officers role should be strengthened so as to guarantee adequate protection of the merging parties’ rights of defence and an appropriate conduct of the procedures.

14 Judgment CFI of 6 June 2002, Case T-342/99 [2002] ECR II-2585. The judgment prompted numerous writings; see for instance Ken MÜLLER-TAUTPHAEUS, Erstmalige Aufhebung eines Fusionsverbotes durch das EuG, European Law Reporter ELR 9/2002, 328 ss.

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months in Endemol. The expedited procedure (fast track procedure) was applied by the CFT in the two public bid cases Schneider/Legrand and in Tetra Laval/Sidel, and the judgments were rendered within 10½, respectively 9½ months . The latter two cases are also good examples showing that the CFI does not at all restrict its review to the legal issues only, but will carry out critical review on the evidentiary basis on which the Commission had rendered its decision, in the sense of examining whether the Commission has shown pursuant to the requisite legal standard that the concentration creates or strengthens a dominant position. However, a further appeal from the CFI to the European Court of Justice (ECJ) can be made, on points of law only, and the EU Commission filed such appeal to the ECJ in January 2003, essentially attacking the disproportionately high standard of evidence imposed by the CFI.15

As was announced by Commissioner Mario Monti in his opening address at the European Commission/IBA Conference in Brussels held on 7 November 2002, the reform package consisted of (i) a new EC Merger Regulation, (ii) a new Commission Notice containing comprehensive Guidelines on the assessment of dominance in horizontal mergers (the draft is expected to be published for wider public consultations), (iii) a draft set of (new) Best Practice Guidelines on the conduct of merger investigations (for discussion with the legal and business community), describing inter alia the relationship between the Commission and the merging parties and interested third parties, as well as the timing of meetings, transparency and due process in merger proceedings, and (iv) certain proposed measures relating to the staffing and resources of DG Competition.

2.4 Several Commission Decisions Annulled by the CFI: A Healthy Blow?

Hardly have one seen ever before a more heated debate than that surrounding the CFI’sannulments of three major prohibition Decisions issued by the Commission in the cases Airtours/First Choice, Schneider/Legrand and Tetra Laval/Sidel.16 Moreover, the more recent judgments in Largardère v/Commission, BaByliss v/Commission and Philipsv/Commission17 have attracted very significant interest. Is the Commission shipwrecked?

15 It may also be noted in this context that the CFI is rather reluctant to grant the parties' application for organizing an expedited procedure. Nevertheless, out of some 40 applications made until April 2003, 16 cases were admitted to benefit from the fast track procedure, whereof 13 challenged merger decisions. The CFI is moreover reluctant to grant interim relief; all application but one (in Kali und Salz) were rejected so far. On the expedited procedure, see the Article by KYRIAKOS FOUNTOUKAKOS, Judicial Review and Merger Control: The CFI’s Expedited Procedure, Competition Policy Newsletter 3/2002, p. 7-12.

16 Airtours v/Commission, Case T-342/99 [2002] ECR II-2585. Schneider v/Commission, Case T-310/01, CFI Judgment of 22 October 2002, not yet published in the ECR (as of April 2003); Tetra Laval v/Commission, CFI Judgment of 25 October 2002, not yet published in the ECR (as of April 2003). The Commission had rendered, in 2001, five prohibition decisions which gave rise to considerable debate, and to proceedings before the CFI, followed by damage claims against the Commission for amounts in excess of € one billion. - See also the comments to the Airtours-judgments in the European Law Reporter (ELR) by Ken MÜLLER-TAUTPHAEUS, Erstmalige Aufhebung eines Fusionsverbotes durch das EuG, ELR 9/2002, 328 ss.; on the Schneider case, see Lars VOLCK MADSEN, Commission’s Second Defeat in Merger Cases, ELR 2/2003, 55 ss., and on the Tetra/Sidel case, see the article yet to be published in ELR 5/2003.

17 Largardère SCA, Canal+ SA v/Commission, Case T-251/00, Judgment of 20 November 2002 (not yet published in the ECR); BaByliss v/Commission, Case T-114/02, Judgment of 3 April 2003 (not yet published) and Philips v/Commission, Case T-119/02, Judgment of 3 April 2003 (not yet published).

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Is the Commission’s reputation seriously damaged? Was its approach, factual analysis and legal assessment fundamentally flawed?

For our purpose, it is less important to join in the chorus of the critics. Rather, the question is whether the CFI’s verdict over the fact-finding and legal assessment by the Commission has prompted the Commission to work on appropriate remedies and improvements. Fortunately, as we can say already now, this was the case. The review of the Reform Package (as described below) shows that the Commission has “learned its lesson”, that it has taken the criticism very seriously (even though the Commission does not agree with some of the statements made by the CFI, and has brought an appeal to the ECJ). Hence, the CFI verdicts came indeed at an almost ideal moment in time when the Reform Package was being worked out by the Commission.

In Airtours/First Choice, the Commission based its prohibition on its assessment that a collective dominance will be created and that the parties will have an incentive to co-ordinate their market strategy through tacit collusion within the oligopoly. However, the Commission’s Decision was based on a mere assumption which did not meet the requirements pronounced by the CFI. The discussions regarding the Airtours Judgment prompted reflections on the issue whether or not Article 2 ECMR 1989 would be sufficiently wide to cover not only co-ordinated effects within an oligopoly, but also unilateral effects, and some commentators argued that the dominance test would be too narrow to cover unilateral effects.18 Basically, the “old” dominance test under Article 2 (2) ECMR 1989 required cumulatively a creation or strengthening of a dominant position as well as a resulting significant impediment of effective competition in the Common Market (or in a substantial part thereof), whereas under the SLC Test under the Clayton Act would seem to set a lower threshold in that only the requirement of a lessening of competition would have to be satisfied.19

The ensuing scholarly debate circled around oligopolistic market structures and the appreciation of unilateral effects (effects created “with or without co-ordination”), previously discussed in the Gencor Decision.20 The assessment of oligopolies is now further explained in a new Paragraph 25 of the Recitals within the ECMR 139/2004:

“In view of the consequences that concentrations in oligopolistic market structures may have, it is all the more necessary to maintain effective competition in such markets. Many oligopolistic markets exhibit a healthy degree of competition. However, under certain circumstances, concentrations involving the elimination of important competitive constraints that the merging parties exerted on each other, as well as the reduction of competitive pressure on the remaining competitors, may, even in the absence of a likelihood of

18 Compare e.g. the Report by John FINGLETON, Does Collective Dominance Provide Suitable Housing For All Anti-Competitive Oligolopolistic Mergers?, IBA-EC Merger Control Conference, Brussels 7/8 November 2002, See also Nicholas LEVY, Dominance vs SLC - A Subtle Distinction? IBA-EC Merger Control Conference, Brussels 7/8 November 2002.

19 Clayton Act, 323 § 7, 38 Stat. 730, 731-732 (1914), Version 15 U.S.C. § 18 (1994). 20 Case T-102/96, Gencor v/Commission, T-102/96, [1999] ECR II-753, Paragraph 200.

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coordination between the members of the oligopoly, result in a significant impediment to effective competition……”

In Schneider/Legrand and in SEB/Moulinex, portfolio effects triggered by a conglomerate merger had to be appreciated by the Commission. The CFI, however, voiced stark criticism in that, essentially, it would not be sufficient for the Commission to voice presumed portfolio effects. a more tangible evidence and proof would be required, and the Commission failed to examine closely the effects in relation to the various products sold in each affected national market.

In the Decision BaByliss v/Commission, 21 the CFI broadened its position taken on the requirement to analyse portfolio effects,22 in that it voiced the opinion that the Commission should have extended its analysis to neighbouring markets.

In GE/Honeywell and in Tetra Laval/Sidel, the Commission essentially had to consider that the merged entity could possibly strengthen its dominance through bundling in that, post-merger, GE might offer package discounts to customers who buy both GE engines and Honeywell products. The Commission’s concern was based on a theoretical economic model provided by a competitor, predicting that there would be an incentive for such behaviour after the merger.23 In September 2001, both GE and Honeywell filed a complaint against the Commission’s Decision to the CFI, arguing specifically that the Commission’s Decision lacks substantiation and proof. The matter is still pending at the CFI.24

In Tetra Laval/Sidel,25 the Commission also analyzed potential bundling effects and leveraging potentials, resulting in the Commission’s prohibition of the transaction. The CFI annulled the Commission’s Decision, whereupon the Commission had to conduct a second investigation, examining the impact of the transaction on the wider stretch blow-moulding machines market, rather than the narrower markets for these machines by end-users. Re-evaluating the results of the investigation within the terms of the CFI’s Judgment, the Commission could no longer maintain its finding that the operation would create a dominant position. However, with regard to a certain new technology (“Tetra Fast”), which had not been considered in its first Decision, the Commission expressed serious concerns as to the possible creation of a dominant position, which concern was

21 T-114/02, BaByliss v/Commission, Judgment of 3.4.2003 (not yet published in the ECR), Paragraphs 342, 353.

22 See the comments to the CFI judgment of 3 April 2003 by Lars Volck MADSEN, Accepting the „Portfolio Effect Theory“ in European Competition Law, European Law Reporter ELR 4/2003, 151 ss.

23 Commission Decision of 3.7.2001, General Electric/Honeywell, COMP/M.2220, Paragraph 349; see also the economic analysis by Matthias PFLANZ and Cristina CAFFARRA, The Economics of GE/Honeywell [2002] ECMR, 115; see further William J. KOLASKY, Conglomerate Mergers and Range Effects: It is A Long Way From Chicago to Brussels, speech of 9 November 2001, available on the internet: http://www.usdoj.gov/atr/public/speeches/9563.pdf.

24 T-209/01, Honeywell v/Commission, OJ 2001, C331/23, and Case T-210/01, General Electric v/Commission, OJ 2001, C331/24.

25 Commission Decision of 30.10.2001, COMP. 2416, Tetra Laval/Sidel.

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ultimately removed by Tetra’s commitment to license the new technology. Nevertheless, the Commission appealed the CFI Judgment to the European Court of Justice.

All of the above cases which we depicted with only a few characteristics, attracted very wide echoes almost around the globe. And the echoes came “just in time” to allow the Commission to digest the CFI’s verdict and to reflect on any improvements which could find their way into ECMR 139/2004. In fact, ECMR 139/2004 brought substantial improvements to the thoroughness and quality in the handling of future investigations. We will now take a look at the most essential elements of the Reform Package.

2.5 The Reform Package Leading to ECMR 2004

On 11 December 2002, exactly one year after the publication of the Green Paper, the European Commission adopted the most far-reaching reform package of its merger control regime since the entry into force of the ECMR 4064/89 in 1990. The package was intended “to deliver a world-class regulatory system for firms seeking approval for their mergers and acquisitions” and should combine a predictable review timetable with an improved decision-making process based on economic analysis and enhanced opportunities for merging firms’ views to be taken into account.

The package26 consisted of (i) a proposal for a revision of the Merger Regulation27 with

Explanatory Memorandum, (ii) draft Guidelines on the appraisal of horizontal mergers, i.e.

mergers between competitors, and (iii) a series of non-legislative measures intended to

improve the decision-making process, some of which are contained in a set of Best

Practices.

The changes which the Commission proposed to be made to the ECMR required the approval by the EU Ministers. The revised ECMR 139/2004 entered into force as of 1 May 2004, i.e. at the same time when new States became members of the EU.

The most essential elements of the new ECMR are the following:

• The new ECMR reflects a new substantive test, the SIEC Test; it also clarifies that the Regulation equally applies to oligopolies which may give rise to competition problems.

• The new ECMR moreover rationalises the timing of the notification of proposed mergers to the Commission, by introducing the possibility for a notification prior to the conclusion of a binding agreement, and by abolishing the requirement that transactions be notified within a week of the conclusion of such an agreement. Hence, these measures are intended to remove some of the criticised regulatory

26 Available on the Commission’s website at http://europa.eu.int/comm/competition/index_en. html.27 OJ 28.1.2003, C20/4, with black-lined text highlighting the deletions and insertions at that time; however,

the final ECMR 139/2004 contains quite a number of further modifications.

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rigidities, and should facilitate the co-ordination where multi-jurisdictional merger filings have to be made to different national competition agencies.

• The system for the referral of merger cases from the Commission to Member State competition authorities for investigation, and vice versa, is addressed in a carefully elaborated way which evidences the politically delicate aspect of this matter; the aim was to ensure that the best placed authority should examine a particular transaction (while at the same time seeking to reduce the burden of multiple filings).

• While the clearly restricted time-table of the EC merger review has significant advantages, the time constraints were softened so as to avoid impairment on the quality and thoroughness of the review. Hence the conduct of merger investigations, in particular for complex cases, was more aptly scheduled.

• More time, in particular, had to be allowed for proper consideration of remedies offered by the Parties, as well as for consultation with Member States. In Phase I, the period within which parties may offer commitments was extended to 20 working days, and in Phase II to 65 working days.28 The stretching of the timeframes was also made in view of the high evidentiary burden that is incumbent on the Commission following the recent decisions of the Court of First Instance (CFI) in Airtours, Schneider and Tetra Laval.

• Moreover, the Commission’s fact-finding powers were strengthened, enabling it to more easily obtain information for the purposes of an investigation, with higherfines being contemplated for a failure to comply with requests to supply information. Under the old ECMR 1989, the maximum fine was € 50'000, whereas ECMR 139/2004 now allows fines up to 1% of the aggregate turnover for supplying incorrect or misleading information.29

Apart from the above, the decision-making process of the Commission was improved; already on 11 December 2002, the following measures were announced:

• The creation of a post of the Chief Competition Economist within the Directorate-General for Competition, headed by Philip Lowe. The Chief Economist (presently Dr. Lars-Hendrik Röller) and his team are now involved in merger and other competition investigations and enhance DG COMP’s economic competence.

• The Commission also announced that it intends to make a more frequent use of outside consultants for the purpose of conducting economic studies.

• A peer review panel (or: devil’s advocates’ panel) composed of experienced officials will be appointed for all Phase II merger investigations. The task of the panel is to

28 See Regulation 802/2004, Article 19, which contains a further escape clause available in exceptional circumstances.

29 See Article 14 ECMR 139/2004.

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scrutinise the investigating team’s conclusions with a “fresh pair of eyes” at key-points of the enquiry. According to Philip Lowe, such a review panel had already been used as from the beginning of 2003, and has proved to provide a very useful tool.30

• Moreover, additional support staff was allocated to the Commission’s Hearing Officers, strengthening their role.

• Similarly, the role of the Advisory Committee (composed of Member States experts) was enhanced.

• A Consumer Liaison Officer is appointed within the Competition department so that the “consumer voice” would be better heard.

• The parties whose proposed merger is being investigated are granted improved rights of defence, for instance by an earlier opportunity to access the Commission’s file, notably following the opening of an in-depth investigation.

• In addition, it was discussed that an opportunity should be given for the parties to meet with “complaining” third parties in order to address and discuss the concerns they may have.31 Moreover, triangular meetings may take place.32

• And in addition, the Commission installed systematic so-called “state-of-play” meetings between the Commission and the merging parties at decisive points in the procedure, thereby guaranteeing that the merging parties are kept constantly appraised of progress and that they are given the opportunity to discuss the case with senior Commission Management.33

• Quid, where a concentration has been implemented although it is declared

incompatible with the common market, or in case a condition attached to a decision

is not honoured? Articles 8.4 and 8.5. have been re-phrased for the purpose of

Regulation 139/2004, spelling out the sanctions.

• Finally, the internal case management and the handling of investigations were

significantly improved, taking into account the high evidentiary burden now

incumbent on the Commission after the four recent CFI annulments in Airtours,

Schneider Legrand, Tetra Laval and Lagardère/Canal+.

Under the date of 12 July 2002, the Commission published its draft Explanatory Note on

Divestiture Commitments and the Trustee Mandate under the ECMR, as well as

30 Philip LOWE, speech at the Brussels XXth Forum of the Studienvereinigung Kartellrecht, of 10/11 April 2003.

31 See the Best Practice Guidelines of 19 December 2002, Paragraphs 32 ss. 32 Best Practice Guidelines, Paragraphs 35 ss. 33 Best Practice Guidelines, Paragraphs 23 ss.

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pertaining model texts. These drafts came out in final form on 2 May 2003 and provide

highly useful guidance to parties and their advisers; we will revert to these below.34

2.6 Change of Control

The new ECMR 139/2004 amended the definition in Article 3 (1) of the 1989 ECMR so as to now explicitly include the criterion according to which a concentration requires a change in control and that this control has to take place on a lasting basis. The definition of change is a broad one, in that it suffices that one party acquires “the possibility of exercising decisive influence” over another undertaking. Such “decisive influence” may be exercised on a de facto or on a legal basis, irrespective of the size of the shareholding concerned (for instance by way ownership of shares, or assets, or rights that confer a decisive influence).

A change of control also arises if there is a change from sole control to joint control, or vice versa. Depending on the more particular circumstances, even an option to acquire sole or joint control will be caught by the ECMR; likewise, management buy-outs and venture capital type of transactions fall within the scope of the ECMR.

In respect of the control over joint ventures, the “decisive influence-test” will examine the power to block actions which determine the strategic commercial behaviour of the joint venture. A joint control exists not only in the framework of a 50/50 joint venture but also in cases where a minority will be conferred the power to exercise a veto in respect of strategic decisions relating to the business policy and other important matters such as the business plan, the budget, the major investments to be made and the appointment of the senior executives. Other veto-rights, however, which do not go beyond investors’ rights normally conceded to minority shareholders, would not be considered as conferring a joint control; hence the minority shareholder who may be able to block changes in the statutes of the joint venture company (such as e.g. an increase or decrease of its capital or its liquidation) would not as such confer joint control.

Issues regarding the control over a joint venture are also fact-related since, for instance, two minority shareholders may exercise joint control over a joint venture where, as a matter of fact, they have strong common interests, as may be evidenced by their past voting behaviours. On the other hand, if various minority shareholders are shifting their alliances over the time, an assumption of joint control would normally be excluded.

However, there are a number of exceptions which may be noted. For instance, certain acquisitions by credit institutions which are holding securities on a purely temporary basis, and certain acquisitions by financial holding companies as well as intra-group restructurings, will not be caught. Likewise, certain acquisitions in the context of insolvency proceedings are outside the scope of the ECMR.

34 The texts are published on DG COMP’s website at http://europa.eu.int/comm/competition/mergers/legislation/ divestiture_commitments.

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2.7 Community Dimension

For mergers of a community-dimension, as per the thresholds stated in the ECMR,35 the European Commission will be the one-stop authority to clear the transaction, dispensing the parties from making parallel filings to national competition authorities. Where the relevant turnover36 thresholds as per the ECMR (and as reduced on the basis of the amendment effective as of 1 March 1998) are met, a notification to the European Commission, under the old ECMR 1989, had to be made within not more than one week37

after the earlier of the conclusion of the underlying agreement, or the announcement of a public bid, or the acquisition of a controlling interest. ECMR 139/2004 abolished that timing requirement and now only prescribes that the concentration be notified prior to its implementation.38 The notification, in the case of a merger, is to be made jointly by the merging parties or, in the case of the acquisition of a joint control, by all of the parties exercising such control. In the case of a take-over, the notification must be made by the acquiror.

Even absent a Community dimension, several Member States acting together may request the EU Commission to investigate a concentration. This is a particularly welcome possibility in cases where multiple filings to the national competition authorities in several Member States would otherwise be required. The first Article 22 ECMR-referral was made in the case Promatech/Sulzer where filings to national competition authorities had been filed in Germany, Italy, Spain and the UK. Another case was GE Aircraft Engines/Unison,upon referral by France, Germany, Greece, Italy, Spain and the UK (Commission Decision of 17 April 2002). In order to deal with the problem of multiple filings, the ECMR 2004 established a politically fine-tuned scheme of referral from national competition authorities to the EU Commission.39

35 The threshold of a Community dimension is met when all of the following parameters are fulfilled: (i) the combined aggregate world-wide turnover of all the companies concerned is more than € 5 billion; (ii) the aggregate community-wide turnover of each of at least two of the companies concerned is more than €250 million, and (iii) the companies concerned do not achieve more than two thirds of each company’s aggregate Community-wide turnover within one and the same Member State. Basically, the first threshold intends to exclude mergers between small and medium-sized companies; the second threshold intends to exclude relatively minor acquisitions by large companies, or acquisitions with only a minor Community dimension, and the third threshold intends to exclude those concentrations where the effects of the merger are primarily materialising in a single Member State (in which latter case it would appear to be more appropriate for the national competition authorities to deal with that kind of concentration). However, as the one-stop merger review is a significant advantage for companies contemplating a concentration, the ECMR, according to Article 1 (3) ECMR, also applies where (a) the combined aggregate world-wide turnover of all companies concerned is more than € 2.5 billion, and (b) where the aggregate combined turnover in each of at least three member States is more than € 100 million, and (c) where the aggregate turnover of each of at least two undertakings in those three Member States is more than € 25 million, and (d) where the aggregate Community-wide turnover of each of at least two undertakings is more than € 100 million, and where (e) each of the companies concerned does not achieve more than two thirds of its aggregate Community-wide turnover within one and the same Member State.

36 The relevant turnover is the amount net of sales rebates and taxes derived from the sale of products or the provision of services derived during the last financial year.

37 However, in practice, the Commission will often grant an extension of the time-limit. 38 ECMR 2004, Article 4 (1). 39 ECMR 2004, recitals 15 ss and Article 22.

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Referrals occasionally also operate in the reverse direction, in that the EU Commission would refer a matter to national competition authorities. For instance, in Lafarge/Redland,the Commission partly referred the concentration to the authorities in France and in the UK. Likewise, in Carrefour/Promodès (a case more specifically reviewed below) the Commission referred part of the review of the concentration to the French and Spanish competition authorities.

2.8 Relevant Market

Concentrations have to be assessed in relation to the relevant product markets and the relevant geographic markets affected by them. The relevant product market not only includes the products of the concentrated business or businesses, but also any other products which generally may be regarded as substitutable from the demand perspective, having regard to the characteristics of the products such as price and usage. Offer substitutability may also be taken into account.

The Commission, in determining the relevant product market, tends to opt for a rather narrow market definition, which means that the merging parties run a significant risk that the combined market share will step up into a critical region of 50% or more.

Regarding the relevant geographic market, the Commission will define the area within which the merged companies will operate by supplying the relevant products or services, and in which area the conditions of competition are sufficiently homogenous and distinguishable from neighbouring areas (where market conditions might be appreciably different, for instance due to significant price differences, different transportation costs, different customer habits and preferences, trade barriers, particular licensing requirements and the like).

In sum, it may be said that a market share of below 25% is generally not considered as impeding competition. But on the other hand, very high market shares (which generally may trigger a Phase II investigation) will not necessarily lead to a prohibition; see hereto as an example, the Danish Crown/Vestjyske Slagterier case, where a market share of 80% was cleared by the Commission.

As the discussion of the various cases reported below will also show, the Commission will take into account quite a number of different factors, such as the factor whether or not there is an evidence that new participants will come on the market. It will take into account low (or high) entry barriers; it will consider the availability of alternative products (even if they cannot as such be considered as being substitutable products); it will moreover consider the balance of the economic effects of the concentration.

A magic word has become the so-called “portfolio effect” which may operate as an important factor to strengthen the market position. Moreover, the Commission may consider “gate-keeper effects” in the sense of a company’s ability to control an emerging

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market through proprietary technology, voicing the opinion (for instance in Microsoft/Liberty Media/Telewest) that any such gate-keeper effects should be eliminated.

On the other hand, the Commission has also paid tribute to the failing company doctrine, in the sense of approving a “rescue merger” in the case BASF/Pantochim/ Eurodiol, by approving the acquisition, by BASF, of Pantochim and Eurodiol despite the resultant high market share of some 45%. In the case, the Commission concluded that, absent the acquisition by BASF, Pantochim and Eurodiol would be bankrupt, and the disappearance of these two players on the market would cause more damage to consumers than the proposed merger. The topic of the failing firm defence and the notion of lack of causality was recently discussed by VINCENZO BACCARO.40

2.9 From the Dominance Test to the New “SIEC Test”, as a Test Distinct of the

US SLC Test

The years 2001-2003 were characterized by a much debated "hot topic", essentially fuelled in connection with the debate regarding the European Commission's decision to prohibit the merger between General Electric and Honeywell. The debate was whether the European Commission would have reached (and in the view of some commentators should have reached) a different conclusion, had it adopted the US “SLC test” (“substantial lessening of competition”), instead of applying the “dominance test” (“creationor strengthening of a dominant position”) under the ECMR. The discussion on the substantive test to be applied was moreover launched by the Commission's Green Paper published in December 2001. Critics suggested that a change from the dominance test to the SLC test would provide better-suited decisions and a more appropriate recognition of the full range and complexity of competition problems arising in merger control. Most commentators have, during 2002, expressed the opinion against adopting the US concept.41 The ECMR 139/2004, as discussed below, reflects this discussion in its Explanatory Memorandum, Paragraphs 52 to 58.

40 VINCENZO BACCARO, Failing Firm defence and Lack of Causality, [2004] E.C.L.R.., Issue 1, p. 11-24, reviewing the most recent cases including Rewe/Meinl, BASF/Eurodiol/Pantochin, BLU, the AndersenCases, Newscorp/Telepiù.

41 For instance, in respect of the Boeing/McDonnell Douglas case (IV./M.877, of 30 July 1997), one may say - in perhaps an overly simplistic analysis – that the US authorities (FTC) were lead to approve the concentration on the basis of the SLC-Test (and a notion close to the failing company doctrine, see the remarkably short opinion by Chairman Roger PITOFSKY), whereas the European Commission, applying the dominance test, was lead to reach the opposite conclusion, such that – at the eleventh hour of the Phase II review - a heavy package of structural and behavioural commitments had to be negotiated and conceded by Boeing. See the detailed report on that decision below. More recently, authors take the view that the two tests do not differ significantly, and in particular do not leave a gap. See e.g. Ulf BÖGE, Muss die EU zum SLC-Test wechseln? Wirtschaft und Wettbewerb WuW 2002, 825; also Mario MONTI in his address to the 7 November Merger Review Conference („Indeed, I believe that the dominance test, if properly interpreted, is capable of dealing with the full range of anti-competitive scenarios which mergers may engender”); nevertheless, he indicated that he will propose a clarification regarding the notion of dominance in the current substantive test, to be inserted in a paragraph within Article 2 of the preambles to the Regulation, so as to make it clear that the so-called „unilateral effects“ in situations of oligopoly will also be covered. See also the extensive reports presented at the 7/8 November 2002 Conference by by NICHOLAS LEVY, Dominance vs. SLC: A Subtle Distinction? and by Kevin R SULLIVAN/Brian R MEINERS,Merger Analysis: SLC vs. Dominance (on information, these reports will soon be published). – It is

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The former Commissioner Mario Monti was rather inclined to defend the dominance test, on the argument that the dominance and the SLC standards have produced broadly convergent outcomes. He thus expressed the view that the dominance test, if properly interpreted, would be capable of dealing with the full range of anti-competitive scenario which mergers may engender.42 However, he also indicated that so-called "unilaterialeffects" in situations of oligopoly will need to be considered more seriously while, on the other hand, the Commission should be open to a more explicit recognition of merger-specific efficiencies.

What then was the outcome and result of the intensive debate?43 The outcome ultimately materialized in a new wording of Article 2 (2) ECMR, as can be seen from the following comparison:

ECMR 4064/1989, Article 2 (2):

"A concentration which does not create or strengthen a dominant position as a result of which effective competition would be significantly impeded in the Common Market or in a substantial part of it shall be declared compatible with the Common Market."

The new provision in Article 2 (2) ECMR 139/2004 now reads as follows:

"A concentration which would not significantly impede effective competition in the Common Market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position, shall be declared compatible with the Common Market."

The change of the wording does not appear to be "breathtaking"; nevertheless, it is indeed significant. The criterion of creating or strengthening a dominant position, which had been the leading yardstick under the 1989 ECMR, is no longer the keynotion. Instead, the keynotion under the 2004 ECMR is the issue whether or not a concentration would be likely to "significantly impede effective competition", and the former criterion of creating or strengthening a dominant position is now only considered as one aspect or illustration in the last part of the new provision starting with "in particular as a result of ...".In respect of appreciating the level of concentration, the Commission has now, in the wake of the modernisation-package, borrowed on the U.S. practice, by applying the

sometimes argued that the enforcement authorities both sides of the Atlantic ocean do not seem to operate on the same level; this characterization is however not accepted by Mario Monti, who stressed the good cooperation between the US and European authorities in hundreds of cases (his speech at the Brussel XXth Forum of the Studienvereinigung Kartellrecht, of 10/11 April 2003). We may note in this context that there exists a US-EU Merger Working Group which has published its Best Practices on Cooperation in Merger Investigations, available on the website at http://europa.eu.int/comm/competition/mergers/others/ eu_us.pdf.

42 MARIO Monti, in his opening address to the IBA Conference on European Merger Control, 7 November 2002.

43 The debate is very carefully characterized in NICHOLAS LEVY’s paper: Dominance vs. SLC: A Subtle Distinction?; the paper was submitted to the European Merger Control Conference on 7/8 November 2002. See further ULRICH SCHWALBE, Marktbeherrschungs- oder SIEC-Test im GWB, WuW 10/2004, 997.

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HHI (Herfindahl-Hirschman Index), and by appreciating the delta as may result from a concentration.44

The new test, therefore, is the SIEC test (“significant impediment of effective competition”-test), and the question is obvious whether or not this test would mean something different from the US-based "substantial lessening of competition test" (SLC test)45 which, by the way, is also used in some countries of the European Community, foremost in the UK. The answer to this question is not yet cast in stone and, for instance, Götz Drauz has repeatedly indicated that there might be very little difference indeed. Yet, and this is certainly a strong rationale speaking in favour of the SIEC test, the concern was to avoid that, in connection with the European concept of merger control parties would refer to, and import into the European substantive test, the US case law on the SLC test. Hence, the SIEC test should receive its independent case law, without relying on the SLC concepts used in the US practice.

2.10 Collective Dominance

One of the criticisms voiced against the dominance test under the old ECMR 1989 is the remark that it did not appropriately address coordinated conduct, whereas the US SLC test addresses both, single firm market dominance as well as coordinated or collective dominance by two or more firms.46 For the first time in the well-known Kali & Salz case47 –the Commission took the view that it had jurisdiction to prohibit concentrations which create or strengthen oligopolistic market structures, even though the merged entity on its own would not hold a dominant position. The ECJ confirmed the Commission’s view, and the CFI, in its judgment in respect of the Gencor/Lonrho case,48 endorsed that view. It also did so in its Airtours/First Choice decision, referred to above, where it circumscribed collective dominance as follows:

“A collective dominant position significantly impeding effective competition in the Common Market or a substantial part of it may thus arise as the result of a concentration where, in view of the actual characteristics of the relevant market and of the alteration in its structure that the transaction would entail, the latter would make each member of the dominant oligopoly, as it becomes aware of common interests, consider it possible, economically rational and hence preferable, to adopt on a lasting basis a common policy on the market with the aim of selling at above competitive prices, without having to enter into an agreement or resort to a concerted practice within the meaning of EC Article 81 … and

44 The HHI was first used in the US Merger Guidelines of 1982. For a detailed description of how the index works, see MATTHIAS ULSHÖFER, Der Einzug des Herfindahl-Hirschman Index (HHI) in die EuropäischeFusionskontrolle, Zeitschrift für Wettbewerbsrecht 1/2004, p. 30-74.

45 The SLC-Test originates from the basic norm of US merger control, i.e. Section 7 of the Clayton Act; see further Section 1 of the Sherman Act and Section 5 of the FTC Act in matters connected to a contract, combination or conspiracy in restraint of trade.

46 Compare hereto the US Horizontal Merger Guidelines of 2 April 1992 (available at http:// www.usdoj.gov),which specifically refer to “actions by a group of firms that are profitable for each of them only as a result of the accommodating reactions of the others. This behaviour includes tacit or express collusion, and may or may not be lawful in itself”.

47 Joined cases C-68/94 and C-30/95 France and Others (Kali & Salz) [1998] ECR I-1375.48 Case T-102/96, Gencor v/Commission [1999] ECR II-753.

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without any actual or potential competitors, let alone customers or consumers, being able to react effectively.”

In its further analysis, the CFI emphasised that the Commission must scrutinise “whetherthe concentration would have the direct and immediate effect of creating or strengthening a (collective dominant position) which is such as significantly and lastingly to impede competition in the relevant market”. For so doing, the Commission has to use a prospective analysis.

Hence, basically, the CFI in principle agreed with the Commission’s approach in its Airtours/First Choice decision of 22 September 1999, but disagreed on the evaluation of the probative value of the evidence gathered by the Commission. According to the CFI, the Commission should have examined more carefully the level of competition existing on the markets before the concentration so as to determine whether the transaction would be likely to reduce that level of competition. The CFI also argued that any tacit co-ordination between companies would have to be sustainable in order to back up a finding of collective dominance. In effect, this means that some deterrents must exist which would make it unprofitable for any of the collectively dominant entities to depart from a common course of conduct. This, however, was not self-evident in the eyes of the CFI.

Moreover, the CFI criticised that the Commission had failed to adequately assess the likely impact of the reaction of smaller tour operators, potential competitors and consumers as a countervailing force, should a common policy be maintained over time. In sum, the CFI criticised the Commission for having conducted an incomplete analysis, for its arguments not being sufficiently “specific” or “persuasive”, and it reproached a certain lack of evidence backing up the Commission’s decision. The Airtour/First Choice matter (as well as the two other decisions annulled by the CFI in the Schneider/Legrand case and the Tetra Laval/Sidel case49) has significantly changed the Commission’s burden to prove its case50 and to improve the gathering of evidence and its assessment of the weight to be given to it. In the Tetra Laval case, the Commission, under the date of 13 January 2003, brought an appeal against the CFI’s verdict before the ECJ, alleging an error of law regarding the standards of proof and of judicial review.51

49 On Schneider/Legrand, see the case report in Wirtschaft und Wettbewerb WuW 3/2003, 299–314 and Gerrit SCHOHE, Das Verbot des Zusammenschlusses von Schneider und Legrand ist nichtig: Ein weiteres “Menetekel” für die Kommission, Wirtschaft und Wettbewerb WuW 4/ 2003, 359 ss.; Lars Volck MADSEN,Commission’s Second Defeat in Merger Cases – The CFI’s Schneider Judgment, European Law Reporter ELR 2/2003, 55 ss.; on Tetra Laval/Sidel, see the case report in Wirtschaft und Wettbewerb WuW 4/2002, 411–422.

50 At the merger review Conference of 7/8 November 2002 in Brussels, the opinion was voiced from the audience that it is for the Commission to meet the burden of proof that a concentration is incompatible under the perspectives of the ECMR, and not for the parties to prove the compatibility. However, in his oral response to the audience, Mr. Francisco Enrique GONZALES DIAZ of the MTF seems to have voiced the opposite opinion, in the sense that it would be for the merging parties to show that clearance under the ECMR is appropriate. – Quite surprisingly, this very basic issue still seems to be heavily debated. The Commission’s position is also expressed in the Notice on Remedies; see below.

51 OJ of 22.3.2003/C70/07 and C70/08. The Commission’s most essential concern seems to be the burdenof proof in leveraging cases. Leveraging in this context means the possibility which an acquiring company might use to leverage the merged company into a dominant position in neighbouring markets. The high degree of evidence which the CFI’s ruling imposes in leveraging cases would require more

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In the BP/E.On case52, the Commission again re-stated the seven basic elements which characterise a collective dominance, when it said:

“The Commission considers that following the proposed concentration and if the transaction between Shell and DEA is implemented, a collective dominance of the two new entities on the ARG+ market for ethylene will arise. In former collective dominance cases, the Commission has referred to the following elements to establish the existence or not of a collective dominant position: (i) supply concentrations, (ii) homogeneity of the product, (iii), symmetry of market shares, costs and interests, (iv) price transparency, (v) retaliation possibilities, (vi) high entry barriers and absence of potential competition and (vii) inelastic demand without countervailing buying power.”

In Schneider Electric v/Commission, the CFI had to deal with the Commission’s Decision of 10 October 2001 prohibiting the Schneider/Legrand merger, i.e. the merger of two manufacturers of low voltage electrical equipment. The Commission argued that the merger would create a dominant position on certain sectoral markets in seven Member States and would strengthen a dominant position on some sectoral markets in France. The CFI, however, found that the Commission’s economic analysis contained errors and omissions which lead the Commission to over-estimate the economic power of the merged entity, leading to an exaggeration of the impact of the concentration on the affected national sectoral markets. More particularly, the CFI considered that transnational effects of the concentration had not been established to the requisite legal standard of proof. It moreover identified certain errors in the Commission’s analysis of the distribution structure, in that it had not been sufficiently established that the merged entity would be an unavoidable trading partner for wholesalers, or that the latter would be incapable of exercising any competitive restraints. And finally, the CFI held that the Commission’s analysis of the merged entity’s economic power on national sectoral markets was incorrect.

The effect of the CFI’s Decision in respect of the investigative powers and duties of the Commission are significant. The CFI takes the Commission to a high standard of proof and evidence, as it also did so in the aforementioned Tetra Laval/Sidel case which the Commission had blocked in October 2001. Likewise, in the latter case, the CFI considered that the Commission had insufficient evidence regarding the application of the leveraging

exacting investigations into a merged company’s capabilities and incentives to use its economic strength across the markets. In the framework of the several conferences at which the Commission’s burden of proof after Tetra was discussed, it became obvious that the Commission may have significant difficulty to rely on hard and fast evidence which the CFI now seems to require (whereas before Tetra, the Commission simply had to take the care to avoid manifest errors in its analysis). But there seems to be even more at stake behind the scene: The Commission firmly objects against an erosion of its powers as the regulator in enforcing the EC competition policy and merger control, and the Commission certainly does not want to see that the CFI is supplanting its own view and assessment over that of the Commission except in cases of manifest errors. In other words, the CFI should not engage in making a de novo assessment on the effects on the market following the proposed merger. The outcome at the ECJ is at this time still awaited with great interest. The author is rather sceptic that the Commission will succeed in convincing the ECJ to annul the CFI’s Tetra decision. The outcome will in any event set a significant flag: It will indicate whether the Commission is right in claiming the vast powers as the watch-dog over the EC competition policy, or whether the CFI succeeded to usurp a slice of these powers.

52 COMP/M. 2533, of 20 December 2001. Compare hereto also the Exxon/Mobil decision of 29 September 1999, IV/M. 1383.

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theory, i.e. the theory that an acquiring company might use a dominant position in its own market to leverage the merged company into a dominant position also in neighbouring markets.

Prior to the Tetra case, the Commission simply needed to avoid manifest errors in its analysis, but the new CFI ruling lays down a more onerous burden of proof which, as the Commission fears, is hardly possible to be discharged in practice. Hence, the Commission filed an appeal to the ECJ, essentially accusing the CFI of usurping the Commission’spowers by substituting its own views of the case for that of the Commission’s. In the Commission’s view, the CFI should stick to reviewing administrative and procedural aspects, without embarking on a full review on the merits.53

2.11 Conglomerate Mergers

The aforementioned case Tetra Laval v/Commission was the first case where the CFI had to deal with a conglomerate merger, i.e. a merger of undertakings which, essentially, do not have a pre-existing competitive relationship, either as direct competitors or as suppliers and customers. The Commission, in its Decision of 30 October 2001, had declared the acquisition of Sidel by Tetra Laval incompatible with the Common Market. Tetra Laval holds a dominant position on the markets for aseptic carton packaging and for the corresponding packaging machines, whereas Sidel has a leading position on the markets for certain types of PET packaging machines.

In its Decision, the Commission essentially took the view that the concentration would have harmful effects on competition. However, the CFI annulled that Decision on 25 November 2002, holding that the Commission had erred in its assessment of the effects of the merger. The CFI examined closely the Commission’s assessment on certain anti-competitive conglomerate effects in the future which may either be of a structural or of a behavioural nature. Since conglomerate effects might be neutral or even beneficial for the competition on the markets concerned, the proof of anti-competitive conglomerate effects calls for a precise examination, supported by “convincingevidence” of the circumstances which allegedly produce those effects. In this regard, the Commission should have weighed economic incentives to engage in anti-competitive practices against the deterrent of a detection of such illegal conduct, actions taken by competition authorities on the community and national levels, and the deterrent of the financial penalties which could ensue. The CFI noted that, for instance, Tetra Pak, following the Commission’s earlier Tetra Pak II Decision taken in 1992, had committed itself not to engage in anti-competitive behaviour.

53 The outcome of this appeal to the ECJ is awaited with greatest interest. Essentially, the issue appears to be of a rather fundamental nature, as it may, if the appeal succeeds, confirm the Commission’s powers as “the merger watch-dog”. However, if the appeal fails, the Commission will have a new accountability in respect of its fact-gathering burden and its scope of appreciation.

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Moreover, the CFI examined whether the Commission had proved, to the requisite legal standard, that the merger would enable the merged entity to use its dominant position on the global carton packaging market as a “lever” in order to achieve a dominant position on the PET packaging equipment markets, whether the merger would reinforce the current dominant position of Tetra on the markets for aseptic carton packaging equipment by eliminating the competitive constraints so far maintained by Sidel, and whether the merger would generally strengthen the overall position of the merged entity on the markets for packaging of “sensitive” products. The CFI answered these questions in the negative. The CFI agreed, in principle, that the merged entity would have a possibility for engaging in leveraging practices, but at the same time reached the conclusion that the Commission had not shown that the merged entity would indeed exploit that opportunity.54

2.12 Ancillary Restraints

As we will see in the cases discussed below, the Commission also has to consider whether certain restrictive agreements or practices related to a concentration (but without being an integral part of the concentration as such) may be characterised as ancillary restraints. Such ancillary restraints would typically include licences for technology between the parent companies and the joint venture, the conclusion of purchase and supply agreements between the parent companies and the joint venture, for instance during a start-up phase, and certain non-compete obligations. In order for such restrictions to be qualified as being “ancillary” they must be directly linked to the concentration, and must be necessary for its implementation and proportionate in scope as to their duration, subject matter, geographical field of application, and reasonable as to what the concentration may require. See attached hereto the guidance in the Commission Notice on Ancillary Restraints of 2001 (replacing the earlier Notice of 1990). Moreover, the Explanatory Memorandum to the ECMR 139/2004 specifically addresses ancillary restraints.55

2.13 Merger-related Efficiencies

When making its appraisal, the Commission, according to Article 2 (1) ECMR 2004, not only has to take into account the need to maintain and develop effective competition, but also needs to consider alternatives available to suppliers and users, their access to supplies or markets, any legal or other barriers to entry, supply and demand for the relevant goods and services and, moreover, shall have to consider "the development of technical and economic progress provided that it is to the consumer's advantage and does not form an obstacle to competition". The italicized art of this sentence refers to the so-called and indeed "famous" efficiency defence which had been invoked in quite a number of concentrations.

54 Paragraphs 201–309 of the Decision.55 See Paragraphs 101 to 104.

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Essentially, the argument was made that a planned merger - while it may to a certain degree diminish the remaining competition - should nevertheless be allowed on the argument that the merged entity will be able to achieve a higher efficiency, for instance in a production process, thereby realizing an advantage for the benefit of users, buyers, customers. In fact, merger-related efficiencies were a key argument for justifying the concentration between General Electric and Honeywell which, however, was blocked by the European Commission Decision of 3 July 2001.56 As a result, the Commission earned indeed harsh criticism, not only from US commentators but also from European economists who criticized that the Commission would not appropriately evaluate, in favour of an approval of an intended concentration, the positive effect of efficiencies. In the ensuing discussion in connection with the ECMR 2004, the Commission indicated that, in future, it will be prepared to place more weight on the evaluation of claimed efficiencies. The underlying economic rationale is for instance laid down in Section 4 (2) of the US Merger Guidelines: "Efficiencies generated through merger can enhance the merged firm's ability and incentive to compete, which may result in lower prices ... ". Inter alia, the wide debate on efficiencies prompted a member of the European Commission, MIGUEL DE

LA MANO, to publish a highly illustrative paper on the competitive effects of efficiencies in merger control. It is, however, beyond this paper to give a more detailed account on this topic which, certainly, will in future be a very important aspect to be elaborated on in any future concentrations.57

2.14 Notification Requirement

Merger notifications58 must be made jointly by the parties or, in the case of an acquisition, by the acquirer. The filing is to be made on Form CO59 together with all supporting documents (in one original and 35 copies) and can be made in any of the official EU

56 COMP/M.2220. 57 See hereto: MIGUEL THE LA MANO, For the Customer's sake: The Competitive Effects of Efficiencies in

European Merger Control, Enterprise Papers, Enterprise Directorate-General European Commission, No. 11 (2002). See further: PETER DE CAMESASCA, European Merger Control: Getting the Efficiencies Right, a Dutch dissertation, Rotterdam, 2000. See also: LARS-HENDRIK RÖLLER, JOHAN STENNEK and FRANK

VERBOVEN, Efficiency Gaines from Mergers, in: The Efficiency Defence and the European System of Merger Control (a study prepared for the Directorate-General for economics and financial affairs, No. 5 (2001)). A very interesting paper was submitted by JAMES S. VENIT, The Role of Efficiencies in Merger Control (paper prepared for the IBA Merger Control Conference of 8 November 2002). More recently, reference is made to the Article by CHRISTOPH LUESCHER, Efficiency Considerations in European Merger Control - Just another Battle Ground for the European Commission, Economists and Competition Lawyers? [2004] E.C.L.R., p. 72-86). For the US discussion, see THOMAS B. LEARY, Efficiencies and Antitrust: A Story of ongoing Evolution, ABA Section of Antitrust Law, Forum of 8 November 2002, in Washington/DC.

58 Since 1990, and until 30 November 2004, the Commission received 2’631 notifications, whereof about 95 percent were cleared on the basis of a Phase I inquiry, and only some 120 concentrations had to undergo a Phase II investigation. In Phase II, only 18 transactions (as of November 2004) were prohibited (the majority of them were “domestic” mergers of companies based in the same country, such as Schneider/Legrand and SEB/Foreningssparbanken etc.), which is less than 1 percent of the total of the Commission Decisions, five of them were prohibited in 2001. In total, about 180 were cleared after the parties had accepted commitments (structural or behavioural undertakings) in Phase I or Phase II.

59 Completing the Form CO is a major task and may absorb weeks or even months of research in respect of the relevant markets, market shares, information on markets and customers in respect of each EU Member State. Parties may be helped in their task by the confidential guidance offered by the Commission (see below) and by consulting the Best Practice Guidelines.

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languages. The filing must be complete, otherwise the notification will be rejected (and the “clock” for the clearance procedure will not start to run). There are no filing fees payable. Notifications of a concentration are published in the Official Journal, and interested third parties are invited to submit their observations on the proposed concentration.

Concentrations/mergers taking place outside the EU (where neither the parties nor the businesses concerned are EU-based, sometimes called “foreign-to-foreign mergers”60)are equally caught by the ECMR. For instance, the mergers between the US companies reviewed in Boeing/McDonnell Douglas, in United Airlines/US Airways and in WorldCom/MCI had to be cleared by the Commission which imposed significant conditions in the sense of structural commitments as well as behavioural commitments, and in the much debated GE/Honeywell case,61 the concentration was prohibited. Hence, a concentration must not be completed until it has been declared compatible with the common market.

In the famous cases Gencor/Lonrho and GE/Honeywell, the concentrations were blocked by the EU Commission. The cases gave rise to significant debate. The Gencor/ Lonrhodecision was appealed before the Court of First Instance of the European Community (CFI). Basically, Gencor argued against an extra-territorial application of the EU merger review to a transaction which was carried out in a non-member State, i.e. relating to mining activities in South Africa. However, the CFI rejected the appeal, arguing that the ECMR applies wherever a concentration comes within a Community dimension, irrespective of the place where the undertakings are established, or where the production facilities are located. Moreover, the Commission emphasised that a main market for the sale of platinum was in the Community.

Under the ECMR 1989, the notification was required to be filed within one week from the conclusion of a binding agreement. The reform package for the ECMR 139/2004 provided for more flexibility regarding the timing of notifications, in that a notification should become possible even prior to the conclusion of a binding agreement, and the one week time-limit was removed pursuant to Article 4 (1) in the sense that, in any event, the concentration must be notified prior to its implementation. An international coordination of merger filings – a nightmare altogether due to the variety of systems around the globe – should thereby also be facilitated; however, this is still a complex area of wide concern.

2.15 Pre-Notification and Confidential Guidance

In the past, the MTF (Merger Task Force) of the European Commission had ever so often encouraged the parties to get in touch with the Commission as early as possible so as to

60 They account for approximately ten percent of the total of concentrations reviewed by the Commission. 61 See e.g. DAVID J. GERBER, The European Commission’s GE/Honeywell Decision: US Responses and

Their Implications, Zeitschrift für Wettbewerbsrecht ZWeR 1/2003, 87–95. Many other articles have been published on this landmark case.

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discuss the parameters of the intended concentration.62 The interactive process is understood as being a “confidential guidance”.63 The proposal, well meant by the Commission, should assist the parties in putting the necessary information together for the filing of the Form CO.64 In fact, parties may obtain exemptions from some of the information otherwise required by Form CO and, even more essentially, the discussion may reduce the risk for the notifying parties to have their notification being declared incomplete (with the effect that the sharp time-limits for clearance will not start to run).65

Such pre-notification discussions may also help to avoid a Phase II investigation.

More recently, the Commission has expected the parties to provide a BriefingMemorandum66 at least three days prior to the pre-notification discussion, or even a draft Form CO, as a pre-condition for entering into a meaningful dialogue. The Briefing Memorandum will help the DG Competition to form its case-team and to prepare the pre-notification meeting. Such meeting is indeed not only very useful but necessary for the purpose of determining how Form CO should be completed, and frequently the Commission has waived certain requirements which did not appear to be of a crucial relevance.

2.16 Sanctions

A failure to apply for clearance, whether intentionally or negligently, may result in a fine.The old ECMR had limited the range of fines between € 1’000 and € 50’000. This was considered to be an inadequately low range, and ECMR 139/2004 now increased the range drastically up to 1 % of the aggregate turnover of the undertakings concerned (Article 14 (1) ECMR 139/2004). Fines are particularly triggered in the case of submission of incorrect or misleading information provided to the Commission, and in case of a breach of commitments required by the Commission to clear a concentration.

For instance, when Samsung, in February 1998, failed to properly notify its intention to acquire AST Research (a transaction taking place outside the EU, and manifesting very little effect on the market within the Community), a fine, though modest, was imposed on Samsung. A more significant fine was imposed on A.P. Moeller for its failure to notify three concentrative transactions in 1997/98. Moreover, Deutsche Post was fined for failure to notify the acquisition of a minority shareholding in Trans-o-Flex, and where the minority stake was coupled with a significant influence as far as voting powers were concerned.

62 Informal pre-notification discussions are also strongly proposed by several national competition authorities of EU Member States and, notably, by the Swiss competition authority (Wettbewerbskommission and its secretariat).

63 See also the Best Practice Guideline and Regulation 447/98, recital 10 and the introduction to the Form CO.

64 Published by the Commission (OJ L61, 2.3.1998, p.11). 65 See the various cases more extensively discussed below; quite a number of them were considered

incomplete by the Commission.66 Draft Best Practice Guidelines of 19 December 2002, Paragraphs 5–18.

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Cases of incomplete information include KLM in the KLM/Martinair case, where KLM was fined for having submitted incorrect information relating to its subsidiary which had certain overlapping activities with Martinair. Deutsche BP was fined for providing incorrect and misleading information in the Deutsche BP/Erdölchemie case67; Deutsche BP was reproached to have failed to disclose relevant co-operation agreements between the BP Group and its competitors.

Even more drastically, a fine can also be imposed on a third party. For instance, in July 2000, the Commission fined Mitsubishi for having furnished incomplete information relating to the Commission’s investigation of the Ahlström/Kvaerner case. In addition, Mitsubishi was penalised by a periodic penalty totalling € 900’000. Apparently, this had been the first case where the Commission made use of such broad powers.

Another significant case was the joint venture formed by the Elf-Aquitaine Group and the L’Oréal Group. As the information by Sanofi-Synthélabo was considered inadequate, the Commission, for the first time, withdrew its earlier approval of the concentration, on the basis that it had not been correctly notified. The matter was discovered essentially through information which the Commission gathered from third parties. Hence, both Sanofi and Synthélabo were fined € 50’000 for providing incorrect and incomplete information. The effect was that, thereafter, a division of Synthélabo’s activities had to be divested, removing an overlapping activity.

Drastic fines (up to ten percent of the aggregate turnover of the companies concerned) may be imposed in case parties fail to honour the suspension rules. Hence, parties are well advised not to close a deal before a final decisions has been issued,68 unless a derogation has been obtained.

Further sanctions apply under Articles 8.4 and 8.5 ECMR 1900 and 2004.

2.17 Dawn-Raids and Other Investigative Powers (and Duties)

The Commission’s powers are not limited to imposing fines but, even more essentially, include wide investigative powers (see Article 13 (3) ECMR 139/2004).

For instance, in Skanska/Scancem, the Commission launched a dawn raid at the premises of Skanska and Scancem for the purpose of investigating the notifiability of the acquisition of control by Skanska over the Swedish concrete and cement producer Scancem. Previously, in 1995, the Swedish Skanska and the Norwegian company Aker had each acquired 1/3 of the share capital in Scancem. Skanska and Aker considered that this transaction would not provide Skanska with a joint control over Scancem and, therefore, concluded that the transaction would not be notifiable to the EU Commission. The Commission, however, was not convinced by that view and monitored Scancem

67 See also in Wirtschaft und Wettbewerb WuW 2002, 1127ss. 68 This also applies in foreign-to-foreign mergers.

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carefully, when in October 1997, Skanska increased its shareholding to 48%, the Commission – indeed for the first time, launched a dawn raid which then resulted in a merger review procedure several months later which ultimately was cleared against significant commitments.

On the other hand, ECMR 2004 does not provide for home searches. The Explanatory Memorandum69 commented that such far reaching powers would not seem appropriate in merger review, in contrast to the “area of antitrust policy where the detection and prosecution of infringements pursuant to Articles 81 and 82 of the Treaty are central.” – This is certainly a very reasonable differentiation.70

2.18 Legally Binding Timetable

Merger notifications are time-critical, both for the enterprises as well as for the (always over-loaded) Commission. Once a notification is filed, the 25 working day time-limit for the Phase I review by the Commission will start to run.71 However, as indicated above, this time-limit does not even start if the Commission considers that the notification and its pertaining documentation is incomplete.72 In a significant number of cases the Commission had rejected the notification for its incompleteness, hence triggering the negative effects on the time-line.

Exceptionally, the Commission may grant a derogation from the otherwise applicable obligation to suspend an intended concentration pending the clearance procedure. See Article 7 (3) ECMR 139/2004. However, the practice so far showed a considerable reluctance in that, for instance in 2001, only five derogations were granted under the old ECMR (out of 335 notified transactions). Derogation requests were rejected in Bertelsmann/Kirch/Première, in Rhodia/Donau Chemie/Albright & Wilson and in FranceTélécom/Global One, but granted in Mannesmann/Olivetti/Infostrada.

Three recent cases in 2002, already referred to above in various contexts, gave rise to intensive discussions also under the aspect of timing: Airtours/First Choice,Schneider/Legrand and in the conglomerate merger case Tetra Laval/Sidel; the Lagardère/Canal+ case of April 2003 followed. The cases Schneider and Tetra involved public bids (for French companies) which had to be submitted on an unconditional basis and which then closed, by the companies acquiring majority shareholdings in their targets,73 long before the decision of the Commission was available. In all cases the Commission prohibited the concentration. However, the Commission Decisions, in all four cases, were successfully appealed to the CFI (a matter that triggered very intensive

69 Explanatory Memorandum of the proposed ECMR 2004, Paragraph 85. 70 See in contrast hereto the powers of the Commission laid down in Regulation 1/2003, Article 21,

governing investigations in the framework of Articles 81/82 EC. There are, however, several restrictive requirements to be satisfied in that respect.

71 Regulation 139/2004, Article 10 (1). 72 Compare Regulation 802/2004, Article 5 (2); the running time-limit may be suspended for several

reasons, see Article 9. 73 See the public bid exception in Article 7 (3) ECMR.

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debate).74 Hence, the parties won a victory over the Commission, but in fact these victories, years after the proposed concentrations, are mere Pyrrus victories, since the momentum for the concentration had been lost long ago (although the CFI is proud to stress that it had adjudicated the Schneider and the Tetra Laval cases in less than 10 months75). Fact is that the prohibition caused immense costs and damage (running into billions of Euros in the Schneider/Legrand case). As a consequence, the Commission had to face “unprecedented criticism76” and, even more seriously, is taken to court for damages for an amount exceeding € 1 billion in the cases of Schneider and Airtours.

As we have seen above, the merger review before the Commission – under the ECMR 2004 – provides for some more flexibility on the time axis, including a “stop-the-clock”possibility in Phase II where remedies need to be negotiated.

However, equally important is the swift adjudication, by the CFI, of complaints against Commission Decisions, and we will yet have to see how this will be accomplished in cases as complex as Schneider and Airtours.

2.19 Phase I Investigation: 25 to 35 Working Days

Following the notification, the Commission will publish a notice of the fact of the notification (with a summary) in the Official Journal of the European Communities, and third parties are thereby invited to comment on the proposed concentration; they may thus express their opinions, concerns or objections. Moreover, the Commission does send out questionnaires to customers, suppliers and competitors, soliciting their views on the proposed transaction. Third parties may moreover apply to the Commission to be heard by way of giving oral evidence, and a hearing may take place in the presence of the notifying parties.

And of course the EU Member States, throughout the Commission’s investigation, have an opportunity to express themselves on the concentration. Member States may even ask the Commission to refer the matter (or a part of it) back to the national competition authority for review where competition on a distinct market of the Member State would appear to be significantly impeded. Member States may also intervene where it would appear necessary to take parallel action so as to protect legitimate national interests (such as public security interests, plurality of media, supervision of financial institutions, national defence-related matters and the like).

74 As discussed above, the parties invoked that the Commission Decisions were vitiated by serious errors, and that the Commission failed to prove that the concentration would result in a (collective) dominance of the remaining players.

75 CFI President Bo VESTERDORF, in his report delivered at the 10th St. Gallen Kartellrechtsforum of 24/25 April 2003.

76 Mario MONTI, in his opening address at the 7 November 2002 European Commission/IBA Conference in Brussels on the “Review of the EC Merger Regulation – the Reform Package”. He stated that it is by now clear that the CFI is “holding the Commission to a very high standard of proof”.

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Within 25 working days77 (previously one month under the 1989 ECMR) from the effective date of the (complete) notification, the Commission has to reach its decision (so-called first-stage clearance decision, or Phase I-decision), and a press release will be issued. A failure of the Commission to take a decision within the time-limit will lead to the concentration being deemed to be declared compatible (see Article 10 (6) ECMR 2004). Since 1 March 1998, this deadline was extended to 6 weeks where the parties, following a discussion with the Commission, submit (within three weeks from the date of the notification) commitments (or remedies) intended to address concerns voiced by the Commission.78 The ECMR 139/2004 allows an additional ten working days on the time-table.

Such Phase I commitments are typically conceded by the parties so as to avoid the launching, by the Commission, of a Phase II investigation. Hence, a good deal of negotiations may then have to take place between the parties and the Commission so as to finally ease out anti-competitive concerns voiced by the Commission, allowing it to render an Article 6 (1)(b)-decision. The acceptance, by the Commission, of Phase I-commitments is appropriate “where the competition problem is readily identifiable and can easily be remedied” or, as stated in the Commission Notice on remedies, where remedies can “clearly rule out ‘serious doubts’ within the meaning of Article 6 (1) (c) ECMR” 79. Hence, the remedies should be straight forward and not too complex; in most cases, they provide for divestments of overlapping businesses.

Nevertheless, these Phase I commitments may involve very substantial concessions: inUnilever/Bestfoods, the divestiture package was estimated at € 500 million of annual retail sales. Apart from divestiture, the Commission may accept an undertaking to grant licenses to third parties; see for instance below in GlaxoWellcome/SmithKline Beecham,or Nestlé in Nestlé/Ralston Purina (offering as one alternative the licensing of Nestlé’s Friskies and Felix brands, coupled with a second alternative of a “crown jewel remedy” in the sense of a divestment by Ralston Purina of its 50% shareholding in its Spanish joint venture with Agrolimen S.A.). The report below will describe particular Phase I commitments in more detail.

2.20 The Commission Notice on the Simplified Procedure

A simplified procedure was introduced in September 2000 for concentrations which do not involve significant competition issues. Up to mid-2002, the procedure had been used in more than 300 non-opposition decisions assessed on the basis of the simplified procedure. This procedure is available for instance for concentrations between parties that are not operating on the same product and geographical market, or in markets which are upstream or downstream; it is also available for mergers where two or more of the merging companies have a combined market share of only 15% or less in a horizontal

77 See Article 10 (1) ECMR 139/2004. 78 See Article 10 (1) ECMR 1989. 79 Commission Notice on Remedies, of 2 March 2001, para. 32.

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relationship, or 25% or less in a vertical relationship. Moreover, joint ventures with little foreseen activities within the EEA can be cleared on the basis of the simplified procedure, i.e. where a joint venture has a turn over of less than € 100 million and where the assets transferred are of a value less than € 100 million. Again, notifications need to be made on Form CO, but the pre-notification discussions with the MTF may significantly alleviate the burden.

2.21 Serious Doubts: Phase II Investigation – 90 Working Days

However, where the Commission reaches the conclusion that a concentration raises serious doubts about market dominance, it will render a “serious doubts”-decision as per Article 6 (1)(c), launching Phase II investigation (“second stage investigation”) with an in-depth analysis of the effects on the market in order to decide whether the concentration is compatible or not with the Common Market. The overall timeframe for the second stage investigation is 90 working days80 (previously four months under ECMR 1989) (subject to some time-outs and extensions in case the Commission requires additional information) and will in most cases involve a very considerable workload for the lawyers, the parties (including managers) and the Commission itself. As discussed above, the ECMR 2004 introduced stop-the-clock provisions allowing time extensions up to 105 or 110 working days, allowing the Commission and the parties to deal with remedies, if offered less than 55 working days after the initiation of the proceedings.81 At the end of the investigation, the Commission may either (i) approve the concentration, or (ii) approve it against certain structural and/or behavioural commitments, or (iii) prohibit it.82

80 Regulation 139/2004, Article 10 (3). 81 See Article 10 (3) ECMR 139/2004. The importance (and draw-backs) of the more stringent time-limits

applied under the former ECMR 1989 were particularly felt in the Schneider/Legrand case where the Commission warned in its press release of 10 October 2001 announcing the prohibition that Schneider Electric “did not put forward in good time adequate undertakings to ensure that, following the merger, the conditions of effective competition would be restored”, and after expiry of the time limit, the Commission could no longer accept any “last minute” undertakings, unless it was able to establish immediately and without any possible doubt that they would restore the conditions of competition. The trouble here is that, as the CEOs of Tetra Laval (Goran Grosskopf) and Schneider Electric (Henri Lachmann) criticised, the Comission may well have failed to make its competition concerns sufficiently clear early on to the parties; understandably, parties do not wish to engage in painful divestiture discussions, unless they clearly understand what will be required in order to clear the transaction. Moreover, the counsel advising the parties may not have sufficiently used the Commission’s open door to understand and discuss the concerns. Likewise, in GE/Honeywell, modified remedies were offered late and did not allow the Commission to resubmit them to a market testing.

82 Where a transaction already completed prior to the Commission’s decision, the parties run the risk that they may have to “unscramble the egg”. The method is as simple as it may be painful: the Commission is likely to require a divestiture of a business division, or indeed of the major part of the concentrated business, so as to restore “effective Competition”. This happened to Tuko Oy, where the Kesko/Tukotransaction had already been implemented when the Commission issued its prohibition. We will come across some other cases in the detailed analysis below.

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2.22 Statement of Objections of the Commission and Phase II Commitments by

the Parties

About six weeks into this second phase, the Commission will normally have prepared a detailed Statement of Objections, and the parties – who will have access to the Commission’s files83 – will then have a short period of some two weeks within which to reply.84 Hence, the parties will have ample opportunity (but within tough time constraints) to voice their views and observations; they may propose hearings and, most importantly, they may put forward alternative proposals or commitments.85 In the recent years, the tactic and approach of negotiating such commitments has become very common and avoids the highly undesirable outcome of an outright blocking of the transaction by the Commission by a negative decision.

Furthermore, third parties and competitors may be consulted, and they have a right to be heard on their own motion if they demonstrate a sufficient interest. Moreover, the MemberStates are sent a copy of the proposed commitments, and the Advisory Committee on Concentrations will have to be consulted by the Commission.

In the sense of a very rough rule, concentrations leading to the control over 35–40% of the market share will likely to be reviewed closely and hence lead to a second stage investigation. A concentration will, in essence, be prohibited and result in an Article 8 (3)-prohibition, if it creates a dominant position, or if an already existing dominant position would be strengthened and if, as a result, the effective (remaining) competition would be significantly impeded in the Common Market or in a substantial part thereof.

A statement of objections may also prompt the parties to withdraw their notification.86

They may then either abandon the contemplated concentration altogether, or re-structure the deal and re-notify it to the Commission for clearance. Parties may elect the latter avenue also on the basis of a Phase I investigation: the withdrawal, followed by a re-structuring of the deal and the re-notification thereafter may give them a better chance to avoid the endurance of a Phase II investigation.87

83 The Commission Notice on Access to Files of 1997 is currently (in December 2004) under revision, and a new draft will replace the 1997 Notice, taking into account the new legislative landscape as of 1 May 2004.

84 In the Schneider/Legrand case, for instance, the Commission sent the parties a request for information containing 322 questions to which they had to reply within 5 working days, a time-limit which the parties were unable to keep.

85 The parties will have to take all precautions to submit their commitments within the required time-frame. In Airtours/First Choice, for instance, the Commission refused to accept a revised package of commitments on the ground that it had been submitted out of time.

86 Even in the case of a withdrawal, the Commission will nevertheless most likely publish the reasons which would have led it to prohibit the concentration, had it not been abandoned; see Alcan/Péchiney and Ahlström/Kvaerner. In WorldCom/Sprint, the withdrawal was notified just one day before the prohibition was adopted; nevertheless, the Commission issued a formal decision on the matter.

87 See for instance BP/Amoco and Industri Kapital/Perstorp.

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2.23 Article 8 (2)-Clearance and Scope of Review

Otherwise, if the serious doubts could be removed, for instance by commitments of the parties which the Commission deems satisfactory, the Commission will issue an Article 8 (2)-clearance of the concentration (which, however, will in most cases be subjected to the condition that the promised commitments will be honoured by the parties). These decisions are taken by the entire College of Commissioners.

Within this Phase II investigation, the Commission examines primarily the market position of the companies, considering inter alia:

• the structure of the relevant product and geographic markets;

• the actual and potential competition on these markets;

• the particular market position of the enterprises involved and their economic and financial power;

• the alternatives available to suppliers, competitors and users, and their access to supplies on the market;

• any legal or other entry-barriers and/or exit barriers;

• the supply and demand trends;

• the interests of the intermediate and the ultimate customer or consumer;

• the development of the technical and economic progress;

• the Phase II commitments offered by the parties in order to address the concerns of the Commission, such as structural remedies directed at maintaining a competitive market structure (for instance the divestiture of an entire business division as an on-going/viable entity to be transferred to a third party/competitor, or the termination of an exclusive vertical agreement, the termination of exclusive supply – or purchasing contracts, the opening-up of access to essential networks, the withdrawal from a particular activity, the divestiture or licensing of specific assets, the removal of a non-competition clause) and behavioural commitments (for instance continued supplies to competitors on a non-discriminatory basis, ensuring the access to essential facilities and the like);88

• the guarantees and other means of control available to the Commission to make sure that commitments be faithfully kept, including the appointment of an independent divestiture-trustee, of an expert or of an arbitrator.

It is the two last bullet-points that deserve our very particular attention in the framework of the present study.

88 In respect of such commitments to be given by the notifying parties, the Commission has a preference for structural remedies. However, the Commission’s Notice on Remedies made it quite clear that the Commission will also accept behavioural commitments where deemed appropriate or satisfactory.

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2.24 Significance of Remedies and Commitments: 180 Decisions until November

2004 89

We have seen the important role that remedies90 play in the framework of the merger review process. Recital 8 of the earlier Regulation 1310/97 has now been reflected in the ECMR 139/2004, recitals 30 and 31, reading as follows:

“Where the undertakings concerned modify a notified concentration in particular by offering commitments with a view to rendering the concentration compatible with the Common Market, the Commission should be able to declare the concentration, as modified, compatible with the Common Market. Such commitments should be proportionate to the competition problem and entirely eliminate it. It is also appropriate to accept commitments before the initiation of proceedings where the competition problem is readily identifiable and can easily be remedied. It should be expressly provided that the Commission may attach to its Decision conditions and obligations in order to ensure that the undertakings concerned comply with their commitments in a timely and effective manner so as to render the concentration compatible with the Common Market. Transparency and effective consultation of Member States as well as of interested third parties should be ensured throughout the procedure. - The Commission should have at its disposal appropriate instruments to ensure the enforcement of commitments ….”

These commitments, by way of their incorporation within a decision of the Commission (or by the reference made within the decision to the commitment letter of the enterprise concerned), become themselves part of the “acte communautaire”.91 Consequently, the Commission formed a special enforcement unit of some ten case handlers of the Merger Task Force to monitor the compliance with the commitments given. A failure to adhere to the commitments may cause the Commission to revoke its clearance decision (whether issued in Phase I or in Phase II), a matter which obviously will entail most serious consequences.92

89 Statistics are updated monthly on the Commission’s website: http://europa.eu.int/comm/competition/ mergers/cases/stats.html.

90 The Commission has drawn on the experience of the US FTC in remedies cases for developing its policy in this area, particularly the FTC’s 1999 report on the divestiture process. On 15 March 2002, the FTC moreover presented its “Best Practices Analysis for the Merger Review Process”. DG COMP borrowed some of the practices, including the increased use of monitoring trustees, divestiture trustees,upfront buyers (“fix-it-first” remedies whereby the parties must first find a suitable purchaser for their proposed divestment package and sign a purchase agreement prior to obtaining approval for their concentration) and crown jewel provisions (that is a fall-back offer in the sense of a more extensive divestment, should the preferred divestiture package fail, for instance because no suitable buyer could be attracted).

91 See hereto also Article 9 of the Council Regulation entering into force as of 1 May 2004 (replacing Regulation No. 17/62), which now makes specific reference that the Commission may accept commitments in respect of its review under Articles 81/82, and “may by decision make those commitments binding on the undertakings”. In contrast to the preferred practice in merger review cases, where the preferred remedy are of a structural nature, behavioural remedies are preferred in the framework of a review under Articles 81/82 (“structural remedies should only be imposed either where there is no equally effective behavioural remedy, or where any equally effective behavioural remedy would be more burdensome for the undertaking concerned than the structural remedy”; see recital 12).

92 For instance, the Commission may require a divestiture, or may take any other action deemed appropriate so as to restore an effective competition.

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The Notice on Remedies93 sets out the details regarding the Commission’s assessment of the burden of proof. Paragraph 6 of the Notice reads as follows:

“It is the responsibility of the Commission to show that a concentration creates or strengthens market structures which are liable to impede significantly effective competition in the Common Market. It is the responsibility of the parties to show that the proposed remedies, once implemented, eliminate the creation or strengthening of such a dominant position identified by the Commission. To this end, the parties are required to show clearly, to the Commission’s satisfaction in accordance with its obligations under the Merger Regulation that the remedy restores conditions of effective competition in the Common Market on a permanent basis.”

In the cases more closely reviewed below, we will see how this allocation of the burden of proof was handled in practice. The negotiation of remedies/commitments typically takes place under significant time-pressure,94 an impact which the Commission however addressed in the new ECMR 139/2004 which provides some more flexibility for the benefit of both, the Commission and the parties. A most far-reaching remedy package, for instance, had to be negotiated in the Exxon/Mobil case.95

Another substantial remedy package was negotiated in the Boeing/McDonnell Douglascase, but in some cases the tight timeframes did not allow the parties to come up with commitment packages which satisfied the Commission. Hence, the Commission blocked the Airtours/First Choice case, as it blocked the WorldCom/Sprint deal and the acquisition of Metsä Tissue by SCA Mölnlycke as well as the acquisition of Honeywell by General Electric. Some merger proposals were withdrawn by the parties as a consequence of the antitrust concerns voiced by the Commission where the parties found no possibility to offer remedies which would have satisfied the Commission’s requests.

It is noticeable that the remedy packages which had to be offered by the parties became more and more complex. This may have to do with the development of more exacting

93 OJ 2001 C68/3. 94 In the Telia/Telenor case (Case COMP/M. 1439, of 13 October 1999) commitments submitted one week

after the expiry of the legal deadlines were still accepted by the Commission on the quite exceptional ground that the Swedish and the Norwegian parliaments had to be consulted before the proposed commitments could be formally submitted. However, in the Airtours/ First Choice case, the Commission rejected a second set of commitments which had been submitted shortly after the expiry of the deadline. Also in the Volvo/Scania case (case COMP/ M. 1672 of 14 March 2000) the Commission rejected late commitments offered by Volvo. However, the late submittal of these commitments may not have been the only ground for their rejection. It appears that in both cases, Airtours/First Choice and Volvo/Scania, the packages of commitments were rather complex or to some extent unclear and would have required further market testing and more detailed examination, and when such packages are submitted as late as two weeks into the last months of the Commission’s investigation, then there will simply not be enough time for the Commission to consider them and to be satisfied by their effects. In contrast, in the Telia/Telonor case, the package offered late was sufficiently clear-cut and thus could be accepted by the Commission. Moreover, in Schneider/Legrand the Commission warned in its press release announcing the prohibition: “Despite the scale and seriousness of the problems posed by the merger, Schneider Electric did not put forward in good time adequate undertakings to ensure that, following the merger, the conditions of effective competition would be restored.” In fact, after the expiry of the deadline, the Commission was not prepared to accept “last minute” undertakings, unless the parties had been in a position to establish immediately and without any possible doubt that they would restore the conditions of competition. – As indicated above, however, these time-constraints will, under the New ECMR, be significantly alleviated, as a stop-the-clock provision will be introduced in Phase I and in Phase II.

95 Case IV/N.1383, 29 September 1999.

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economic theories applied to assess the potential danger for creating or strengthening a dominant position. For instance, oligopoly and collective dominance theories have become an integrated part of merger control, and have given the Commission an additional tool to cause the parties to offer commitments.

How should commitments be structured so as to make them acceptable to the Commission? The Notice on Remedies, in Paragraph 9, makes reference to the Gencorcase where the Court of First Instance:

“… established the principle that the basic aim of commitments is to ensure competitive market structures. Accordingly, commitments that would amount merely to a promise to behave in a certain way, for example a commitment not to abuse a dominant position created or strengthened by the proposed concentration, are as such not considered suitable to render the concentration compatible with the Common Market.”

2.25 Structural Remedies – So Far Preferred

Based on Gencor/Lonrho, the Commission stated that commitments which are structural in nature would be preferable and would have the advantage that they would not require medium or long-term monitoring measures. The CFI then held as follows:96

“The categorisation of a proposed commitment as behavioural or structural is therefore immaterial. It is true that commitments which are structural in nature, such as a commitment to reduce the market share of the entity arising from a concentration by the sale of a subsidiary, are, as a rule, preferable from the point as view of the Regulation’s objective, inasmuch as they prevent once and for all, or at least for some time, the emergence or strengthening of the dominant position previously identified by the Commission and do not, moreover, require medium or long-term monitoring measures. Nevertheless, the possibility cannot automatically be ruled out that commitments which prima facie are behavioural, for instance not to use a trademark for a certain period, or to make part of the production capacity of the entity arising from the concentration available to third-party competitors, or, more generally, to grant access to essential facilities on non-discriminatory terms, may themselves also be capable of preventing the emergence or strengthening of a dominant position.”

Hence, the emphasis will lie on structural remedies which may consist of divestiture commitments, the termination of exclusive agreements and licensing arrangements providing for access to core technology, infrastructures and networks.

For this purpose, commitments:

• should be clear-cut and capable of unambiguously remedying the potential concerns regarding the maintenance of a workable competition,

• should be such as to eliminate the creation or strengthening of a dominant position,

• should be capable of being implemented effectively and within a short period of time, and, ideally,

• should not require additional monitoring once they have been implemented.97

96 T 25.3.1999, Gencor/Lonrho, [1999] ECR II-753, 319.

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The last element is a particular problem and concern, and the reason why, in most cases the Commission has, wherever feasible, favoured (hard) structural commitments over merely (soft) behavioural commitments. For instance, the Commission is not likely to accept the mere promise of a dominant enterprise that it will “behave well” and will not use its dominant market powers; instead, the Commission will normally prefer to nail this down by way of a “hard” commitment in the sense of a divestiture requirement, wherever possible.

Among the structural remedies, a divestiture promises to offer the most effective way to restore effective competition. Such divestiture should pave the way for the emergence of a new competitive entity and, therefore, for the strengthening of existing competition. This being the idée de manoeuvre, the divested activities obviously will have to consist of a viable business which, if operated by a suitable purchaser, can effectively compete with the merged entity on a lasting basis.

For instance, in respect of the joint-venture (further reviewed below) between Shell andBASF,98 the parties had to undertake to divest the polypropylenes resin production plants with very significant capacities, and to divest BASF’s technology business in the polypropylenes production and catalyst market (where Shell was considered to be a leading player), and the parties had to ensure that the joint-venture would license its metallocene patent rights to all interested third parties. This is one of the most fascinating cases, and we will take a closer look at this below.

Equally fascinating was the Alcoa/Reynolds merger99 where clearance to form the largest integrated aluminum producer worldwide was obtained against the parties’ undertaking to divest quite a number of businesses in order to remove overlaps as well as to secure supplies of raw materials to Alcoa’s only competitor. In the TotalFina/Elf Acquitaine case, the merged entity had almost absolute control over the national market for refined products, and the only way for the Commission to impose an effective opening-up of the market was seen by strengthening imports. For that purpose, overlaps had to be removed and the parties had to give up their controlling position, for instance by TotalFina selling 70 service stations, by divestiture of the parties LPG business, and by a divestiture of 50% in the single fuel supply pool operating in respect of the airports in Lion and Toulouse (where Elf held the other 50%).

A “naked” divestiture, however, would not as such be sufficient, unless it would go along and would be accompanied by the requisite infrastructures, logistics, customer contracts and technology enabling it to be operated. Thus, a divestment proposal offered in the Alcan/Pechiney/Alusuisse case was rejected by the Commission because it had not been accompanied by customer contracts, whereas in Air Liquide/BOC the divestiture offered

97 For instance, the Notice on Remedies makes reference to the Boeing/McDonnell Douglas case (Commission Decision 97/816/EC, IV/M. 877; OJ 1997 L336/16) where, quite reluctantly, the Commission considered and accepted commitments which required further monitoring.

98 Case COMP/M. 1751, project Nicole, Decision of 29 March 2000. 99 Case COMP/M. 1693, Decision of 3 May 2000.

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included divestments of plants accompanied by the related distribution infrastructure, all of the necessary technology licenses, all relevant customer information and current purchase orders.

Hence, the divestiture commitment must relate to a business which is suitable for divestment which means that it will have to be a viable business which can be operated by a competitor who is totally independent from the merging parties. For instance, in the aforementioned Exxon/Mobil case, the Commission had rejected a suggested divestment of Mobil’s business in aviation lubricants, because this business decision was too heavily integrated within Mobil and would not have been capable to be operated as a stand-alone business. Hence, it will also be important that the buyer for the divested business is a “suitable” buyer who will be able to create an effective competitive pressure on the merged entity.

As we will see in the cases reported below, the Commission has set the widely accepted standard of requiring the appointment of an independent trustee who will be in charge to monitor or implement the structural commitment as per the yardsticks set by the Commission. For instance, a Monitoring Trustee was to be appointed in the BP/E.ONcase, discussed in detail in Part VII below. And in case the parties would not reach consensus on a final agreement regarding certain divestiture shares, a DivestitureTrustee was to be appointed. Both were subject to Commission-approval.

This pattern is also used in US merger review proceedings; compare e.g. the extensive FTC Decision in Glaxo Wellcome plc and SmithKline Beecham plc; the tasks to be accomplished by the Monitor Trustee (as he is called in the USA) are defined in great detail in Title X of that Decision, and those of the Divestiture Trustee in Title XI.100

Typically, these trustees are appointed by the FTC itself, and not by the parties, whereas the EU Commission leaves the designation of the trustees to the parties, but will reserve its right to approve the candidate, or to object.

Normally, structural remedies are to be implemented within a very short period of time(a few weeks or months). They are typically labelled as a condition on which the Commission’s decision is based, and if not implemented, the decision as such falls without a remedy, with of course very serious consequences.

2.26 Best Practice Guidelines for Divestiture Commitments, of 2 May 2003

On 12 July 2002, the Commission submitted, for consultation with the Member States and the interested public, two model texts relating to divestiture commitments submitted by notifying parties under the ECMR. These texts have by now been finalized and are accessible on DG COMP’s website. The Guidelines and the models assemble the

100 FTC Decision of 26 January 2001, p. 39 ss. and 42 ss.

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experience the Commission has gained in shaping remedies and tie in with the remedies policy set out in the Commission’s Notice on Remedies.101

The standard model texts are not intended to provide exhaustive coverage of all issues, and are not legally binding upon the parties; nevertheless, they contain the essential elements that should be included in commitments and trustee mandates relating to divestitures. The standard models are designed to apply to all remedy proceedings in both Phase I and Phase II. The Commission also indicates that it intends to keep these model texts updated based on ongoing practice, taking into consideration the developments of the commission’s remedies policy and the experience gained from working with the merging parties and trustees in future matters.

Recognising that the timing is crucial under the legally-binding timetable set in the ECMR, the model texts will relieve the parties from the burden of structuring rather standard terms and provisions for commitments and trustee mandates under tight time constraints. Hence, the proceedings will be expedited and will allow the merging parties more time to concentrate on the actual substance and implementation of the commitments. Moreover, the standard models will ensure some consistency across different cases and will contribute, as the Commission states, to increasing the level of transparency and legal certainty for merging parties offering commitments to the Commission.

The Standard Model for Divestiture Commitments sets out all the requirements for achieving full and effective compliance with divestiture commitments offered by the merging parties so as to obtain a clearance decision. The model, after a definitions section, describes the divestiture procedure, the divestiture period and the extended period; it describes the procedure sometimes used where an up-front buyer will have to be identified and where the parties commit themselves not to implement the proposed concentration unless and until they have entered into a binding agreement with such buyer for the Divestment Business. The Commission reserves its right to approve the proposed buyer.

Moreover, in some cases, alternative divestitures, in particular “Crown Jewels” structures have to be contemplated in case the originally proposed business cannot be divested.102

The model text provides for a prohibition to re-acquire direct or indirect influence over the Divestment Business. Such Divestment Business will have to be identified very precisely; it must be an existing entity that can operate as a stand-alone business. In particular, it must comprise all the assets and personnel necessary to ensure the viability of the divested activities. Moreover, the Divestment Business must be entitled to benefit from products or services provided by the merging parties for a transitional period of time, such period to be determined on a case-by-case basis.

101 Notice on Remedies Acceptable Under Regulation EEC No. 4064/89 and Regulation EC No. 447/98, at OJ C68, 2.3.2001, pages 3–11; published at http://europa.eu.int/eur-lex/pri/ en/oj/dat/2001/c_068/c_06820010302en 00030011.pdf.

102 See hereto also the Notice on Remedies, Paragraphs 22 and 23.

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Section C of the model contains a number of related commitments designed to maintain, pending the divestiture, the viability, marketability and competitiveness of the Divestment Business, mostly in the form of hold-separate and ring-fencing obligations. There is provision for a Hold Separate Manager, to be appointed by the parties, and he will be responsible for the management of the Divestment Business as a distinct entity; he will be supervised by the Monitoring Trustee. The ring-fencing will also specifically apply to sensitive information, and the parties will have an obligation to make sure that any central information technology network will be severed.

Related commitments will further contain a non-solicitation clause for key personnel of the Divestment Business. In addition to that, the Commission may request the inclusion of non-compete clauses protecting the customers of the Divestment Business for a start-up period.

An important element is the obligation of the parties to submit regular reports on the divestiture process to the Commission and the Monitoring Trustee.

The Section D sets out the requirements to be met by the purchaser. The aim is to ensure that the Divestment Business will be sold to a suitable buyer who is independent of and unconnected with the parties, and who possesses the financial resources, proven experience and incentive to maintain and development the Divestment Business as a viable and active competitive force in the market place.

The approval process consists of submitting a fully documented and reasoned proposal to the Commission; the Commission will verify all of the significant elements and, in particular, will examine the report to be submitted by the Monitoring Trustee.

Section E then deals with both legal monitoring and Divestiture Trustees. Terms of their appointment are identified, as well as the content of these mandates, the conditions for replacement of the trustees and the like. The parties will owe the trustees significant duties and obligations, including the obligation to provide to them all managerial and administrative support necessary for the Divestment Business.

Section F contains a review clause which allows the Commission to extend the periods of time and to waive or modify the undertakings. The parties must show good cause in order to be able to benefit from the exercise of the review clause.

The second model is the Standard Model for Trustee Mandates, which sets out the duties and responsibilities of both, the Monitoring Trustee and the Divestiture Trustee. The Commission does not have a preference for the appointment of a single person to serve in the dual role; rather, the decision as to whether one or more trustees are appointed should be determined on a case-by-case basis by the parties. The Standard Trustee Mandate consists of a number of main elements which may be summarized as follows:

Section A again contains definitions; Section B and C deal with the appointment of the trustee, or the Trustee Team and the general duties.

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Section D devotes rather detailed provisions on the duties and obligations of a monitoring trustee, whereas Section E deals with the duties and obligations of a divestiture trustee.

Section F contains detailed provisions on the reporting obligations; essentially, monthly written reports submitted to the Commission will be required, dealing with the operational and financial performance, the issues or problems that have arisen in the frame work of the execution of the obligations, the current monitoring of the preservation of the economic viability, marketability and competitiveness of the Divestment Business, the review and assessment of the progress made, particulars as to the work-plan and proposals for any revisions and the estimated future timetable.

Section G deals with the duties of the parties in respect of their co-operation, assistants and all managerial and administrative support. Sections H to J cover additional trustee-related provisions, including those on conflicts of interest, remuneration, indemnity, confidentiality, termination of the mandate, any amendments, governing law and the like.

No doubt, merging parties will find these models extremely useful; basically, they apply to “hard” commitments only. What now needs to be further discussed are – what we may term – “soft commitments” in the sense of behavioural commitments which, ultimately, may be monitored by arbitrators or arbitral tribunals.

2.27 Behavioural Remedies

However, how to proceed where structural remedies are inadequate or not available for practical and other reasons? More particularly: would behavioural remedies be sufficient, and what are the yardsticks under which they could be considered suitable? Moreover: how to deal with the problem of monitoring behavioural remedies?

Where hard and fast divestments are not the answer, the Commission as well as the merging parties will have to look at other methods, in terms of soft behavioural commitments, to address competitive concerns. In the past, the Commission has shown quite some reluctance, and the CFI judgment in the Gencor case issued on 25 March 1999103 may have corroborated that attitude.

This hesitation and obvious scepticism, however, is not as such justified.

We will see that adequate solutions can be found, essentially by way of charging an arbitral tribunal to monitor such kind of behavioural commitments, and we will see that this tool – so far hardly used in practice – promises to provide an ideal solution to deal with the problem, to guarantee compliance through a carefully administered monitoring process, and with a flexibility as may be required due to changed circumstances. However, let us examine these issues step by step.

103 Case T-102/96, Gencor v/Commission [1999] ECR II-753, at Paragraph 316; see above.

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In the Gencor judgment, the CFI established the principle and requirement that commitments must ensure competitive market structures. Accordingly, commitments that would merely amount to a promise to behave in a certain way, for example a commitment not to abuse a dominant position created or strengthened by the proposed concentration, would not as such be considered suitable to render the concentration compatible with the Common Market. Hence, according to the CFI, commitments which are structural in nature are, as a rule, preferable from the point of view of the Regulation’s objective, and will moreover have the advantage that they do not require medium or long-term monitoring measures. This reasoning in the Gencor judgment of the CFI was almost literally reflected in Paragraph 9 of the Commission’s Notice on Remedies.

However, the Notice does recognise that there may be situations where a divestiture of a business is impossible. The Notice makes reference to the Boeing/McDonnell Douglascase where the investigations revealed that no existing aircraft manufacturer was interested in acquiring Douglas’ aircraft company from Boeing, nor was it possible to find a potential participant to in commercial jet aircraft market who might achieve entry through the acquisition of McDonnell Douglas. Furthermore, the Notice acknowledges that there are other circumstances where it would not be feasible to impose a hard commitment in the sense of a divestiture. For instance, control over networks cannot be broken up, and a required divestiture might ruin such infrastructures.

Foreclosure effects resulting from a concentration are likely to create higher entry barriers or other impediments for potential new entrants on the relevant market. The control over infrastructures, networks, essential facilities (such as for instance access to port facilities in the shipping industry, slots at airports, railway infrastructures and the control over key-technologies including patents and other intellectual property rights) are factual and legal parameters which need to be considered with greatest care in the framework of the competitive assessments. These are situations where hard structural remedies might be unavailable, or unrealistic, or otherwise ineffective, whereas behavioural commitments would appear to be much more appropriate and conducive to maintain an effective competition. For good reasons, the Notice on Remedies, in Paragraph 29, refers to the example stated by the Commission in the Glaxo/Welcomecase which will be reviewed in more detail further below, and where the Commission considered that an imposed divestiture (in contrast to the imposition of a merely behavioural commitment in terms of requiring the granting of licences) would have impeded efficient and ongoing pharmaceutical research, ultimately at the detriment of the consumer.

Similar situations may arise where there exists a combination of networks, such as a combination of key-patents which, as such, cannot be broken up although the (so-called) “network effects” may result in a foreclosure through existing exclusive agreements and, thereby, may lead to a dominant position or strengthen the same. In such situations, therefore, the adequate response would seem to require a termination of foreclosing exclusive agreements, or the forced opening up of exclusive networks requiring the

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merging parties to grant access to all qualifying interested third parties which access would have to be granted on a commercially viable and non-discriminatory basis. Several of the cases which we will analyse below in quite some detail are of this nature, and it is impressive that the Commission placed confidence in the crucial problem which arises in all of these situations, i.e. in the problem of monitoring compliance over a medium or even long-term period of time.

As we will see, although the MTF has a highly qualified taskforce for monitoring commitments, the Commission has accepted the parties’ commitments to refer matters of the policing to independent arbitrators (or experts), and the purpose of this paper is to highlight the circumstances, the solutions adopted and the problems that may be associated therewith.

2.28 Different Requirements for Commitments

The Notice on Remedies flags out slightly different requirements and procedures for commitments submitted in a Phase I investigation as opposed to Phase II investigations. In Phase I, it will be particularly important that commitments be submitted in due time, with a sufficient degree of detail to enable a full assessment to be carried out by the Commission within a very short period of time and moreover must explain in what way the commitments offered will solve the competition concerns identified by the Commission.

The Commission may consult authorities of the Member States on the proposed commitments and, where appropriate, also third parties in the form of a market test. Where the assessment of these commitments confirms that the proposed commitments remove the grounds for serious doubts, the Commission will clear the merger in Phase I. However, where the assessment shows that the commitments offered are not sufficient to remove the competitive concerns raised by the concentration, the parties will be informed accordingly. Possibly, the Commission may be prepared to accept modifications to the commitments but, in any event, such modifications would have to present an immediate and satisfactory response to the Commission’s concerns regarding the maintenance of a workable and effective competition. Should the parties fail to remove the serious doubts, the Commission will issue an Article 6 (1)(c) decision and open the further proceedings.

In the framework of the Phase II investigation, the Commission – pursuant to Article 8 (2) ECMR – must declare a concentration compatible with the Common Market where, following modifications, a notified concentration no longer creates or strengthens a dominant position within the meaning of Article 2 (3) of the ECMR.

Extensions of the time-limit, under the current practice, were available only in exceptional circumstances and where sufficient time was left for the Commission to make a proper assessment by the Commission and to allow it to consult with Member States and third parties. Phase II commitments, therefore, have to be submitted in due time, at the latest on the last day of the three months period and shall have to address all competition issues raised in the Statement of Objections (unless subsequently abandoned). The

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commitments must specify the substantive and implementing terms entered into by the parties in sufficient detail to enable to Commission to make a full assessment. Moreover, the parties shall have to explain how the commitments offered will solve the competition concerns. The parties will also have to supply a non-confidential version of the commitments for purposes of market testing.

If the assessment confirms that the proposed commitments remove the competition concerns, following consultation with the authorities of the Member States, discussions with non Member States authorities and, where considered appropriate, with third parties in the form of a market test, a clearance decision will be submitted for Commission approval.

However, where the assessment leads to the conclusion that the proposed commitments do not sufficiently resolve the competition concerns, the parties will be informed accordingly. They may then subsequently modify the proposed commitments, and the Commission may accept those where it can clearly determine in a straightforward fashion that such commitments, once implemented, will resolve the competition problems.

2.29 Commitments Offered – Or Imposed?

The Notice on Remedies typically refers to the commitments “offered” by the parties, but it would be more realistic to characterise these commitments as being imposed by the Commission, or conceded on the Commission’s request. The Notice on Remedies further provides quite detailed guidance regarding divestment commitments, with detailed suggestions on how a divestiture should be engineered, what the divestiture package will have to consist of in terms of tangible assets (R&D, production, distribution, sales and marketing activities) and intangible assets (intellectual property rights, goodwill), personnel, supply and sales agreements (with guarantees as to their transferability), customer lists, third party service agreements, technical assistance etc. Moreover, the Notice contains guidelines on the procedure and on the appointment of a divestiture trustee and the role and function to be accomplished by that person, including possibly the function of a hold-separate trustee. Such divestiture trustee must be independent of the parties and possess the necessary qualifications to carry out that function and shall have to make sure that he will not expose himself to any conflict of interest. The Commission reserves the right to verify whether the proposed trustee fulfils these requirements, and the Commission will review and approve the terms of the trustee’s appointment. The mission of the trustee is defined in Paragraph 56 of the Notice on Remedies as follows:

“The trustee will assume specified duties designed to ensure compliance in good faith with the commitments on behalf of the Commission, and these duties will be defined in the trustee’s mandate. The mandate must include all provisions necessary to enable the trustee to fulfil its duties under the commitments accepted by the Commission. It is subject to the Commission’s approval.”

Moreover, when the “job” is done, the trustee’s mandate

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“… will provide for the trustee to request the Commission for a discharge from further responsibilities. Even after the discharge has been given, the Commission has the discretion to require the re-appointment of the trustee, if subsequently it appears to the Commission that the relevant commitments might not have been fully and properly implemented.” 104

While divestments (as structural remedies) are not the prime focus of this report, two observations – which may be quite significant – can be made:

• First, it is quite significant how the position, function and responsibility of the divestiture trustee is characterised in the Notice. While the trustee is independent from the Commission and must be independent from the parties, it is nevertheless clear, by the terms cited above, that the divestiture trustee will be closely held to the chest of the Commission, will derive its terms of reference after approval by the Commission and will only be able to discharge its function with the consent of the Commission. Hence, the divestiture trustee is a kind of prolonged arm of the Commission.

• Second, the Notice on Remedies only contains this kind of detailed parameters for structural commitments (in the sense of divestments) but nothing comparable regarding behavioural commitments. This is surprising, and possibly the answer may lie in the fact that the Commission (quite in the sense of the Gencor judgment) has had significant hesitations to at all impose (or accept) behavioural commitments, unless there had really been no other solution.

• Third, this lacuna is the more surprising since, as the following discussion of quite a number of decisions will show, the Commission nevertheless, in more than two dozens of cases, considered and accepted behavioural commitments tied to the imposition of an independent arbitral tribunal to monitor these.

• Hence, one would have expected the Notice on Remedies to also contain a full chapter (similar to the one on structural remedies) devoted to behavioural commitments and the methods, requirements and possibly best practices for their policing.

It is the purpose of this writing to provoke further discussion on behavioural remedies and their monitoring through arbitration, and the author would hope to see, in any future (amending or replacing) Notice on Remedies a separate chapter devoted to behavioural commitments, and setting some of the basic standards as to their effective monitoring through arbitration.

2.30 Failure to Honour Commitments, and Consequences

Legal consequences in case parties fail to honour their commitments: where commitments had to be conceded by the parties, the Commission’s clearance of the concentration will be based on the premise that the commitments will be honoured by the parties. However,

104 Paragraph 57 of the Notice.

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the question is what consequences would follow in case commitments would not be honoured. In this respect, a distinction must be made between conditions and obligations:

• Structural commitments (i.e. the requirement for achieving a measure that gives rise to the structural change of the market, such as a requirement to divest) will typically be qualified as conditions.

• However, the implementing steps which are necessary to achieve such a result will generally constitute obligations of the parties (for instance the appointment of a divestiture trustee) with an irrevocable mandate to sell the business.

• Moreover, behavioural commitments will in most cases qualify as obligations, not as conditions for the clearance.

Where the parties concerned commit a breach of an obligation, the Commission may revoke clearance decisions issued either under Article 6 (2) or Article 8 (2) ECMR, acting pursuant to Article 6 (3) or Article 8 (5)(b), respectively.105

The parties may also be subject to fines and periodic penalty payments as provided for in Articles 14 (2)(a) and 15 (2)(a) of the ECMR.

However, where a condition is not fulfilled, the Commission’s compatibility decision would not longer stand as such. In such circumstances, the Commission may (pursuant to Article 8 (4) of the ECMR) order any appropriate action necessary to restore conditions of effective competition. The measures available to the Commission will include periodic penalty payments under Article 15 (2)(b) ECMR. In addition, the parties may be subject to fines as provided for in Article 14 (2)(c) ECMR.

2.31 Behavioural Commitments Subject to Arbitration

The “trouble” with behavioural commitments, as we have seen, is the long-termperspective and the difficulties of policing these commitments over the period of time by DG COMP’s Enforcement Unit.

Where a third party finds itself aggrieved by dealings (acts/omissions/behaviour) of the merged party, it may (i) either file a complaint to the Commission, or (ii) initiate legal proceedings against the merged party, or (iii) may proceed on both avenues.

In the scenarios (i) and (iii), the Commission will have to examine the matter from the administrative point of view, whereas the dealing with the civil law implications (under (ii) and (iii)) will be outside the Commission’s jurisdiction: it is here where judicialproceedings will be necessary.

105 Notice on Remedies, Paragraph 12.

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As further discussed in Part D of this Report, ordinary State courts, for practical reasons, can hardly fulfil such a task, and indeed arbitration is almost the only solution.Arbitration will have the essential advantages of :

• providing a truly neutral forum;

• enabling the parties to handle the dispute in the most convenient language, such as English (and not in a local language which may not be familiar to one of the parties);

• enabling a highly competent/professional adjudication, entrusted to arbitrators with longstanding professional experience in arbitration and competition law;

• allowing a swift adjudication on a fast track time-table, thereby meeting the explicit requirements of indeed all of the Commission decisions rendered in the past (which provide for very short timeframes of, basically, between one month to six months;

• fostering and shaping the arbitral proceedings to what is needed under the particular circumstances, particularly in respect of interim relief, documentary requests, burden of proof and the like;

• providing a final decision which (except for serious violations of due process and for public policy violations) will not be challengeable before State courts in the country of origin of the award, with the award being enforceable according to the terms of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

In Part C below, we will first examine the arbitration provisions so far reflected in numerous Commission decisions which, as the arbitration specialists will immediately recognize, contain quite a number of strikingly unusual or even inconsistent, sometimes "pathological" elements.

We will also see that, in the most recent decisions, a basic conceptional body has been developed by the Commission which, as such, provides a framework of what the Commission requires.

2.32 A caveat: Special Knowledge Will Be Required

There are, however, aspects which need further review and thinking and, most of all, it will be important to have an educated class of highly experienced arbitrators, knowledgeable in an efficient case management and knowledgeable in competition law matters who fully understand what the process is about, and realise that this kind of arbitration, necessarily, shows significantly different features from any other proceedings or ordinary arbitration cases.

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Hence, it would be quite wrong to try to assimilate the procedures (as may result from the cases discussed below) with the typical paths used in, for instance, an ordinary ICC arbitration on some contractual issues.

In the above context, third parties play an important role because, in most cases, the behavioural commitments indeed aim to protect those third parties. As we will see, most commitments to arbitrate work in their favour, and they would seem to be well advised to use the system offered, rather than to address themselves to the ordinary State courts. The advantages, as we will see, are multifold and substantial.

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2.33 Table of 34 Commission Decisions Providing for Arbitration

Commission Decisions regarding Art. 81 (3) EC

1 23.12.1977 Decision 78/253/EEC Campari Case, OJ [1978] L 70/69

2 12.7.1989 Decision 89/467/EEC UIP, OJ [1989] L 226/25

3 11.6.1993 Decision 93/403/EEC EBU/Eurovision OJ [1993] L 179/23

4 12.4.1999 Decision 99/329 EC P & I Clubs, OJ [1999] L 125/12

5 15.9.1999 Decision 99/781/EC British Interactive Broadcasting/Open, OJ [1999] L 312/1

Phase I – Decisions according to Art. 6(1)(b) Merger Regulation (Reg. 4064/89)

6 4.9.1992 Case IV/M.235 Elf Aquitaine-Thyssen/ Minol

7 27.11.1992 Case IV/M. 259 British Airways/TAT

8 20.7.1995 Case IV/M. 616 Swissair/Sabena (II)

9 4.6.1998 Case IV/M.1185 Alcatel/Thomson CSF-SCS

10 25.1.2000 Case Comp/M.1684 Carrefour/Promodès

11 21.3.2000 Case Comp/JV.37 BSkyB/Kirch Pay TV

12 29.3.2000 Case Comp/M.1751 Shell/BASF/JV – Project Nicole

13 12.4.2000 Case Comp./M.1795 Vodafone Airtouch/Mannesmann

14 8.5.2000 Case Comp/M.1846 Glaxo Wellcome/Smithkline Beecham

Phase I – Decision according to Art. 6(2) Merger Regulation (Reg. 4064/89)

15 13.10.2000 Case Comp/M 2050 Vivendi/Canal+/Seagram

16 8.5.2001 Case Comp./M.2268 Pernod Ricard/Diageo/Seagram Spirits

17 8.1.2002 Case Comp/M.2621 SEB/Moulinex

18 10.7.2002 Case Comp/M.2803 Telia/Sonera

19 11.2.2004 Case Comp/M. 3280 Air France/KLM

20 22.11.2004 Case Comp/M. 3570 Piaggio/Aprilia

Phase II – Decisions according to Art. 8(2) Merger Regulation (Reg. 4064/89)

21 30.9.1992 Case IV/M.214 Du Pont/ICI

22 16.1.1996 Case IV/M.623 Kimberley– Clark/Scott

23 30.7.1997 Case IV./M.877 Boeing/McDonnell Douglas

24 15.10.1997 Case IV/M.938 Guinness/Grand Metropolitan

25 9.3.1999 Case IV/M 1313 Danish Crown/Vesjyske Slagterier

26 1.12.1999 Case IV/M. 1578 Sanitec/Sphinx

27 1.12.1999 Case Comp/M.1601 Allied Signal/Honeywell

28 3.5.2000 Case Comp/M.1671 Dow Chemical/Union Carbide

29 20.12.2001 Case Comp/M.2389 Shell/DEA

30 20.12.2001 Case Comp/M.2533 BP/E.ON

31 20.12.2001 Case Comp/M.2530 Südzucker/Saint Louis Sucre

32 3.7.2001 Case Comp/M.2220 General Electric/Honeywell

33 2.4.2003 Case Comp/M. 2876 Newscorp/Telepiù

34 2.9.2003 Case Comp/M. 3083 General Electric/Instrumentarium

35 29.9.2003 Case Comp/M. 3225 Alcan/Péchiney II

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3. Arbitration Provisions as Used in Past Commission Decisions

In respect of the cases below, space does not allow to describe the factual background of the concentration, and to describe the scene which has prompted the parties and the Commission to provide for arbitration; hence, the quotes herein below essentially only recite the provisions regarding arbitration.106 We will begin our review with five Article 81-cases, to then turn to 30 Merger Control cases, grouped under Phase I and Phase II decisions.

3.1 Five Cases under Articles 81/82 EC

1. Campari-Milano SpA (1977)

“All disputes as to the interpretation and performance of the Agreements are to be settled by three arbitrators107, whose function is to produce an amicable settlement.”108

The European Commission added and required in the framework of its Decision

• that it be informed of any awards made under the arbitration clause;

• because of the Commission’s fear that the arbitrators might interpret the agreements without paying due regard for the Commission’s Decisions;

• that the Commission might, therefore, have to amend the arbitrators‘ decision, and in particular;

• that the arbitral awards may need to be reviewed as to their compatibility with Article 81 and 82 EC (at that time Articles 85/86).

The text reads as follows:

“Arrangements should also be made to ensure that the Commission is informed of any awards made under the arbitration clause, as there is a risk that the agreements might be interpreted without regard for this Decision, so that the Commission might have to amend it. There is a greater risk at arbitration than in the ordinary courts that interpretation of the Agreement may go beyond the limits imposed by the exemption, particularly where the arbitrators, whose function, as in this case, is to produce an amicable settlement, are not bound by the substantive law. Furthermore, review of arbitral awards for their compatibility with Articles 85 and 86 (now 81/82), inasmuch as these fail to be regarded as part of EEC public policy is not necessarily available in non-member States.”

Moreover, Article 3 of the Decision required:

“The above mentioned undertakings shall inform the Commission immediately of all awards made under the arbitration clause.”

106 The details of the background in respect of most of the cases decided prior to May 2003 are in quite some detail reflected in my earlier book: MARC BLESSING, Arbitrating Antitrust and Merger Control Issues, p. 84-156.

107 All emphasis in the quotations cited in this text are added by the author. 108 Commission Decision of 23 December 1977, Paragraph 10.

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2. United International Pictures (UIP) (1989)

The UIP undertaking reads as follows:

“UIP undertakes in good faith that:

(a) UIP will support cinema industry efforts to establish arbitration or comparable procedures for the resolution of disputes relating to product allocation or access to exhibitor screenspace.109

(b) When a dispute arises with an exhibitor regarding product allocation in those Member States where exhibitors currently cannot compel UIP to submit disputes to arbitration under existing industry arbitration procedures, UIP will advise that exhibitor that it can register with UIP to arbitrate this and all future disputes regarding the allocation of films for which UIP holds the distribution rights which may arise before, during or after any contractual relationship concerning a particular film is entered into between UIP and the exhibitor.

Whenever existing mandatory systems do not foresee arbitration of disputes regarding product allocation arising before, during or after any contractual relationship concerning a particular film is entered into between UIP and the exhibitor concerned, UIP will also advise that exhibitor that it can register with UIP to arbitrate such disputes.

(c) Any such arbitration shall respect the following principles:

1. The party who intends to bring a dispute before an arbitrator or arbitral tribunal shall give written notice (registered letter) to the other party, stating the nature of the dispute to be resolved, the basis of the claimant's position and the relief requested.

2. The proceeding shall be conducted by one arbitrator nominated jointly by the parties within fifteen (15) days after receipt of the written notice, or by three arbitrators. In the latter case, the parties to the dispute shall appoint one arbitrator each within fifteen (15) days after the period to jointly nominate one arbitrator has elapsed. The arbitrators appointed by the parties shall appoint another arbitrator to be president of the arbitral tribunal within fifteen (15) days after the both of them have been nominated. If the arbitrators do not agree, the third arbitrator shall be appointed by the President of the Court of Appeals having jurisdiction in commercial matters in the capital city of the exhibitor's country.

3. The law applicable to the substance of the case shall be the law of the country of the exhibitor.

4. The internal arbitration procedure shall follow the Rules of the Arbitral Court of the International Chamber of Commerce (ICC Rules). The law of the country of the exhibitor shall regulate general procedural issues.

5. The place of arbitration shall be the country of the exhibitor.

6. The arbitration shall be conducted in the language of the exhibitor.

109 The renewal of the exemption granted by the Commission provided for the following: UIP and the Partners have agreed to provide an undertaking to establish a new conciliation procedure

in addition to the already established arbitration procedure to resolve disputes between UIP and exhibitors relating to the supply of prints. Moreover, the arbitration procedure has been improved by being designed to operate more quickly. The new mechanisms are to be applied in Member States where no industry arbitration procedures exist.

In the Commission's view the new conciliation and the amended arbitration procedures are useful instruments in ensuring that UIP deals with exhibitors on a fair and equitable basis (see Case No IV/C.2/30.566 - UIP Cinema, OJ [1999] C 205/6 at 4.2.9).

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7. Unless otherwise agreed by the parties the arbitral award is to be made within five months after the date on which all the arbitrators accepted office. Arbitrators should be aware of the urgency derived from the specific features of the cinema distribution industry.

8. To the extent permitted by national law, an application to the competent judicial authority for preservation or interim measures shall not be incompatible with the arbitration agreement and shall not imply a renunciation of the agreement.

9. The arbitrator or arbitral tribunal shall fix the on account payment which shall be made by either or both parties towards the costs of arbitration.

10. If an exhibitor elects to arbitrate a product allocation dispute with UIP, that exhibitor thereby agrees to arbitrate any dispute UIP may then or thereafter have relating to access to that exhibitor's screenspace.

11. The arbitration award shall, in addition to dealing with the merits of the case, fix the costs of the arbitration and decide which of the parties shall bear the costs or in what proportions the costs shall be borne by the parties.

(d) This undertaking shall become effective upon the grant of an exemption to UIP and shall remain effective throughout the period of the exemption.”

In the subsequent notice, pursuant to Article 19 (3) of the Council Regulation No. 17, concerning an application for a renewal of the Commission Decision, the arbitration provision was amended to include a conciliation procedure.

“4.2.9. Arbitration: UIP and the Partners have agreed to provide an undertaking to establish a new conciliation procedure in addition to the already established arbitration procedure to resolve disputes between UIP and exhibitors relating to the supply of prints.

Moreover, the arbitration procedure has been improved by being designed to operate more quickly. The new mechanisms are to be applied in Member States where no industry arbitration procedures exist.

In the Commission’s view, the new conciliation and the amended arbitration procedures are useful instruments in ensuring that UIP deals with exhibitors on a fair and equitable basis.”

This notice, published in July 1999, certainly evidences more confidence of the European Commission towards arbitration (if compared to the Campari case reported above).

What appears noteworthy is the fact that, on the one side, the ICC Rules should be followed but that, on the other hand, some of the provisions would stand in contradiction to the ICC philosophy, for instance regarding the appointment of the third arbitrator and the determination of the arbitrators’ fees.

Moreover, what we see here is a designing of the arbitration mechanism clearly in favour of the weaker party, i.e. of the exhibitor: his substantive law is to be applied, even his procedural law, and his language!

3. European Broadcasting Union (EBU) (1993)

“In the event of a dispute over the access fee where all other conditions of access have been agreed at the request of the non-member the matter will be submitted to arbitration by independent expert(s). The expert(s) will be nominated jointly by the parties. Failing

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agreement, nomination will be by the president of the competent Court of Appeal in the case of national arbitration (concerning access for national channels) and by the president of the International Chamber of Commerce in the case of international arbitration (concerning access for pan-European channels). The expert(s) shall fix the access fee. The decision shall be final and binding.”110

In the body of the Decision, the Commission stated in Article 2 that the exemption shall be subject to the obligation that:

“EBU shall inform the Commission of any amendments and additions to the rules notified, of all arbitration procedures concerning disputes under the access scheme, and of all decisions regarding applications for membership by third parties.”

4. Protection and Indemnity Clubs (P&I Clubs) (1999)

“As to the procedure, a subcommittee of the IG will have to make a recommendation on the application within 30 days of receipt of all the relevant information (this period may be extended by a further 30 days during the renewal period). The clubs will then vote on the basis of the recommendation. If the decision is negative, the insurer who is refused re-insurance should be given a written notice to that effect within 10 days of the vote being taken, such notice stating the reasons for the refusal. The insurer will have the right to appeal against any such refusal. The appeal will be considered by three arbitrators, who will decide whether the clubs have applied the conditions listed above in a reasonable manner. The parties will designate one arbitrator each within 14 days of the request for arbitration being submitted, and the third, to be designated by the two others within 10 days of their appointment, must be a senior lawyer experienced in commercial and insurance matters. The arbitrators will determine their own procedures and will act with due expedition. They have to give their decision in writing, stating their reasons. Their decision has a binding character.”111

5. British Interactive Broadcasting/Open (1999)

The reference reads as follows:

“Condition No. 7 B iii (c) as determined in the resolution of any dispute: under an appropriate and independent arbitration procedure which the BiB Parties will procure is made available to third parties.”

3.2. 14 Phase - I Merger Review Cases Where the Commission Accepted “arbitration” as a Remedy

These first cases refer to decisions taken in Phase - I under Article 6 (1)(b) ECMR; thereafter, we will review 4 decisions taken under Article 6 (2) ECMR.

6. Elf Aquitaine – Thyssen/Minol

The Commission’s Decision in Paragraph 13 states:

“Arbitration by mutually agreed independent experts will be provided in case of disputes relating to the application of the agreement.”

110 Decision 93/403/EEC, at Paragraph 40. 111 Decision 99/329 EC, at Paragraph 28.

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7. British Airways/TAT (1992)

The full text of the undertaking reads as follows:

“A carrier wishing to avail itself of the benefits of these undertakings shall write to British Airways (“BA”) requesting it to make slots available in accordance with the undertakings. Providing: the undertaking in respect of the route in question has not already been fulfilled; the request has been made within the time required; the carrier making the request has made every normal effort to obtain the slots necessary for its planned operation on the route which, save in respect of the season Summer 1993, must include a application to the co-ordinator for slots by the due date prior to the slot meeting for the season concerned; and, if the request is in respect of Gatwick - Lyon, the number of passengers carried by scheduled services on the route in the most recent twelve month period for which data is available was at least 40,000; then BA will make slots available as necessary. Should there be two or more requests made during the same period which could not all be met within the limits of the slots which BA will enter into discussions with the carriers with a view to reaching agreement as to how the available slots shall be distributed. Should it be impossible to reach agreement, then an independent arbitrator, whose appointment will be agreed by the parties concerned, shall resolve the issue. In the event that no agreement is reached within a reasonable time, BA will nominate an arbitrator, whose appointment will fall to be confirmed by or on behalf of the Director General for Competition of the European Commission.”112

8. Swissair/Sabena (II) (1995)

The commitment is almost identical to the BA commitment and reads as follows:

“A carrier wishing to avail itself of the benefits of these undertakings shall write to SWISSAIR or SABENA respectively requesting it to make slots available in accordance with the undertakings. Providing: the undertaking in respect of the route in question has not already been fulfilled; the request has been made within the time required, the carrier making the request has made every normal effort to obtain the slots necessary for its planned operation on the route which save in respect of the Winter 1995 / 96 traffic period, must include an application to the co-ordinator for slots by the due date prior to the slot meeting for the season concerned; then SWISSAIR and/or SABENA will make slots available as necessary. Should there be two or more requests made during the same period which could not all be met within the limits of the slots which SWISSAIR or SABENA is making available in accordance with its undertakings, then SWISSAIR or SABENA will enter into discussions with the carriers with a view to reaching agreement as to how the available slots shall be distributed. Should it be impossible to reach agreement, then the issue shall be resolved by an independent arbitrator, whose appointment will be agreed by the parties concerned. In the event that no agreement is reached within a reasonable time, SWISSAIR or SABENA will nominate an arbitrator, whose appointment will fall to be confirmed by or on behalf of the Director General for Competition of the European Commission.”113

9. Alcatel/Thomson CSF – SCS (1998)

The full text reads as follows:

« Afin de garantir leur volonté déclarée à la Commission, de fournir sans restriction à tout tiers des TOP dans les mêmes conditions que celles offertes à SCS, les parties se sont engagées auprès de la Commission à créer, sur la base de la clause compromissoire prévue par le Nouveau Code de Procédure Civile français, une instance d’arbitrage indépendante et compétente (“l’Arbitre”). L’Arbitre jugera en dernier ressort de tout litige en

112 Letter annexed to Case No. IV/M.259, p.4. 113 Letter annexed to Case Comp/M.616, at Paragraph 4.5.

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matière de TOP qui lui serait soumis par un client direct ou indirect. L’European Space Agency, prise en la qualité de son Directeur de l’Administration, est désignée à cet effet. Aux termes de l’engagement, l’Arbitre disposera de pouvoirs étendus d’injonction et d’investigation, et pourra prendre toutes mesures, notamment conservatoires nécessaires à l’accomplissement de sa mission. La sentence de l’Arbitre devra intervenir rapidement (dans les deux mois au plus après réception de la saisine) et sera exécutée dans les plus brefs délais par Thomson. Cette clause de recours et la procédure afférente seront insérés dans les conditions générales de vente de TTE. En outre, les saisines de l’Arbitre et les sentences rendues seront communiquées sans délai à la Commission, qui sera également destinataire d’un rapport annuel sur l’activité de l’Arbitre. »114

The Commission appreciated the above commitment favourably, in that it concluded that any interested third party will, at all times, have the possibility to initiate an arbitration procedure that will offer all the guarantees regarding neutrality and an efficient process. The Commission highly approved that the parties were amenable, even beyond a simple behavioural remedy, to delegate the decision making over claims and grieves of a third party to a neutral arbitrator who will finally decide the matter. The text reads as follows :

« En vertu de l’engagement proposé, tout concurrent de SCS qui s’estimerait lésé ou menacé dans sa relation commerciale avec TTE aura la possibilité, à tout moment, de soumettre sa plainte à l’arbitrage d’une instance offrant toutes les garanties de neutralité et de compétences pour juger de son bien-fondé. Les pouvoirs étendus de cet arbitre offrent la garantie d’un traitement effectif et diligent des litiges qui pourraient survenir. Cet engagement va au-delà d’une simple obligation de nature comportementale puisque les parties s’engagent, a priori, à abdiquer, au profit de l’arbitre qui jugera en dernier ressort, de leur pouvoir normal de décision dans le traitement de telles plaintes. Les pouvoirs étendus et la compétence de l’Arbitre, ainsi que la rapidité de la procédure, confèrent à la clause un effet dissuasif supérieur au simple recours judiciaire normalement accessible. – En outre, en s’interdisant, pour une durée suffisante, d’intégrer sans l’accord de la Commission l’activité TOP de TTE au sein de l’entreprise commune, et en communiquant à cette dernière les rapports d’un comité ad hoc ayant vocation à connaître la politique commerciale de TTE en matière de TOP à l’égard de tiers concurrents de SCS, les parties éliminent de manière préventive les risques résiduels d’effets verticaux, dont l’appréciation échapperait aux entreprises concernées par la clause d’arbitrage, ou qui pourraient résulter d’une tentative de contournement de cette clause. »115

The commitment was further spelled out in a commitment letter of Thomson-CSF which is fairly detailed and shows the weight that had been given to this kind of commitment. Thearbitration commitment had been the single most important element which led to this Article 6 (1) (b) Decision.

Annexe:

« 1) Thomson-CSF / TTE propose dès à présent d’attraire tout litige relatif à la négociation et à la vente de TOP à un arbitre unique.

Le recours à l’Arbitre pourra être exercé tant par un client direct de TTE que par un client indirect qui serait en concurrence avec SCS et serait susceptible de supporter un dommage d’un traitement inéquitable appliqué par TTE à son fournisseur.

114 Case IV/M.1185, at Paragraph 38. 115 Ibid. at Paragraphs 40 and 41.

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2) Cet Arbitre devant avoir l’expérience, la compétence et l’indépendance requises, Thomson-CSF propose que l’European Space Agency (ESA) prise en la qualité de son Directeur de l’Administration soit désigné comme Arbitre.

Les signataires s’engagent à nommer comme Arbitre, le Directeur de l’Administration de l’ESA ou toute autre personne compétente au sein de l’ESA et n’ayant pas ou n’ayant pas eu dans les 5 ans précédant sa nomination, d’intérêt direct ou indirect avec le groupe Thomson-CSF et ses filiales, ou l’un des autres groupes signataires du présent engagement.

Thomson s’engage à nommer, en même temps que l’Arbitre titulaire, un arbitre suppléant au sein de l’ESA, lequel remplira les mêmes conditions d’impartialité que le titulaire et pourra agir en cas d’absence ou d’empêchement de l’Arbitre titulaire.

3) Thomson-CSF s’engage à exécuter dans les plus brefs délais la sentence rendue par l’Arbitre, dans le délai qu’il fixera. Cette sentence sera rendue de façon définitive et en dernier ressort. En tout état de cause, l’Arbitre rendra sa sentence dans un délai maximum de deux mois après la réception éventuelle de la saisine. En outre, TTE s’engage à exécuter sans délai toute obligation telle que le respect de délais de livraison ou toute autre mesure d’équité qui pourrait lui être imposée par l’Arbitre.

L’arbitrage se tiendra à Paris.

L’Arbitre agira dans le cadre prévu aux Articles 1442 et suivants du Nouveau Code de Procédure Civile en application du droit français et pourra prendre toute mesure conservatoire.

La procédure d’Arbitrage sera équitable, transparente, objective et les règles de procédure seront appliquées.

L’Arbitre pourra accéder à toute information de nature confidentielle, procéder à toute investigation ou expertise auprès de TTE, et ordonner toutes mesures y compris des mesures conservatoires nécessaires à l’accomplissement de sa mission.

Parmi ces mesures conservatoires, l’Arbitre pourra imposer à TTE l’obligation de réserver une partie de sa production aux concurrents de SCS, moyennant une information préalable sur leur prévision de besoins.

L’Arbitre sera saisi par tout plaignant par lettre recommandée avec accusé de réception.

L’objet du litige et la prétention du plaignant devront être joints à ce courrier.

Thomson-CSF recevra copie de cette demande dans les plus brefs délais par l’Arbitre.

Les Parties et l’Arbitre s’entendront dans les 15 jours à compter de la réception par Thomson-CSF de ladite copie, sur l’acte de mission de l’Arbitre, ce dernier ayant compétence pour décider des limites de sa saisine en cas de désaccord. A compter de la signature dudit acte de mission, Thomson-CSF aura 15 jours pour faire valoir ses arguments.

L’Arbitre devra rendre sa sentence au plus tard dans un mois à compter de la signature de l’acte de mission. Ce délai d’un mois pourra être réduit le cas échéant par l’Arbitre.

Il fixera le montant de ses honoraires dans ladite sentence.

Le recours et la procédure décrits ci-dessus seront insérés dans les conditions générales de vente relatives aux TOP, pour information préalable du client.

4) Les signataires de l’Engagement s’engagent à faire parvenir sans délai à la Commission Européenne copie de toute saisine de l’Arbitre au titre du présent engagement, ainsi que de la sentence rendue.

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En outre Thomson remettra à la Commission, pendant les trois ans à venir, un rapport annuel synthétisant l’activité de l’Arbitre qu’il aura nommé, et précisant notamment les mesures prises par TTE pour répondre à d’éventuelles sentences que l’Arbitre aura pu prononcer à son encontre.

5) Les signataires s’engagent à ne conférer à SCS aucun droit ou pouvoir dans l’activité TOP de TTE, et, pendant une période de 5 ans, à ne pas transférer cette activité à la SCS sans l’autorisation de la Commission. »

10. Carrefour/Promodès (2000)

The undertaking, in Annex 2 to the Commission Decision, reads as follows:

(Annexe 2)

« 1. Carrefour s’engage à proposer à tous les fournisseurs, tels que définis par les présents engagements, de soumettre les litiges qui porteraient sur l’interprétation, l’application ou l’exécution des engagements de Carrefour à un arbitre unique désigné d’un commun accord par les parties, étant entendu que l’arbitre sera un expert indépendant.

Si Carrefour et le fournisseur concerné ne parviennent pas à s’entendre sur la personne de l’arbitre au terme d’une période de 30 jours, à compter de la décision prise par l’une ou l’autre partie de soumettre le litige à l’arbitrage conformément au point B.7, l’arbitre sera désigné par le Président de la Chambre de Commerce de Paris ou de Madrid, suivant qu’il s’agit d’un litige né sur le territoire français ou espagnol.

2. L’arbitre statuera dans un délai de trois mois à compter du jour où il aura accepté sa mission.

3. L’arbitre établira ses propres règles de procédure et statuera au fond, guidé par les principes d’impartialité, d’équité et de justice.

4. Les sentences rendues par l’arbitre ne feront l’objet ni d’appel, ni de révision.

5. Carrefour s’engage à fournir à l’arbitre tous les renseignements qu’il juge nécessaire à l’accomplissement de sa mission.

6. Les frais de procédure seront avancés par Carrefour et supportés en dernier ressort par la partie qui n’aura pas obtenu gain de cause.

7. Le fournisseur fera connaître sa volonté de recourir à l’arbitrage, par lettre recommandée, adressée à Carrefour.

8. La saisine de l’arbitre ne suspendra pas les relations commerciales entre les parties sauf s’il devait y avoir de justes motifs relevant de la santé ou de la sécurité des consommateurs.

9. Dans un délai de deux mois à compter de la Décision de la Commission, Carrefours’engage à distribuer à tous les fournisseurs visés au point A.2 une note décrivant les principes et le fonctionnement de la procédure d’arbitrage des différends. Carrefour soumettra la note précitée à l’attention de la Commission européenne. »

11. BSkyB/Kirch Pay TV (2000)

The following passages are mere extracts of the much more detailed commitments:

“Each of the relevant Kirch company, News and/or BSkyB, as the case may be, will submit to arbitration before the “Arbitrator” in relation to any dispute with a third party regarding the implementation of the commitments.

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The burden of proof for any refusal to meet a request by a third party pursuant to these commitments rests with Kirch, News and/or BSkyB, as the case may be. The proof must be provided to the Arbitrator within the time limits set by the Arbitrator.

The parties will propose an arbitration process to the Commission within two weeks of the Decision. The arbitration process shall comprise the process to be used and the appointment of the Arbitrator(s). The Commission shall decide within one month whetherthey approve the proposed arbitral process. If the Commission does not approve the arbitral process, the parties shall have a further fourteen days to propose alternatives and the Commission a further month to give its final approval. If the Commission does not approve any process proposed by the parties it may lay down the arbitral process itself.

The Arbitrator may decide all matters relating to these commitments arising between the parties or any of them and a third party. The arbitral process shall be for the benefit of third parties for the purpose of procuring that the parties achieve full compliance, and make good any non-compliance, with the commitments vis-à-vis third parties. In reaching a decision the Arbitrator shall take full account of any prior decision by any other arbitrator, court or regulatory body on matters covered by these commitments relevant to the dispute before him.

Decisions of the Arbitrator shall be final and binding on all persons submitting to arbitration. Nothing in the arbitral process shall affect the powers of the Commission to take decisions in relation to the undertakings in accordance with its powers under the Merger Regulation and the Treaty.”

A quite significant (if not striking) feature is the provision that the Commission has been given the power to approve the arbitral process, and if not, the parties will have to submit improvements to satisfy the Commission’s concerns. Moreover, the last paragraph cited above is significant; it in fact reflects (and corresponds to) the unalienable duty of the Commission to safeguard treaty-compliance.

The subject matter of the arbitral process will be:

• In regard to technology: “Kirch agrees that the relevant Kirch company will keep separate financial accounts regarding its activities as a provider of technical services for each technical service separately, which shall be audited on an annual basis as part of its annual audit by an audit firm of international standing. Kirch will deliver copies of such accounts to the Arbitratorand the Commission if and when either of them so requests. Kirch will make available at its premises said accounts for inspection by interested third parties within two weeks of receipt of a written request. The Arbitrator shall be entitled to call for and the relevant Kirch parties will submit all necessary information, including the transfer pricing and other terms of supply for each technical service separately within Kirch Group to enable the Arbitrator to evaluate any claim that the terms offered by the Kirch party are discriminatory. The Arbitrator may at its discretion make available said transfer pricing for technical services to any third party in an arbitration instituted pursuant to these undertakings subject to such third party entering into an appropriate confidentiality undertaking, which if not agreed, shall be determined by the Arbitrator.”

• Regarding third party access to Kirch’s d-box system: “If the third party submits its application to testing by the relevant Kirch company and if the testing shows that the application is compatible with and does not interfere with any functionality of the d-box, then the application shall be permitted to run on Kirch's d-box base without further liability. Testing shall be to no higher standards than those applied to the testing of other applications, including Kirch’s own. The testing shall be undertaken on reasonable commercial terms and within a reasonable time scale, such time scale to be agreed between the relevant Kirch company and the third party within 1 month of receipt of a written request together with the necessary information to evaluate a realistic time-scale for testing and in the absence of agreement within such month,

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within such time-scale as is determined by the Arbitrator. Kirch undertakes to provide adequate resources to perform such testing and to permit it to be done in the same timeframe as provided for other equivalent applications, including Kirsch’s own.”

• Regarding interoperability of competing technical platforms: “Kirch agrees to procure that the relevant Kirch company will offer to develop and to operate Simulcrypt arrangements (including the provision of the necessary coding information) with all digital conditional access providers in the German speaking territories who request the same, on reasonable commercial terms. Kirch will use all reasonable endeavours to procure that Simulcrypt arrangements are operational as soon as possible, or within such time-scale as is agreed by the parties to the Simulcrypt arrangement, such time scale to be agreed within 1 month of receipt of a written request together with the necessary information to evaluate a realistic time-scale, and in the absence of agreement within such month, within such time-scale as is determined by the Arbitrator. To this end the relevant Kirch company will co-operate fully with the conditional access provider (and its technology provider, if different).”

• Regarding production of “multiple system” boxes: “Kirch agrees to procure that the relevant Kirch company will grant manufacturing licenses for the production of the d-box to interested manufacturers of IRDs or comparable hardware in a non-discriminatory manner and under terms and conditions which are customary in and normally applied by the industry. It shall do so within 1 (one) month after receiving a written request for a license together with the information necessary to enable the relevant Kirch company to grant such a licence or, if the granting of the manufacturing license objectively requires more than 1 (one) month, within such timeframe as to be agreed within 1 (one) month after the receipt of the request between the relevant Kirch company and the interested party or, in the absence of an agreement, within such timeframe as to be determined by the Arbitrator. Kirch undertakes that it will not, in licensing manufacturers to manufacture d-box decoders which include Kirch's conditional access system, preclude the manufacturers from including in such decoders a third party’s conditional access system, or capability for a third party's conditional access system to be attached to such decoder, and furthermore Kirch undertakes that it will not refuse to supply subscribers with its Pay TV services based solely on the fact that they wish to subscribe using a d-box which contains such capability.”116

12. Shell/BASF/JV-Project Nicole (2000)

The commitment was a commitment in favour of third parties spelled out in the detailed commitment letter. For the resolution of disputes as may arise thereunder, BASF and Shell committed themselves to submit disagreements regarding the licence or non-assert obligation to what they termed as a “pendulum arbitration”, which could be more conveniently characterised as being a base-ball arbitration or, as Americans might be tempted to say, a “Russian roulette”, or the Russians would call a “Texas auction”. The commitment letter reads as follows:

“If no agreement can be reached on the consideration for a License or Non-Assert, such disagreement will be resolved by “pendulum arbitration”. Pursuant to such arbitration each party will submit a single proposal for the consideration for such License or Non-Assert to the arbitration panel which can only decide in favour of one of the two submitted proposals in its entirety. Pending such arbitration, if requested by the relevant interested party, the License or Non-Assert will become effective immediately.”

116 Annex 1 to Case No. Comp/JV.37.

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13. Vodafone Airtouch/Mannesmann (2000)

In order to address the Commission’s concerns, Vodafone had to submit a number of commitments in connection with the intended transaction. The Decision refers to these commitments in Paragraph 58 as follows:

“In order to respond to the Commission’s serious doubts regarding the market for the provision of advanced mobile telecommunications services to internationally mobile customers, Vodafone Airtouch has submitted undertakings aiming at enabling third party non-discriminatory access to the merged entity’s integrated network so as to provide advanced mobile services to their customers. These undertakings cover exclusive roaming agreements, third parties’ access to roaming arrangements, third parties’ access to wholesale arrangements, standards and SIM-cards and a set of implementing measures aimed at ensuring their effectiveness. In particular, Vodafone Airtouch has proposed to set up a fast track dispute resolution procedure in order to solve disagreements between the merged entity’s group and third parties on third parties’ access to roaming arrangements, third parties’ access to wholesale arrangements, standards and SIM-cards.”

The commitments submitted by Vodafone were extensively negotiated and found their way in a detailed “Divestment Undertaking” including five annexes. Therein, Vodafone had to agree to divest itself of all shareholdings in Orange held by Mannesmann.

A second important focus of the commitments which had to be conceded by Vodafone related to its covenant not to enter into roaming agreements on an exclusive basis. This covenant operates, as we may characterise it, as a limitation or a bar to the use of the strengthened market power of Vodafone.

A third important tear of the commitments (which indeed quite obviously had to be expected under the circumstances) was the commitment which had to be offered by Vodafone to grant (competing) third parties access to Vodafone’s network (Clause 21 of the undertaking) and to open up its interconnecting facilities to third parties (Clause 22 of the undertaking) observing a strict non-discrimination principle (Clause 23 of the undertaking).

Clause 24 then provides for a fast track dispute resolution which will be available to third parties intending to challenge an act or decision of Vodafone. According to Clause 24, the “Fast Track Procedure” shall apply if:

• any member of the Divestor’s Group rejects a request under Clause 21 or under Clause 22 to make available wholesale services; or

• a third party operator disputes the non discriminatory nature of the terms offered by the members of the Divestor’s Group or any of the mobile telecommunications operators in which any one of the members of the Divestor’s Group has an interest pursuant to a request under Clause 21 or 22; or

• a third party operator disputes the manner in which standards are made availableunder Clause 26; or

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• a requesting party disputes the manner in which SIM cards are made available under Clause 27.

The Fast Track Procedure itself is regulated in Clause 25 and, essentially, consists of an obligation by Vodafone to provide detailed written reasons for the decision that had been challenged by the third party (claimant), supported by detailed data on network capacity, technical feasibility, accounting and technical quality details etc.

Clause 19 of the Undertaking requires the Parties to provide separate accounts on a confidential basis to the arbitral tribunal, which shall not be used for other purposes (a provision of this nature has given rise to different interpretations in other contexts); literally:

“The Divestor, Mannesmann and each of their respective EEA mobile operating subsidiaries (except Orange) shall keep separate accounts pursuant to the principles set out in Annex 4 to this Undertaking which shall be provided on a confidential basis to the arbitration tribunal referred to in Clause 25 for the purposes of any Fast Track Procedure under that Clause and for no other purpose.”117

The parties are to name their arbitrators, and the two arbitrators are to nominate a third arbitrator within one week. The arbitral tribunal will have to then render its award within one month, pronouncing therein whether or not Vodafone (in the undertaking referred to as “the Divestor’s Group”) complied with the obligations under its undertaking.

In addition, there is a specific provision in respect of the requirement to provide anyrelevant information to the tribunal, which implies a negative inference if such documentation is not produced.

Even more significant is a further paragraph regarding the burden of proof. In that paragraph, Vodafone indeed accepted to bear the major burden of proof, and if it fails, the matter is to be decided on the basis of a prima facie case presented by the third party. We will term this “The Prima facie Evidence Rule”. While the reading of this paragraph may indeed strike our attention, there is certainly a good logic behind in that, in those cases, most of the relevant material will be in the hands of Vodafone and it is, therefore, quite justified that it is rather for Vodafone to prove the appropriateness of its decision (and not for the claiming third party who may not have any access to relevant materials). We will come across the same or similar provisions in cases reported below.

Clause 25 reads as follows:

“Any third party operator who wishes to avail itself of the Fast Track Procedure must (a “requesting party”) notify the members of the Divestor’s Group in writing specifying the decision challenged and nominating an arbitrator.

The members of the Divestor’s Group shall within two weeks of receiving a notification in writing from a requesting party nominate its arbitrator and provide to the requesting party in writing detailed reasons for its challenged decision(s). Such reasons will be justified by the

117 Ibid. at Paragraph 19.

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data and information on network capacity, technical feasibility, accounting and technical quality which the members of the Divestor’s Group are required to keep pursuant to this Undertaking. The arbitrators nominated by the Divestor and the requesting party shall, within one week from the nomination of the former, agree to appoint a third arbitrator. The arbitrators shall be instructed to establish an arbitration tribunal and to make a decision within one month of the appointment of the third arbitrator as to the compliance by the members of the Divestor’s Group with their obligations under this Undertaking.

Any of the arbitrators will be entitled to request any relevant information from the members of the Divestor’s Group or the requesting party. If the information required to be kept by the members of the Divestor’s Group pursuant to this Undertaking is not available, the arbitrators shall decide in favour of the requesting party having taken account of the significance of the information which is unavailable.

The burden of proof in any dispute under the Fast Track Procedure set out in this Clause is as follows: (i) the requesting party must produce evidence of a prima facie case, and (ii) if the requesting party produces evidence of a prima facie case, the arbitrator must find in favour of the requesting party unless the Divestor’s Group can produce evidence to the contrary.

The arbitrators shall be instructed not to disclose confidential information. Throughout this undertaking the standard attributed to confidential information and business secrets are those as set out in accordance with European Community competition law. The arbitration shall be in English and shall be conducted in accordance with the Rules of the London Court of Arbitration and the Rules of the London Court of Arbitration will be amended accordingly.”

Further details on this interesting procedure are contained in Annexes 1, 3 and 5. They read as follows:

(Annex 1)

"When required under the terms of the Fast Track Procedure, the members of the Divestor’s Group must be able to demonstrate that across its constituent parts it has:

• offered to third parties equivalent Inter-Operator Tariff;

• offered non-discriminatory discounts against the standard Inter-Operator Tariff;

• been able to make at least a reasonable return at the inter-operator tariff level with discounts;

• been able to make at least a reasonable return at the retail level with the Inter-Operator Tariff as input costs.”

(Annex 3) Unavailability of adequate network capacity:

“The members of the Divestor’s Group will be entitled to rely on the exception of unavailability of network capacity only if the following procedure is complied with and it is demonstrated under the Fast Track Dispute Resolution on the basis of this procedure that the requested capacity is unavailable.

Within one month of the date of approval of the concentration by the Commission, the members of the Divestor’s Group will establish an inventory of the available capacity in the networks solely controlled by the members of the Divestor’s Group and shall use its Best Endeavours to establish an inventory of the available capacity in those networks in which the members of the Divestor’s Group have an economic interest from time to time falling short of sole control.

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A copy of such inventory will be made available to the Commission. The inventory will be updated by the members of the Divestor’s Group or any mobile telecommunications operator in which any of the members of the Divestor’s Group has an economic interest from time to time on a quarterly basis.

Any request of third party operators pursuant to Clauses 21 and/or 22 will be made to the Commission within one month of the approval of the concentration and subsequently within one month of the end of each quarter.

If the members of the Divestor’s Group demonstrate that the requested capacity exceeds the available capacity in any given period, the available capacity will be allocated on a non-discriminatory basis between the requesting third party operators and the members of the Divestor’s Group.”

(Annex 4) Technical unfeasibility:

“The members of the Divestor’s Group will be entitled to rely on the exception of technical unfeasibility only if it is demonstrated under the Fast Track Dispute Resolution that (i) the request from a third party operator presents technical characteristics which are different from those of the operators solely controlled by, or within which an economic interest is owned by the members of the Divestor’s Group from time to time and (ii) such difference prevents the provision of roaming and/or wholesale services to a third party operator and (iii) the technical problem cannot reasonably be solved.”

(Annex 5):

“The members of the Divestor’s Group will keep and provide upon the request of any of the arbitrators appointed pursuant to the Fast Track Dispute Resolution Clause the information listed below for the month immediately prior to the request. The information will be presented as ratios of the mobile operators of the members of the Divestor’s Group/other mobile operators.

In relation to circuit switched performance:

• dropped calls;

and if technically available at reasonable cost:

• call set up delay;

• refused calls;

• data calls blocked;

• fax calls blocked.

In addition, the members of the Divestor’s Group will submit to an audit upon request by any of the arbitrators in order to demonstrate that it has not discriminated against third party operators in relation to the technical quality of services offered, for example by providing evidence of call routing for third party calls and members of the Divestor’s Group’s calls.

As and when the following services are launched and the technology is available at reasonable cost to allow monitoring of such services, the members of the Divestor’s Group shall provide information in relation to packet data services performance (for example, but not exclusively GPRS, CDPD, EDGE, IMT20000 and UMTS) over the air interface, including, where possible:

• ratio of requested QoS parameters/granted QoS parameters;

• percentage of performance contracts met;

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• average through put;

• average dropped packets;

• average packet delays on the worst 1% of packet delays;

• packet delay variance.

In relation to IP telephony, all the parameters in (ii) above in addition to dropped calls, refused calls and calls set up time.

The above criteria and the addition or deletion of criteria for measuring the technical quality of service in accordance with this Annex 5 may be amended by the arbitrators pursuant to any development of technical products in the mobile telecommunications sector.”118

14. Glaxo Wellcome/SmithKline Beecham (2000)

The parties had to agree to arbitrate disputes on the basis of the following commitment:

“Any dispute arising under or in connection with [this undertaking] shall be determined by arbitration in London pursuant to the rules of the London Court of International Arbitrationby a single arbitrator chosen by agreement between the parties, failing which the arbitrator shall be chosen by President of the Law Society of England and Wales. The arbitration shall be conducted and the award shall be made in the English language.”

3.3 The following 6 Phase - I Decisions were Taken under Article 6 (2) ECMR

15. Vivendi/Canal +/Seagram (2000)

The Decision spelled out a particular concern in respect of the emerging market for online music and criticised that Vivendi’s proposed commitments had not provided for an arbitration mechanism in case of dispute. Literally:

“On the emerging market for portals and on the emerging market for online music, the result of the market test reveals that third parties considered the undertaking to be insufficient. The undertaking was considered to be behavioural with no structural effect and the undertaking did not provide any elements to determine the content of the non-discrimination principle of the undertaking. The two-year duration of the undertaking was too short as Vizzavi’s customer base will increase substantially after the first two years. Finally, the undertaking did not provide for any arbitration mechanism in case of a dispute.

For these reasons, the Commission reached the conclusion that the undertaking was inadequate to remove serious doubts identified on the emerging market for portals and on the emerging market for online music. In order to respond to the above comments, the notifying party has submitted a substantially amended undertaking which provides for access to Universal’s music content on a non-discriminatory basis regarding the pricing and terms and conditions. Furthermore, the undertaking provides for an arbitration procedure in case of a dispute concerning the access conditions of the undertaking. The undertaking is limited to five years with the possibility of revision after three years.”119

118 Case No. Comp/M.1795, at Paragraph 58. 119 Case No./M.2050, at Paragraph 78.

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Therefore, in order to address the Commission’s concern, Vivendi had to improve on its commitments and to agree to a fairly detailed arbitration mechanism based on the ICC Rules, for the arbitral tribunal to have its seat in London.

What again is particularly interesting is the prima facie Evidence Rule (similar to what we have seen above in the commitments that had to be provided by Vodafone), again based on the concept that the complaining party only has to produce prima facieevidence, whereupon the tribunal will have to find in favour of the complaining party, unless Universal can produce evidence to the contrary.

The entire dispute resolution provision reads as follows:

“Dispute Resolution

In the event that a dispute arises between Universal and a competitor of Vizzavi as to whether the material terms, taken as a whole, upon which Universal’s music is being offered to that competitor are discriminatory within the meaning of this Undertaking, the complaining party shall have the right to arbitrate that dispute, provided that both the complaining party and Universal have used their best efforts to resolve the dispute through negotiation.

To initiate arbitration, the complaining party shall give written notice to Universal nominating an arbitrator and stating the specific nature of the claimed discrimination, the factual basis of its position and the relief requested. In such case, Universal shall appoint an arbitrator within 14 days after receipt of the written notice. The arbitrators so appointed shall appoint another arbitrator to be president of the arbitral tribunal within 7 days after both have been nominated.

The arbitration procedure shall follow the Rules of the Arbitral Court of the International Chamber of Commerce (ICC Rules). The arbitration shall be conducted in London. The language of the arbitration shall be English.

Any of the arbitrators will be entitled to request any relevant information from Universal or the complaining party. If information required to be kept by Universal pursuant to this Undertaking is not available, the arbitrators shall decide in favour of the complaining party having taken into account the significance of the information, which is unavailable. The arbitrators shall be instructed not to disclose confidential information. The standard attributed to confidential information and business secrets are those as set out in accordance with European Community competition law.

The burden of proof in any dispute under this Undertaking shall be as follows: (i) the complaining party must produce evidence of a prima facie case, and (ii) if the complaining party produces evidence of a prima facie case, the arbitrator must find in favour of the complaining party unless Universal can produce evidence to the contrary.

The parties, in appointing the arbitrators, shall instruct the arbitrators to use their best efforts to make a decision concerning what relief, if any, is warranted in compliance with this Undertaking within one month of the appointment of the president of the arbitration panel. The arbitral tribunal shall fix the on account payment which shall be made by either or both parties towards the costs of arbitration. The arbitration award shall, in addition to dealing with the merits of the claim, impose the fees and costs of the prevailing party upon the party that is unsuccessful in the proceeding.”120

120 Case No. Comp/M.1846, at Paragraph 77.

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The provision regarding the fixing of the deposits is, however, not compatible with the ICC Rules, as the determination of the deposits is a prerogative solely exercised by the ICC Court of Arbitration.

16. Pernod Ricard/Diageo/Seagram Spirits (2001)

In connection with the commitment relating to the disposal of the Seagram Venture Assets and certain Pernod Ricard on-sale assets, an arbitration procedure was envisaged on the basis of the following provision:

“In the event that one or several Seagram venture assets remain unsold [...] before the end date, the parties will meet as often as necessary in order to agree a final allocation between them of these remaining assets (other than [...]). In the absence of agreement between the parties on this final allocation before the end date, the parties undertake, either to give the divestment trustee an irrevocable authority to sell such assets within [...] of such instruction at no minimum price, or to refer the matter to arbitration, giving the arbitrator an irrevocable instruction to conclude such arbitration proceedings within [...] of the end date.”121

17. SEB/Moulinex (2001)

The Decision states:

« Les autres engagements, notamment ceux concernant la nomination et les missions du mandataire et la procédure d'arbitrage, constituent des charges car elles portent sur des étapes de mise en œuvre des remèdes qui sont nécessaires pour réaliser le rétablissement d'une concurrence effective. »122

Within the commitments made by SEB, the following reference to arbitration proceedings is made :

« Dans l'hypothèse où le Groupe SEB considérerait soit qu'une représentation de la marque MOULINEX ne respecte pas les éléments du logotype, soit qu'un produit mis sur le marché et portant la marque MOULINEX n'est pas conforme aux normes annexées au contrat, il en informerait immédiatement le licencié par courrier recommandé avec accusé de réception, pour qu'il y remédie. Il en informerait également le Mandataire.

Si le Groupe SEB et le licencié, sous la supervision du Mandataire, ne trouvaient pas une solution à cette difficulté dans les 15 jours suivant l'information donnée par le Groupe SEB, la question serait alors soumise à la procédure d'arbitrage prévue au paragraphe (f) ci-dessous: ....... »

Paragraph (f) then contains a detailed arbitration provision, providing for default appointments of the sole arbitrator by the President of the Commercial Court of Lyon. The Sole Arbitrator will have to set up Terms of Reference within one month or, failing an agreement of the parties to such Terms of Reference, organise a Hearing drawing up a Protocol which will stand in lieu of agreed Terms of Reference. Thereafter, within 4 months, the arbitral award is to be rendered, with however a somehow strange reservation to remit the matter to the President of the Commercial Court of Lyon

121 Ibid. at Paragraph 6 of the Annex. 122 Comp/M.2621, at Paragraph 148.

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who may be seized by a party as a référé. The Arbitrator’s Award was to be motivated, final and definitive, and the parties were taken to have explicitly waived any means of recourse or setting-aside procedures for annulling the Award.

The literal text of the commitment is as follows:

« A défaut de règlement amiable, tout différend se rapportant au contrat de licence ou, le cas échéant, au contrat d'approvisionnement ou au contrat de licence de modèle, sera définitivement tranché par voie d'arbitrage, par un arbitre unique, selon les dispositions suivantes.

La ou les parties désirant avoir recours à l‘arbitrage notifieront la requête d‘arbitrage par lettre recommandée avec accusé de réception à l‘autre partie ou, le cas échéant, aux autres parties. Cette requête d‘arbitrage précisera l‘objet de la demande, sera accompagnée des pièces justificatives et proposera le nom d'un arbitre unique.

Dans les trente jours de la réception de la requête, l‘autre partie ou, le cas échéant, les autres parties, adresseront à la ou aux demanderesses par lettre recommandée avec accusé de réception une réponse à la requête d‘arbitrage avec les pièces justificatives, formulant une éventuelle demande reconventionnelle, et se prononcera sur le nom de l'arbitre unique, et le cas échéant fera une nouvelle proposition.

Si les parties ne s‘entendent pas sur le nom de l'arbitre unique dans les 15 jours de la réception de la réponse à la requête d'arbitrage, l'arbitre unique sera désigné par le Président du Tribunal de commerce de Lyon, saisi comme en matière de référé par la partie la plus diligente.

L'arbitre unique dans le mois de sa désignation dressera un acte de mission avec l'aide des parties. A défaut d'accord des parties sur l'acte de mission dans ledit délai, l'arbitre organisera une réunion avec les parties dans un nouveau délai d'un mois et dressera un procès-verbal de cette réunion qui tiendra lieu d'acte de mission.

Une sentence finale sera rendue dans un délai de quatre mois à compter de la signature de l‘acte de mission ou à défaut de l'établissement du procès verbal susmentionné, le tout sous réserve de prorogation décidée en accord avec les parties ou par le Président du Tribunal de commerce de Lyon, saisi comme en matière de référé par la partie la plus diligente.

Le siège de l‘arbitrage sera à Lyon. La langue de l'arbitrage sera le français. Le tribunal tranchera le litige en droit.

La sentence du tribunal arbitral sera motivée, finale et définitive. Les parties renoncent expressément à tout recours auquel elles sont en droit de renoncer. La sentence sera notifiée aux parties par lettre recommandée avec accusé de réception dans le mois de son prononcé.

Les provisions pour frais d'arbitrage seront dues à parts égales par les parties, et le cas échéant par la ou les parties demanderesses, d‘une part et la ou les parties défenderesses, d‘autre part. Dans sa sentence finale, le tribunal déterminera celle des parties à laquelle/auxquelles il incombera de supporter les frais d'arbitrage ou la proportion dans laquelle ces frais seront supportés par les parties. »

18. Telia/Sonera (2002)

Telia had to accept a non-discrimination obligation for access by third party operators (and competitors) and offer a fast track dispute resolution procedure in

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the event of disputes regarding the application of the non-discrimination obligations. The text reads as follows:

“Telia additionally commits to:

c) ensure that its fixed and mobile (NMT, GSM and UMTS) network businesses in Sweden and Finland are held in separate legal entities (“Network Companies”), which are distinct from related retail activities. Such Network Companies shall have a Board of Directors, and each such Board shall include an external director not related to Telia or to Sonera, appointed in accordance with applicable governance principles.

Telia commits to achieve this legal separation within a period of 9 months from the effective date, unless it shows good cause and applies to the Commission for a reasonable extension. Until the legal separation has been achieved, as an interim solution, Telia commits to cause separate accounts to be kept and to be available to the arbitration panel, for the fixed and mobile network businesses;

d) apply: (a) a non-discrimination obligation in relation to the provision of regulated wholesale fixed and mobile network services as between the Telia Group and specified third party operators in Sweden and Finland, and (b) a non-discrimination obligation in relation to making available of access to international wholesale roaming in its GSM networks in Sweden and Finland, between the Telia Group and third party mobile network operators in Sweden and Finland;

e) offer a fast track dispute resolution procedure in the event of disputes regarding the application of the non-discrimination obligations described above.”123

Furthermore, Telia was required to remedy a certain lack of transparency in connection with its network businesses held in separate legal entities, and was required to establish separate accounts to be kept and to be made available to the arbitration panel in case of disputes.124

“To remedy the existing lack of transparency and the particular competition concerns, Telia has committed to ensure that its fixed and mobile (NMT, GSM and UMTS) network businesses in Sweden and Finland are held in separate legal entities („Network Companies“), which are distinct from related retail activities. Furthermore, Telia has committed itself to appoint an external director to each of the Boards of Directors. The duration of this commitment is not as such limited in time. As an interim solution, until the full legal separation has been achieved, Telia has committed to cause separate accounts to be kept for the entities to be legally separated. These accounts shall also be made available to the arbitration panel for the purposes of the Fast track dispute resolution procedures.”125

The arbitration procedure itself, as reflected in the Commission’s Decision, is explained under the heading “Fast Track Dispute Resolution”. The commitment was termed to be effective during three years. The Commission opined on the scheme and considered that the commitments would sufficiently contribute in eliminating serious doubts as regards the likelihood of foreclosure in specified upstream markets. The Commission Decision reads as follows:

“Fast Track Dispute Resolution:126

123 Case No. Comp/M.2803, at Paragraph 119. 124 Decision, Paragraph 136. 125 Ibid. at Paragraph 136. 126 Ibid. at Paragraph 143 et seq.

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Telia’s commitment provides third parties with specific means to dispute in an arbitration procedure whether the non-discrimination obligations described above have been correctly applied. This arbitration also provides for a faster alternative to the procedure provided by the national regulatory authorities. The duration of this commitment is limited to three years from the effective date.

The Commission considers that the application of a non-discrimination obligation supported by a Fast track dispute resolution and backed by greater transparency, will provide third parties with sufficient means to detect discriminatory practises and to react to them. As above, this commitment also forms an essential element of the proposed package of additional commitments, which are partly behavioural in nature. These commitments are together considered to sufficiently contribute to eliminating serious doubts as regards the likelihood of foreclosure in the specified upstream markets.”

The whole process is further described in Telia’s commitment letter addressed to the European Commission under the date of 9 July 2002, Paragraphs 21-31. It first contains the details regarding the separate accounts to be established, then addresses the commitment of non-discrimination (Paragraphs 23/24) and the commitment to grant access on a non-discriminatory basis (Paragraph 25), and finally establishes the terms of the fast track dispute resolution. Literally:

“Fast Track Procedure:127

In the event that a third party telecommunications operator to whom rights have been granted disputes the non-discriminatory nature of terms offered to it, the following Fast Track Procedure shall be available to such third party operator.

A third party operator who wishes to avail itself of the Fast Track Procedure (a „requesting party”) must notify Telia and - where the facts at issue relate to Sweden - the Stockholm Chamber of Commerce or - where the facts at issue relate to Finland - the Helsinki Chamber of Commerce in writing specifying the offer challenged, establishing its entitlement to benefit from rights under this commitment, and nominating an arbitrator.

Telia shall within two weeks of receiving a notification in writing from a requesting party nominate its arbitrator and provide to the requesting party in writing justification for its offer. The arbitrators nominated by Telia and the requesting party shall, within one week from the nomination of the former, agree to appoint a third arbitrator. Unless otherwise agreed by the parties, the arbitrators shall be instructed to establish an arbitration tribunal and to make a decision within one month of the appointment of the third arbitrator as to the compliance by Telia with its obligations under paragraphs 23 and 25 above.

The Tribunal will be entitled to request any relevant information or documentation from Telia or the requesting party.

The burden of proof in any dispute under the Fast Track Procedure set out in this Clause is as follows: (i) the requesting party must produce evidence of a prima facie case, and (ii) if the requesting party produces evidence of a prima facie case, the arbitrator must find in favour of the requesting party unless Telia, having had an opportunity to comment on evidence so produced, can produce evidence to the contrary.

The arbitrators shall be instructed not to disclose confidential information. Throughout this Undertaking the standards attributed to confidential information and business secrets are those as set out in accordance with European Community competition law. The arbitration shall be in Swedish where the facts at issue relate to Sweden and shall be conducted in Stockholm in accordance with the rules of the Stockholm Chamber of Commerce whose

127 Ibid. at Paragraph 26 et seq. of the Annex.

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rules shall be amended accordingly. The arbitration shall be in Finnish where the facts at issue relate to Finland and shall be conducted in Helsinki in accordance with the rules of the Helsinki Chamber of Commerce whose rules shall be amended accordingly. The losing party shall compensate the other party in relation to its reasonable costs and expenses for presenting its case.”

What is interesting is the requirement that the third party operator (claimant) will have to notify Telia and at the same time either the Stockholm Chamber of Commerce or the Helsinki Chamber of Commerce.

Moreover, the arbitrators will have to render a Decision within one month from the appointment of the third arbitrator, and the Decision will have to express an opinion whether or not Telia complied with its obligations under Paragraphs 23 and 25 of the commitment letter.

And here again we do see the prima facie Evidence Rule discussed above, in the sense that the requesting party only has to make a prima facie case, and the arbitrators will have to find in favour of the requesting party unless Telia will be able to provide evidence to the contrary.

It may further be noted that the language of the proceedings are either Swedish or Finnish, and that the Stockholm or the Helsinki Chamber will be the institutions to supervise the process.

19. Air France / KLM (2004)

Within the Commitments Package offered by Air France and KLM, the behavioural commitments vis-à-vis third parties as subjected to a fast track arbitration procedure, on the following terms:

"12 Fast Track Dispute Resolution

12.1 In the event that a Prospective New Entrant, a New Air Services Provider or an Intermodal Partner has reason to believe that the Merged Entity is failing to comply with the requirements of the Commitments vis-à-vis that party, the fast track dispute resolution procedure described in this Clause 12 will apply.

12.2 Any Prospective New Entrant, New Air Services Provider or Intermodal Partner who wishes to avail itself of the fast track dispute resolution procedure (a "Requesting Party") must notify the Merged Entity in writing setting out in detail the reasons leading that party to believe that the Merged Entity is failing to comply with the requirements of the Commitments (the "Notice"). The Requesting Party and the Merged Entity will use their best efforts to resolve all differences of opinion and to settle all disputes that may arise through co-operation and consultation within a reasonable period of time not to exceed fifteen (15) business days after receipt of the Notice.

12.3 Should the Requesting Party and the Merged Entity fail to resolve their differences of opinion through cooperation and consultation as provided for in Paragraph 12.2, the Requesting Party shall nominate an arbitrator.

12.4 The Merged Entity shall, within two weeks of receiving notification in writing from a Requesting Party of the appointment of the Requesting Party's arbitrator, nominate its arbitrator and provide to the Requesting Party in writing detailed reasons for its challenged conduct.

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12.5 The arbitrators nominated by the Merged Entity and the Requesting Party shall, within one week from the nomination of the former, agree to appoint a third arbitrator. If the arbitrators nominated by the Merged Entity and the Requesting Party cannot agree on the nomination of a third arbitrator, they shall ask the President of the International Chamber of Commerce ("ICC") to appoint the third arbitrator.

12.6 The arbitrators shall be instructed to establish an arbitration tribunal and to make a preliminary ruling on the contested issues within one month of the appointment of the third arbitrator. The preliminary ruling shall be applicable immediately and until the final decision is issued. The final decision shall be taken by the arbitrators within six (6) months of the appointment of the third arbitrator.

12.7 In their preliminary ruling and their final decision, the arbitrators shall also decide the action, if any, to be taken by the Merged Entity in order to ensure compliance with the Commitments vis-à-vis the Requesting Party.

12.8 Any of the arbitrators will be entitled to request any relevant information from the Merged Entity of the Requesting Party in order to enable the arbitrators to reach a decision.

12.9 The burden of proof in any dispute under this fast track dispute resolution procedure shall be borne as follows: i) the Requesting Party must produce evidence of a prima facie case, and ii) if the Requesting Party produces evidence of a prima facie case, the arbitrator must find in favour of the Requesting Party unless the Merged Entity can produce evidence to the contrary.

12.10 The arbitrators shall be instructed not to disclose confidential information and to apply the standards attributable to confidential information and business secrets by European Community competition law.

12.11 The arbitration shall be in English. The arbitration award shall, in addition to dealing with the merits of the claim, impose the fees and costs of the prevailing party upon the party that is unsuccessful.

12.12 In the event of disagreement between the parties to the arbitration regarding the interpretation of the Commitments, the arbitrators shall inform the Commission and may seek the Commission's interpretation of the Commitments before finding in favour of any party to the arbitration. The Commission may, at any time, issue a submission during the arbitration procedure.

12.13 Nothing in the arbitration procedure shall affect the powers of the Commission to take decisions in relation to the Commitments in accordance with its powers under the Merger Regulation and the EC Treaty.

13 General Provisions

13.1 The Commitments shall take effect on the Effective Date; provided, however, that the Merged Entity shall not be required to provide any slots until one (1) month after the Consummation of the Concentration, except in the case of the Amsterdam-Lagos and Paris-Lagos city pairs where the Merged Entity shall not be required to provide any slots to a carrier whose service falls within the category described in Paragraph 3.3(c) until the beginning of IATA Summer 2006 season. If the Concentration is abandoned, abrogated, not approved or disapproved by a relevant Government Authority, or otherwise terminated, then these Commitments shall automatically cease to apply.

13.2 Upon request of the Merged Entity, any deadline provided for in the Commitments can be extended by the Commission if there are circumstances justifying such an extension. The Merged Entity's request shall be properly reasoned and shall specify the recent circumstances that in the Merged Entity's opinion justify an extension.

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13.3 If the approval of the Concentration by another governmental authority is made subject to requirements that are potentially inconsistent with these Commitments, AF may request a review and adjustment of these Commitments in order to avoid such inconsistencies.

13.4 The Merged Entity shall use its best efforts to provide the Commission with such information as the Commission may require in connection with these Commitments within ten (10) working days from receipt of the Commission's reasoned request.

14 Review Clause

The Commission may, in response to a request from the Merged Entity justified by exceptional circumstances or a radical change in market conditions, such as the operation of a Competitive Air Service on a particular Identified European or Long-Haul City Pair, waive, modify, or substitute any one or more of the undertakings in these Commitments.

At the request of the Merged Entity, all the Commitments submitted herein may be reviewed, waived or modified by the Commission base on long-term market evolution.

The Commission will consider such a request as a matter of urgency in the case of the frequency freeze provided for in Clause 4, when the Merged Entity can demonstrate that, in the case of exceptional events, additional flights are required on a short term basis."

20. Piaggio/Aprilia (2004)

As of the date finalizing the present Report (early February 2005), this is the most recent Commission Decision approving the concentration against the behavioural undertaking supported by an arbitration provision in case of a dispute.

The Commitment Letter requires Piaggio to continue to effectuate further deliveries of scooter engines to its major competitors (foremost Suzuki, Kimco, Malaguti, Benelli, Peugeot, Yamaha, Honda), and to advise these competitors of its undertaking within 5 days from the receipt of the Commission's Decision approving the concentration. The Commission Decision makes reference to the arbitration clause embedded in the Commitment Letter, which reads as follows:

"Impegno di fornitura

Piaggio si impegna formalmente a vendere, nelle forme di un contratto di fornitura di durata indeterminata, il Motore, a qualsiasi Controparte che lo richieda, al Prezzo di riferimento.

A tal fine, una lettera raccomandata verrà inoltrata da Piaggio, entro 5 giorni lavorativi a decorrere dall'autorizzazione della concentrazione, ai principali concorrenti potenzialmente interessati (tra gli altri: Suzuki, Kimco, Malaguti, Benelli, Peugeot, Yamaha, Honda) indicando che tale impegno di fornitura trae la sua origine dalla decisione di autorizzazione della Commissione, nonché il prezzo di riferimento al quale Piaggio fornirà il motore.

La Decisione costituirà parte integrante della lettera.

Clausula arbitrale

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Nel caso in cui una Controparte, anche al di fuori di qualsiasi pregressa relazione contrattuale, abbia ragione di ritenere che Piaggio stia violando i presenti Impegni, può attivare la procedura qui di seguito descritta, mediante notificazione per iscritto alla Parte delle ragioni su cui si fonda il preteso inadempimento di quest'ultima.

La Parte né informerà tempestivamente la Commissione mediante inoltro di copia della notificazione di cui al paragrafo precedente.

Piaggio e la Controparte sono, in primo luogo, tenute a cooperare, facendo ogni ragionevole sforzo per comporre la controversia e raggiungere un accordo soddisfacente per entrambe, entro un termine ragionevole che non ecceda 15 giorni lavorativi dal ricevimento della notificazione. Dell'accordo verrà pure tempestivamente informata la Commissione, per iscritto.

Nel caso in cui Piaggio e la Controparte non raggiungano un accordo secondo le procedura di cui al paragrafo precedente, la Controparte può nominare un arbitro mediante lettera di nomina notificata alla Parte, la quale può a sua volta nominare un arbitro entro 7 giorni lavorativi dal ricevimento della lettera di nomina.

I due arbitri nominati secondo la procedura di cui al paragrafo precedente provvedono, di comune accordo, a nominare un terzo arbitro entro 7 giorni lavorativi dall'ultima nomina; nel caso non riescano a trovare un accordo sulla nomina del terzo arbitro, i due arbitri chiederanno al Direttore generale di ANCMA di provvedervi entro i successivi 10 giorni lavorativi. Sarà cura della Parte informare tempestivamente la Commissione dell'avvenuta nomina dei tre arbitri, indicando i loro nominativi.

Gli arbitri possono richiedere alla Parte ed alla Controparte ogni informazione rilevante e necessaria ai fini della decisione finale. Gli arbitri sono tenuti a non divulgare informazioni confidenziali apprese nel corso dell'arbitrato e a rispettare i principi in materia di informazioni confidenziali e segreti industriali previsti dal diritto comunitario della concorrenza. Gli arbitri adottano entro 45 giorni lavorativi dalla nomina del terzo arbitro una decisione che metta fina alla controversia. Questa decisione sarà portata tempestivamente a conoscenza della Commissione a cura della Parte.

Nel caso di disaccordo circa l'interpretazione dei presenti Impegni ed in ogni caso su richiesta della sola Parte oppure della sola Controparte, gli arbitri possono chiedere alla Commissione Europea un'interpretazione autentica degli stessi prima di prendere una decisione finale. Il termine di 45 giorni sarà in questo caso prorogato dei giorni necessari alla Commissione per pronunciarsi.

La Commissione può in ogni momento sottoporre agli arbitri proprie osservazioni motivate.

Nulla preclude alla Commissione di assumere decisioni relative ai presenti Impegni in forza dei poteri derivanti dal trattato CE e dalle norme comunitarie in materia di concentrazioni.

Reporting

La Parte s'impegna in ogni momento e comunque entro il 30 gennaio 2005, successivamente su base semestrale, a fornire alla Commissione tutti i dati e gli elementi che possano permettere a quest'ultima di valutare l'effettiva esecuzione dei rimedi proposti, ciò nei modi e nei termini che saranno precisati dalla medesima Commissione. Quest'ultima potrà richiedere, in ogni momento, alla Parte gli elementi e le informazioni ritenute utili al fine di verificare la correttezza dell'espletamento degli impegni.

Prezzo di riferimento

Ogniqualvolta Piaggio decida di variare il prezzo di riferimento, per ragioni dovute ad una variazione documentata dei costi di produzione, essa informa della sua intenzione la Controparte. In caso di disaccordo, la Controparte potrà attivare la procedura prevista sub "Clausola arbitrale".

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Review Clause

In presenza di modifiche significative delle condizioni di mercato e della situazione concorrenziale sul mercato 50cc in Italia, la Parte presenterà alla Commissione, la quale li valuterà, i motivi per i quali essa reputa che gli impegni qui descritti non avranno più ragion d'essere.

La Commissione, ricorrendone i presupposti, potrà rivedere i medesimi impegni."

3.4 12 Phase - II Merger Review Cases Under Article 8 (2) ECMR

21. Du Pont/ICI (1992)

The behavioural commitments are stated in the Commission’s decision as follows:

“Du Pont undertakes that, as soon as practicable after the completion of the notified transaction and in any event not later than 30 days after the completion of the notified transaction, Du Pont will take necessary steps to enter into good faith negotiations with interested third parties with regard to the following arrangement and will conclude such arrangement as soon as practicable but no later than [...] after the completion of the notified transaction. These periods may be extended with the agreement of the Commission.

(1) Du Pont will reserve capacity to produce up to 12 Kt per annum of nylon stable fibre representing a cross-section of ICI's current product range for the benefit of an independent third party. So as to ensure improved competition, such a third party must be a supplier of nylon fibres and not a carpet producer.

(2) Du Pont will manufacture up to 12 Kt per annum of such nylon staple fibre as may be specified by such third party for a period of five years renewable by the selected candidate. Such products will be sourced from the facility best suited to meeting such third party’s requirements. The fee to be paid for such fibre products will be based on a polymer pricing formula plus a fibre conversion fee as agreed between Du Pont and the third party. Such fee will be based on take or pay principles common in similar manufacturing arrangements.

(3) Du Pont will, on terms and conditions as agreed between Du Pont and the third party, agree to transfer to such third party a free-standing carpet research and development facility comparable in terms of quality to those currently existing in Oestringen and Geneva and appropriate to the business transferred. Such facility, which will be staffed with competent technical personnel at least half of whom should be from ICI’s Oestringen facilities, will be at a location chosen by the third party. Du Pont will, on terms and conditions as agreed between Du Pont and the third party, take all reasonable steps to encourage the relevant ICI personnel to take up employment with the third party.

(4) Du Pont will, on terms and conditions as agreed between Du Pont and the third party, take all reasonable steps to encourage the competent sales personnel familiar with the business being transferred to take up employment with the third party.

(5) Du Pont will, on terms and conditions as agreed between Du Pont and the third party license exclusively or assign to the selected third party ICI’s “Timbrelle” trademark.

Any dispute between Du Pont and the selected third party arising out of the implementation of these undertakings will be submitted to independent arbitration to be mutually agreed between Du Pont and such third party.”

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22. Kimberley-Clark/Scott (1996)

The Decision states in a very short paragraph that any kind of disputes between KC/S and a third party purchasing the divested business shall be submitted to independent arbitration. Hence, a reference tout court as follows:

“Any dispute between the parties and the third party purchasing the divested business arising out of or in connection with the implementation of the undertakings by the parties will be submitted to independent arbitration.”128

23. Boeing / McDonnell Douglas (1997)

In respect of government-funded patents, Boeing had to undertake to grant licenses on a non-exclusive, reasonable royalty-bearing basis which could be used to manufacture or sell commercial jet aircrafts. Furthermore, Boeing had to commit itself to license its know-how in that field, as well as any blocking patent. Hence, any third party commercial aircraft manufacturer could request Boeing to grant such licenses in respect of those patents and related know-how. Any difference, dispute or disagreement between such a third party and Boeing had to be subjected to an independent arbitration under terms and procedures to be agreed, and Boeing has to submit annual reports for a period of 10 years in respect of its current unexpired patents, supplying those to the EU Commission.

The text129 reads as follows:

“If Boeing and the other commercial aircraft manufacturer cannot agree on the royalty or whether the patent is a “government-funded patent” which could be used in the manufacture or sale of commercial jet aircraft or whether the patent is blocking, such disagreement shall be submitted to independent arbitration under terms and procedures to be mutually agreed between Boeing and the other manufacturer.”

24. Guinness/Grand Metropolitan (1997)

In the event of dispute concerning the supply of whisky, the parties were required to refer the matter to arbitration under the LCIA Rules, applying the law of England and Wales. The clause reads as follows:

“Parties will divest, within a period of 15 months from the date of the Decision or within such extended period as may be approved by the Commission (together „the divestment period”) the rights in all EU/EEA/EFTA Member States, Poland, Hungary, the Czech Republic, Slovakia, Slovenia, Croatia, Bosnia, Serbia, and Macedonia („the territory”) to the Dewar's and Ainslie's Scotch whisky brands („the brands”) together with such confidential information, and related copyright and know-how specific to those brands as is necessary for their satisfactory production. In addition, the parties will undertake, in so far as whisky indispensable to the blending of the Brands can only be sourced from distilleries under their ownership, to continue to supply such whisky to the purchaser, if requested, on reasonable arms' length commercial terms. In the event of any dispute concerning the supply of such

128 Case No.IV/M.623, Paragraph 233, Undertaking 9 sub-paragraph 11. 129 Paragraph 117 of the Decision.

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whisky, the parties shall refer the matter to be resolved by arbitration under the Rules of the London Court of International Arbitration applying the law of England and Wales.”130

25. Danish Crown/Vestjyske Slagterier (1999)

Members were given the right to submit disputed matters to arbitration before a sole arbitrator. Unless the parties agree on the arbitrator, the current President for Maritime and Commercial Court in Copenhagen shall assume such function. The losing members may then resign from Danske Slagterier and they will be paid out as if the Co-operative was to be dissolved. The clause reads as follows:

“No later than 3 months after the Commission’s adoption of a positive decision, the parties will propose and vote in favour of a resolution to amend clause 7.10 of the Constitution of Danske Slagterier. According to the amended provision all matters shall be decided by simple majority. No resolution shall, however, be valid unless board members from at least two Section 3.1.1. members (currently the parties, Steff-Houlberg and Tican) have accepted the resolution. If a resolution on (a) the increase or decrease of membership fees by more than a percentage warranted by the inflation, (b) the adoption of business plan, (c) the adoption of yearly budget, (d) essential changes in the equity capital, (e) approval of new Section 3.1.1. members, (f) any resolution to be taken pursuant to clauses 4.1, 4.2 and 4.3, (g) recommendation to the Ministry of Agriculture and Fisheries of members of the board of directors of the ”Pig Levy Reserve”, (h) recommendation or appointment of members of other external Board of Directors to which Danske Slagterier has a right to recommend or appoint board members, (i) appointment of members of the independently acting companies, or (j) any resolution that has significant financial and/or commercial implications for at least one of the Section 3.1.1. members, has been blocked twice within three months by the parties solely or the other Section 3.1.1. members in common, the member who has put forward the proposal shall be entitled to submit the matter to arbitration.

If the parties have not within 14 days after the last of the two votes agreed on the choice of a sole arbitrator, the President for Maritime and Commercial Court in Copenhagen shall act as sole arbitrator. The arbitrator shall give the parties a fair hearing but is entitled to conduct the arbitration in such manner, as he thinks fit. The arbitration award shall be final. The Section 3.1.1 member(s) whom the arbitration award has decided against may resign from Danske Slagterier provided notice in writing is given no later than 30 days after the arbitrator's decision is taken. The resigning members’ Special Accounts I and II shall be paid out with the entire balance as if the membership was ceased upon the dissolution of Danske Slagterier. Furthermore, the resigning members’ share of The Catastrophe and Activity Reserve of Danske Slagterier shall be paid out as provided for in the statutes governing the Reserve.”131

The Commission also required an undertaking that the parties enter into certain negotiations for the purpose of dissolving the joint ownership in ESS-Food. A trustee was to be appointed for the purpose, who will also have to make sure that ESS-Food will be maintained as a going concern to the extent as commercially viable, and to ensure that the merged entity will not abuse its sole control to the disadvantage of the minority members. The purchase price had to be fair and reasonable and its determination made by an independent expert acting under the supervision of the trustee. In case of dispute regarding the valuation, the latter should be “settled finally and binding by a court of

130 Case No. IV/M.938, at Paragraph 183 (i). 131 Case No. IV/M.1313, at Paragraph 213.

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arbitration consisting of one arbitrator who must be a chartered accountant.” The clause reads as follows:

“The purchase price shall be a fair and reasonable price, based on an evaluation of ESS-Food as a going concern – except for […]*. The evaluation of ESS-Food shall be carried out by an independent expert to be agreed upon by all owners of ESS-Food. The expert shall act under the supervision of the Trustee in accordance with the mandate of the Trustee. The evaluation of the parts of ESS-Food which shall be evaluated as a going concern shall be based upon the price-earning principle applied according to generally accepted international evaluation practice and if this evaluation principle is impossible to apply, then the evaluation shall be based upon the net book value as set out in accounts prepared at the time of transfer of ownership. The expert may be the Trustee, provided all owners can agree to this. The parties and/or Steff-Houlberg and/or Tican will each have the right to have a second opinion on the evaluation of ESS-Food by an expert Danish chartered account. If the evaluation of this/these expert(s) deviates from the first evaluation by more than 10%, the evaluation shall be settled finally and binding by a court of arbitration consisting of one arbitrator who must be a chartered accountant independent of and unconnected to any owner of ESS-Food and member of and appointed by Foreningen af Statsautoriserede Revisorer in Denmark.”132

26. Sanitec/Sphinx (1999)

Disputes between Sanitec and the prospective purchaser were to be submitted to an independent arbitrator. The reference is short, as per the published text quoted below. The further details of the arbitration clause were redacted for the purpose of maintaining confidentiality. Hence, the published text does not provide details of the mechanism that should be lined up for settling disputes, nor the parameters under which the arbitrator should render his decision:

“An independent arbitrator jointly proposed by Sanitec and the prospective purchaser and approved of by the Commission, shall, in the case of a dispute between Sanitec and the prospective purchaser and within the time limits set out in Paragraph 9, decide […].”133

27. Allied Signal/Honeywell (1999)

In respect of TAWS, the parties undertook to provide any supplier of TAWS (seeking to make its TAWS product interphase with any of the parties’ other avionics products) with all licences and interface specification data necessary to enable the TAWS product to interphase with the parties’ avionics products. The details of these undertakings are reflected in Paragraph 128 of the Decision and, in much more detail, in Annexe 1 to the Decision, reflecting the wording of the parties’ undertakings of 27 October 1999, Paragraphs 21 to 31. The Commission then stated in its decision, Paragraph 128:

“To ensure compliance with the undertakings relating to TAWS, an independent expert will be nominated and an arbitration procedure will be established.”

The arbitration procedure was also flagged out in the undertakings of the parties as per Annexe I to the Decision, Paragraph 27 and the behavioural undertakings were to be monitored by way of arbitration under the following provisions:

132 Ibid. at Paragraphs 223 and 212. 133 Case No. IV/M.1578, at Paragraph 20.

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“Enforcement

32. To ensure full compliance with the undertakings in Paragraph 21-31, the Parties will establish, within one month of the Decision, an independent and competent arbitrationprocedure under a single Arbitrator approved by the Commission. The arbitration procedure will be efficient, fair, transparent and objective, and will have appropriate procedural rules ensuring this procedure will be applied.

(a) The Arbitrator will have the experience, competence and independence necessary for his mission and will have had no direct or indirect employment, consultancy, or other relationship with the Parties during the past five years.

(b) The Arbitrator will decide, with no possibility of appeal, all disputes brought to him by any existing or potential supplier of avionics products, aircraft manufacturer or the Parties.

(c) The Arbitrator will have broad powers of investigation and injunction, and will be able to order all measures, including protective and interim measures, necessary to the accomplishment of his mission. In particular, the Arbitrator will be allowed to have access to all confidential information needed to carry out any investigation or evaluation missions within the Parties and to order all measures, including protective and interim measures, necessary to the realisation of his mission.

(d) Any existing or potential supplier of avionics products, aircraft manufacturer or the Parties may initiate an arbitration proceeding by a registered letter with acknowledgement of receipt. The object of the dispute and the complainant’s request must be set forth in the letter. The respondent will receive from the Arbitrator a copy of the letter with no delay. The parties to the dispute and the Arbitrator will agree, within 15 days from the receipt by the respondent of the complainant's letter, on the scope of the Arbitrator's mission. In case of disagreement on the mission's scope, the Arbitrator ultimately decides. The parties to the arbitration will have 15 days to present their arguments. The Arbitrator must issue his decision at the latest within one month from the submission of the arguments. The Arbitrator will set the amount of his fees in the decision, which will be shared equally by the parties.

(e) The Parties undertake to comply without any delay with any decision of the Arbitrator.

(f) The documents initiating any arbitration and the Arbitrators’ decision will be communicated to the Commission without delay. In addition, the Parties will communicate to the Commission, for the period that the undertakings remain in effect, an annual report summarising the activities of the Arbitrator, and indicating in particular the measures taken by the Parties to comply with any decision of the Arbitrator.

33. In addition to the above, within one month from the date of the Decision, the Parties undertake to appoint an independent expert acceptable to the Commission to monitor compliance with Paragraphs 21-31 above. Such expert shall be mandated to monitor and advise the Commission as to the adequacy of the arrangements adopted in compliance with Paragraphs 21-31 above, and to provide the Commission annually with written reports on the efficacy of the arrangements. The expert shall notify the commission promptly if the expert at any time determines that the Parties are not in compliance. The Parties undertake to provide the expert with all such assistance and information as the expert may require in carrying out his or her mandate and to pay reasonable remuneration for the expert’s services.

E. General Provisions

34. With respect to the undertakings in Paragraphs 23-29 and Paragraphs 31 and 32 as they relate thereto, the obligations of the Parties shall remain in effect for a period of eight years from the date of the Decision.

35. With respect to the undertakings in Paragraphs 23-29, the Parties agree to provide to the existing or potential suppliers of avionics products and aircraft manufacturers that purchased an EGPWS box, an EGPWS module or other implementation of TAWS

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functionality pursuant to these undertakings such relevant products, as well as interface data, for as long as an aircraft and/or platform in which that product is installed or designed to be installed remains in production.

36. With respect to the undertakings in Paragraph 30 and Paragraphs 31 and 32 as they relate thereto, the obligations of the Parties shall be of unlimited duration.”

Again, the arbitration commitment reflects elements which we have seen and discussed in other cases, such as:

• the single arbitrator had to be approved by the Commission;

• the procedure had to be efficient, fair, transparent and objective;

• the arbitrator had to be experienced, competent and independent from the parties;

• his decision should not be subject to any appeal;

• the arbitrator to have broad powers of investigation and injunction, including the authority to rule on interim measures;

• moreover, the arbitrator will have broad access to all confidential information;

• the arbitration commitment is an erga omnes offer which may be accepted/triggered by any third party;

• the procedure is on a fast-track basis: 15 days allowed for the parties to present their arguments, and the arbitrator must issue his decision within one month from the submission of those arguments;

• the parties undertake to comply without any delay with any decision of the arbitrator;

• the Commission is to be kept informed on the procedure.

A novel aspect of this case is the concurrent appointment of an independent expert who, again, had to be a person acceptable to the Commission. The function of that expert was to monitor compliance with the behavioural undertakings and to advise the Commission as to the adequacy of the arrangements adopted in compliance with Paragraphs 21 until 31 of the commitment letter. The expert had to notify the Commission promptly if the expert at any time determines that the parties are not in compliance.

Hence, what we see here is another refinement of the solutions so far adopted by the Commission, in that the Commission does not only keep an eye on the arbitral process at the beginning (i.e. in the stage of nominating an arbitrator or an arbitral tribunal) and at the end (when the Commission requires to be informed on the arbitral tribunal’s decision), but, under the Commission’s decision, will have a very efficient tool of constantly monitoring the process and the keeping of the commitments through an independent expert. Presumably, the expert will keep his function during the pendency of any arbitration and would most probably be enabled to take part in the proceedings as a silentlistener/observer so as to keep the Commission informed. This solution provides the Commission almost with an amicus curiae-position.

Probably, this combination of establishing an arbitral tribunal so as to monitor the commitment to provide supplies to third parties on a non-discriminatory basis and, in

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parallel, the appointment of an expert, provides an almost water-tight control of the Commission to police compliance with behavioural undertakings. The policing is, so to speak, outsourced to an arbitral tribunal and (with a different function) to an expert who will do the possibly time-consuming legwork of supervision, with the Commission being fully appraised of the results without however absorbing the Commission’s own human and other resources.

28. Dow Chemical/Union Carbide (2000)

Dow had to undertake to entirely divest its world-wide ethyleneamines business with production plants in Texas. The Commission carefully assessed the offered commitments and the arbitration mechanism offered and was able to then reach the conclusion that, by the proposed commitments, all concerns which had been identified by the Commission in the area of the PE technology could be removed. The reference which the Commission made regarding arbitration reads as follows:

“The granting of open licences, the divestiture to BP of dedicated gas phase technology, the licence of background patents and the service agreement with BP are subject to payment. The commitments provide for an arbitration mechanism (pendulum arbitration) to resolve any disputes regarding the terms of the necessary agreements. In particular, either party may initiate the arbitration procedure at any time. Upon request by the prospective licensee under the open license, that licence will take immediate effect. These provisions will contribute to the effectiveness of the remedial measures concerned.”134

The commitments by Dow (which are annexed to the Decision) spell out in detail the ergaomnes offer by Dow to grant a license to any interested third party under Dow’s Metallocene Background Patents, and further patents, on arm’s length terms and under non-discriminating, reasonable commercial terms.

In case a third party is dissatisfied by the terms offered, it is granted the right to initiate arbitration under the Rules of Arbitration of the Netherlands Arbitration Institute, in the sense of a “pendulum arbitration”, quite in the sense of the provision we have discussed above in respect of the Shell/BASF/JV project Nicole.

The clause to which Dow had committed itself is, however, more detailed and contains provisions regarding the constitution of the arbitral tribunal (which will have to be constituted within an overall timeframe of 15 days only), with the Netherlands Arbitration Institute to serve as appointing authority.

The arbitrators have to decide on whether to endorse the proposal of the claiming third party, or else the proposal of Dow. The clause also provides that, in the absence of a majority, the chairman of the arbitral tribunal would decide alone.

Moreover, there are further teeth in the provision, in that, if a licensee would not abide by the arbitral award within the period of one month following the notification of the award,

134 Case No. IV/M.1671, at Paragraph 186.

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Dow would be entitled to request the Commission to reconsider whether Dow may be relieved from the relevant undertaking with regard to such licensee. The provision reads as follows:

“Consideration due to DOW for the license granted [see Paragraph 27] will be on arm’s length, non-discriminating, reasonable commercial terms and conditions. If either DOW or a licensee determines that no agreement can be reached on the terms of the license, either party shall be free to move to resolve such disagreement by arbitration. The Rules of Arbitration of the Netherlands Arbitration Institute shall apply to such arbitration, to the extent they are not in conflict with the provisions of this paragraph. Each party shall submit a single proposal for the terms of the license to an arbitration panel. The arbitration panel will consist of three individuals; one arbitrator selected by each of the parties and the chair selected jointly by these two arbitrators. This arbitration panel must select one of the two submitted proposals in its entirety. This selection must be made by majority decision or, if there is no majority, by the chair alone. If for any reason the parties are unable to select an arbitration panel within 15 (fifteen) days, either of the parties may ask the Netherlands Arbitration Institute to appoint or approve arbitrators. Exclusive place of the arbitration shall be Amsterdam, The Netherlands, and the arbitration shall be conducted in the English language. If a licensee does not abide by the arbitral award within a period of 1 (one) month following the notification of the arbitral award to DOW and such licensee, DOW may request the Commission to reconsider whether DOW may be relieved from this undertaking in regard to such licensee. If requested by the prospective licensee, the license will take immediate effect, subject to binding arbitration of license terms in the event negotiations are not concluded.”135

Furthermore, Dow had to undertake to sell and transfer all assets dedicated to gas phase Metallocene PE technology to BP Amoco under reasonable commercial termswhich were further defined in the commitment. Again, in case of dispute, Dow and BP Amoco will have to accept resolution by way of a similar scheme of “pendulumarbitration”, for which purpose each party has to submit a detailed proposal, and the arbitrators’ task would then be to select one of the proposals in their entirety. Again three arbitrators, and again reference to the Rules of Arbitration of the Netherlands Arbitration Institute, with a short timeframe for constituting the arbitral tribunal of 15 days. And again, in case BP Amoco would not abide by the award within a period of one month following the notification of the award, Dow would be entitled to request the Commission to reconsider whether Dow may be relieved from its undertaking. The clause reads as follows:

“If either DOW or BP Amoco determines that no agreement can be reached on the proposed terms for the sale of the assets in Paragraph 32 (i) and/or (iii) above and/or the grant of the license in Paragraph 33 above and/or the research and development service agreement in Paragraph 34 above in the time period mentioned in Paragraph 35 above or within the time period as extended by the Commission, either DOW or BP Amoco shall be free to move to resolve such disagreement by arbitration. The Rules of Arbitration of the NetherlandsArbitration Institute shall apply to such arbitration, to the extent they are not in conflict with the provisions of this paragraph. Each party shall submit a single proposal for the terms of the sale of the assets and/or, as the case may be, for the grant of the license, and/or for the terms of the research and development service agreement, to an arbitration panel. The arbitration panel will consist of three individuals; one arbitrator selected by each of the parties and the chair selected jointly by these two arbitrators. This arbitration panel must in each case (i.e., sale of the assets, grant of the license, or

135 Ibid. at Paragraph 28 of commitments.

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conclusion of the research and development service agreement) select one of the two submitted proposals in its entirety. This selection must be made by majority decision or, if there is no majority, by the chair alone. If for any reason the parties are unable to select an arbitration panel within 15 (fifteen) days, either of the parties may ask the Netherlands Arbitration Institute to appoint or approve arbitrators. Exclusive place of the arbitration shall be Amsterdam, The Netherlands, and the arbitration shall be conducted in the English language. If BP Amoco does not abide by the arbitral award within a period of 1 (one) month following the notification of the arbitral award to DOW and BP Amoco, DOW may request the Commission to reconsider whether DOW may be relieved from this undertaking. If requested by BP Amoco, the transfer of assets in Paragraph 32 and the license in Paragraph 33 shall take immediate effect, subject to binding arbitration of agreement terms in the event that negotiations are not concluded.”136

29. Shell/DEA (2001)

The Commission spelled out that its clearance of the concentration is subject to the conditions and obligations as stated in the Decision which included compliance with the commitments given by the concentrating parties. The legal nature of such a condition was also clearly expressed within the Decision, in particular in Paragraph 174:

“The achievement of each measure that gives rise to the structural change of the market is a condition, whereas the implementing steps which are necessary to achieve this result are generally obligations on the parties. Where a condition is not fulfilled, the Commission’s Decision declaring the concentration compatible with the Common Market no longer stands; where the undertakings concerned commit a breach of an obligation, the Commission may revoke its clearance decision, acting pursuant to Article 8 (5) (b) of the Merger Regulation, and the parties may also be subject to fines and periodic penalty payments in accordance with Articles 14 (2) (a) of the Merger Regulation.

In view of the foregoing, this Decision must be conditional upon full compliance by Shell with the commitment to grant access to its terminal for third parties as provided in paragraphs 1 and 3 of the commitments in the Annex. These commitments are given in order to remedy the collective dominance of Shell/DEA and BP/E.ON on the ethylene market on the ARG+ and to provide for competition on this market. The terms of use of the terminal as set out in paragraphs 2 and 4-7 of the Annex as well as in the draft Terminalling Agreement shall be obligations upon Shell, as they aim at implementing the structural change of the market.”

The commitments which had been offered by Shell, RWE AG and DEA (including affiliates) included a commitment to make available access to certain terminal facilities ona fair and non-discriminatory basis for a period of 10 years, and Shell had to invite third parties to apply to it for entering into an Ethylene Terminalling Agreement. The European Commission had to be offered the possibility to request the appointment of an independent expert, experienced in the ethylene industry to oversee the operation and performance of the commitments.

Moreover, the model Ethylene Terminalling Agreement, as it had been submitted to the Commission and had been approved by it as a basis for the Commission’s Decision, contained an ICC arbitration clause for an arbitral tribunal to have its seat in London.

136 Ibid. at Paragraph 36 of commitments.

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The clause also contained particular provisions to protect confidential information, and also contained a paragraph in the sense – as used in decisions cited above – regarding the prima facie evidence to be submitted by the claiming user, and the quite significant shifting of the burden of proof against Shell (Prima facie Evidence Rule).

Quite ambitiously, the arbitration clause requires the parties to instruct the arbitrators to render their decision “within one month of the appointment of the president of the arbitration panel”, hence providing not only for a “fast track arbitration” but for an “even faster track arbitration”.

A further provision states that the arbitral tribunal shall fix the deposits payable by the parties towards the costs of the arbitration which, obviously, is a provision ignoring the ICC mechanism (as it is known, in ICC arbitration, the deposits are fixed by the ICC Court and indeed cannot be fixed by the arbitrators). This defect, however, would of course not in any respect vitiate the validity of the arbitration clause.

Article 16 of the ETA provides as follows:

“16(1): All disputes arising out or relating to this agreement that cannot be resolved between the contracting parties themselves, shall be finally settled by arbitration in accordance with the Rules of the Arbitral Court of the International Chamber of Commerce (ICC Rules) by one or more arbitrators appointed under such rules.

16(2): In the event that a dispute arises between SHELL and User as to whether Articles 6-9 of this Agreement are correctly applied, the User shall have the right to arbitrate that dispute, provided that both parties have used their best efforts to resolve the dispute through negotiation.

To initiate arbitration, User shall give written notice to SHELL nominating an arbitrator and stating the specific nature of the claimed incorrect application, the factual basis of its position and the relief requested In such case, SHELL shall appoint an arbitrator within 14 days after receipt of the written notice. The arbitrators so appointed shall appoint another arbitrator to be president of the arbitral tribunal within 7 days after both have been nominated.

The arbitration procedure shall follow the Rules of the Arbitral Court of the International Chamber of Commerce (ICC Rules). The arbitration shall be conducted in London. The language of the arbitration shall be English.

Any of the arbitrators will be entitled to request any relevant information from SHELL or User. The arbitrators shall be instructed not to disclose confidential information. The standards attributed to confidential information and business secrets are those as set out in accordance with European Community competition law.

The burden of proof in any dispute under this Undertaking shall be as follows: (i) the User must produce evidence of a prima facie case, and (ii) if the User produces evidence of a prima facie case, the arbitrator must find in favour of User unless SHELL can produce evidence to the contrary.

The parties, in appointing the arbitrators, shall instruct the arbitrators to use their best efforts to make a decision concerning what relief, if any, is warranted in compliance with this Agreement within one month of the appointment of the president of the arbitration panel. The arbitral tribunal shall fix the on account payment which shall be made by either or both parties towards the costs of arbitration. The arbitration award shall, in addition to dealing with the merits of the claim, impose the fees and costs of the prevailing party upon the party that is unsuccessful in the proceeding.”

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30. BP / E.ON (2001)

The purpose of these undertakings was to eliminate BP/Veba’s strong foothold in infrastructure and the re-constitution of the ARG as a common carrier so as to make sure that a competitive market structure can be maintained. The open access to the pipeline at competitive costs should allow suppliers to actively compete for customers over the whole of the ARG-serviced area, should increase the customers‘ choice between suppliers and remove the ability of the two new entities to share customers in the sense of tacitly dividing the market according to the two most significant criteria, first the continuity in long-term contracts, and second the geographical proximity.137 Moreover, BP/Veba’s commitment to provide access to ARG suppliers for the ethylene customers will remove the remaining bottleneck infrastructure which is under control of BP/Veba. In this context, and in case of any disputes, reference was made to an independent arbitrator whose task would be to determine the terms and conditions for the delivery of ethylene via the ARG pipeline.

The arbitrator was to be appointed by agreement between BP/E.ON and the customer, and failing their agreement, by the President of the Düsseldorf Chamber of Commerce. The provision in Annex 2 (with redacted square-brackets) reads as follows:

“As no direct link exists between the ARG pipeline in Gelsenkirchen and the pipeline between Gelsenkirchen and [a site in the Rhine/Ruhr area], BP and (for as long as E.ON has a controlling interest in Veba Oel) E.ON hereby undertake to the European Commission that they will guarantee to [an ethylene customer] that ethylene delivered via the ARG pipeline to Gelsenkirchen will be made available at [that customer’s] plant ([...]) on reasonable terms and conditions to be agreed with [that customer] (and in the absence of such agreement, on such terms and conditions as may be determined by an independent third party arbitratorappointed by agreement with [that customer] or, in the absence of such agreement, by the President of the Düsseldorf Chamber of Commerce), in the event of the supply contract between [...] being terminated with effect from [...] or thereafter.”

31. Südzucker/Saint Louis Sucre (2001)

The delivery obligation was a structural commitment and, hence, steps up to the level of constituting a condition on which the clearance by the Commission is based, whereas the other commitments given for the purpose of implementing the undertaking would qualify as simple obligations. In the latter context, Südzucker committed itself to provide for an arbitration clause within its framework agreement which would enable the third party to initiate arbitration proceedings against Südzucker, particularly in respect of the pricing. The clause reads as follows:

„Südzucker wird mit dem Händler einen Rahmenlieferungsvertrag abschliessen, der diesen berechtigt, eine Menge von bis zu 90'000 t pro Jahr zu beziehen. In dem Rahmenlieferungsvertrag ist eine Schiedsklausel vorzusehen, auf Grund derer der Händler im Streitfall die vorherige oder nachträgliche Entscheidung eines Schiedsgerichts darüber

137 See in particular paragraph 146 of the Decision, and paragraph 95.

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herbeiführen kann, ob die von Südzucker über den Interventionspreis hinaus berechneten Kosten unter Beachtung der Ziffer 16 dieser Zusage gerechtfertigt sind. Südzucker wird den Händler nach einem von diesem jährlich zum 15. September zu erstellenden Abrufplan beliefern, in dem die voraussichtlichen Mengen, Qualitäten, Verpackungstypen und Lieferwerke aufgeführt sind.“138

32. General Electric/Honeywell (2001)

On 5 February 2001, the Commission received the notification of a proposed concentration by which General Electric (“GE”) had agreed to acquire the entire share capital of Honeywell International Inc. (“Honeywell”), USA. On 1 March 2001, the Commission decided to initiate proceedings in accordance with Article 6 (1)(c) ECMR.

GE is a diversified industrial corporation with activity in the fields of aircraft engines, appliances, information services, power systems, medical systems, transportation systems and financial services. Honeywell is a technology and manufacturing company serving customers worldwide with aerospace products, automotive products, electronics, speciality chemicals, transportation and power systems and building controls. By virtue of an Agreement dated 22 October 2000, Honeywell was to become a wholly owned subsidiary of GE.

The community dimension was established on the basis of the substantial turnover figures. In the analysis of the compatibility with the Common Market, the Commission identified significant horizontal, vertical and conglomerate effects in the area of aerospace and power systems. In particular, the aerospace market had to be analyzed in respect of the segments of aircraft engines and related markets, avionics and engine controls. The Decision is much more detailed than the Boeing/McDonnell Douglas Decision (commented above), and the competitive assessment of the proposed concentration fills more than 100 pages within the Decision. In respect of the jet engines market, the Commission concluded that there exist high barriers to entry and to expansion and that GE’s relation with many airlines, its incentive to use GE Capital’s financial power, its ability to leverage its vertical integration through GECAS, the limited countervailing power of customers and the weakening or marginalization of its direct competitors, GE appears to be in a position to behave independently of its competitors, customers and ultimately consumers, and can thus be characterized as a dominant undertaking on the markets for large commercial jet aircraft engines and for large regional jet aircraft engines.139

In respect of the market of avionics and non-avionics products, Honeywell is described as being the world-wide largest supplier, benefiting from a significant competitive advantage in that it offers a complete range of equipment. Rockwell Collins was described as being a major challenger, but lacking capability in certain areas. Likewise, Thales as the third major player was described as being strongly focused on Airbus but weak in radio and surveillance areas. Honeywell also enjoys particular strength in services, product

138 See Appendix II to the Decision, Paragraph 13. 139 Paragraph 229 of the Decision.

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integration and package deals such that other competitors, in case of a further concentration, would suffer rapidly and intensively from foreclosure effects. The Commission therefore concluded that Honeywell was the leading supplier of a range of avionics and that no competitor was independently able to replicate its extensive range of products.

In respect of the market of engine controls and engine accessories, Honeywell was described as holding an important market position, and again the merger was assessed as leading to a further strengthening of a dominant position, stemming from the elimination of Honeywell as an independent supplier. Hence, in the post-merger market structure, the merged entity would be able to offer a package of products that has never been put together on the market prior to the merger, and which will be such as to remain unchallengeable by any other competitor.

GE and Honeywell have advanced numerous arguments to counter the objections of the Commission, for instance arguing that competitors can offer counter-bundles, but the Commission was not impressed and reached the conclusion that, also in the markets of avionics and non-avionics, the merger would create and/or strengthen a dominant position. The parties’ arguments that customers would have significant countervailing powers was equally not supported by the Commission.

In respect of power systems, the Commission determined a significant horizontal overlap, and the vertical integration would have the effect to leave competitors “with no realistic chance of winning”.

In response to the Commission’s Statement of Objections of 8 May 2001, GE submitted, on 14 June 2001, a proposal for a package of undertakings notably comprising structural undertakings relating to avionics and non-avionics products, engine starters, small marine gas turbines, large regional jet engines as well as behavioural undertakings concerning corporate jet engines, and the commitment not to engage in bundling practices. These undertakings were analysed by the Commission in detail in paragraphs 485 ss. of the Decision.

In respect of avionics and non-avionics products, engine starters, small marine gas turbines and large regional jet engines, the parties had to commit themselves to divestthese businesses. In addition to that, a number of behavioural commitments had to be conceded such as a non-compete agreement in respect of certain corporate jet engines, and a commitment to keep GECAS as a separate legal entity, with the undertaking to conduct its dealings with Honeywell on an arm’s length basis, such compliance to be monitored by an independent expert.

Moreover, the parties had to commit themselves not to bundle any GE products with any Honeywell products when making offers to customers. In order to ensure compliance with this commitment, the parties proposed to set up an arbitration scheme whereby any affected interested third party may initiate arbitration, and the parties specifically

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undertook to comply with any resultant arbitration decision within an indicated period of time. 140

In its assessment of the offered undertakings, the Commission voiced doubts regarding the commitment to corporate jet engines. The Commission feared that an acceptance of that offer would be tantamount to a reduction of output and would thus reduce supply to the detriment of customers. Moreover, as the Commission feared, “it may be difficult for any approved Trustee or Arbitrator to make the distinction between so-called speculative purchases and financing in the form of purchases. The dominant position of the combined entity will thus remain on the market for corporate jet engines”.

Regarding the commitment not to engage in bundling practices, the Commission was not convinced by the offer to keep GECAS as a legally separate business. The separation as such would not, in the Commission’s view, prevent GECAS from exercising GE’s commercial strategy, and for the rest, the commitment regarding GECAS remained “apure promise not to act in a certain manner; such a promise is in contrast with the Commission’s stated policy on remedies and with the purpose of the merger regulation itself”.

The Commission also expressed the concern that the independent Expert’s or Arbitrator’s intervention would occur ex post only, and “the arbitration mechanism will give rise to endless litigation in which the Commission will have to participate in its capacity as the recipient of the undertakings”.141

Realizing that the Commission was not sufficiently convinced by the commitments offered, the parties tried to improve on them by offering virtually last minute undertakings. However, these came too late for the Commission, having regard to the explicit requirement in 43 of the Commission Notice on Remedies. It therefore stated that the commitments offered ”should allow sufficient time for proper consultation of Member States and need no further market tests”. However, the new package offered by GE/Honeywell did not, in the Commission’s view, fully and unambiguously and in a straight forward manner address the competition concerns identified by the investigation which means that the commitments that had been proposed on 27 June 2001 failed to comply with the requirements of the Merger Regulation.

Hence, the Commission reached the conclusion that the proposed merger would lead to the creation or strengthening of a dominant position on the markets for large commercial jet aircraft engines, large regional jet aircraft engines, corporate jet aircraft engines, avionics and non-avionics products as well as small marine gas turbines, as a result of which effective competition in the Common Market would be significantly impeded. The

140 The period of time is redacted in Paragraph 499 of the Decision. 141 Paragraph 531 of the Decision.

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proposed merger, therefore, had to be declared incompatible with the Common Market pursuant to Article 8 (3) ECMR.142

33. Newscorp/Telepiù (2003)

The Commission Decision in Case No. COMP/M.2876 reflects a two-tier dispute resolution provision in respect of matters to be decided by the Italian Communications Authority ("ICA Dispute") and matters falling within the jurisdiction of a private arbitrator. The full clause reads as follows:

"15. Dispute Resolution

15.1 Should a dispute arise between the Committed Group and third parties as to the implementation of Part II of these Commitments and the Schedules thereto, the following dispute resolutions mechanism shall apply:

(a) ICA Dispute Resolution

(i) Insofar as the subject matter of the dispute relates to paragraphs 10, 11 or 12.1 and falls within the competence of the Italian Communications Authority under Italian or Community law ("ICA Disputes"), the complaining party shall have the right to refer that dispute to the Italian Communications Authority, provided that both the complaining party and the Committed Group have first used their best efforts to resolve the dispute through negotiations.

(ii) ICA Disputes shall be finally settled by the Italian Communications Authority taking into account EC law including the Decision and the Commitments as well as the applicable Italian sector specific laws and regulations.

(iii) To initiate the ICA Dispute resolution process, the complaining party shall simultaneously give written notice to the relevant entity of the Committed Group and to the Italian Communications Authority, stating the specific nature of the claim, the factual basis of its position and the relief requested. The ICA Dispute resolution process shall follow the procedure set out in Delibera n. 148/01/CONS of the Italian Communications Authority or any similar procedural rules that apply from time to time.

(iv) The Combined Platform shall produce all relevant technical and accounting data which are deemed necessary by the Italian Communications Authority to resolve the dispute. In particular the Combined Platform shall have the burden of proof in relation to the principles set out in paragraphs 10.5 and 10.6 (in cases where such principles are relevant). The Italian Communications Authority shall decide which party shall bear the costs of experts that may be used by the Italian Communications Authority to advise on the data produced.

(v) The Committed Group accepts that, in case of an adverse finding by the Italian Communications Authority in relation to a signed contract, the decision shall apply retroactively from the date of the contract signature or, if later, the date of commencement of the infringement.

142 Page 128 of the Decision, Paragraphs 5, 6, 7, and Decision Article 1.

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(vi) The Committed Group acknowledges that the Italian Communications Authority will inform the Commission periodically on the ICA Dispute resolution process.

(vii) Nothing in the ICA Dispute resolution process shall affect the powers of the Commission to take decisions in relation to the undertakings in accordance with its powers under the Merger Regulation and the EC Treaty.

(b) Arbitration

(i) Insofar as any dispute that may arise regarding the implementation of these Commitments is not an ICA Dispute, the complaining party shall have the right to refer that dispute to a private arbitrator, provided that both the complaining party and the Committed Group have first used their best efforts to resolve the dispute through negotiations.

(ii) To initiate the Arbitration process, the complaining party shall give written notice to the relevant entity of the Committed Group nominating an arbitrator and stating the specific nature of the claim, the factual basis of its position and the relief requested. In such case, the Committed Group shall appoint another arbitrator within 14 days after receipt of the written notice. The arbitrators so appointed shall appoint a third arbitrator to be president of the arbitration tribunal within 7 days after both have been nominated.

(iii) Any of the arbitrators will be entitled to request any relevant information from the Committed Group of the complaining party.

(iv) The burden of proof in any dispute shall be as follows: (x) the complaining party must produce evidence of a prima facie case, and (y) if the complaining party produces evidence of a prima facie case, the arbitrators must find in favour of the complaining party unless the Committed Group can produce evidence to the contrary.

(v) The arbitrators shall be instructed not to disclose confidential information. Throughout these Commitments the standards attributed to confidential information and business secrets are those as set out in accordance with European Community competition law.

(vi) The arbitration procedure shall follow the Rules of the Arbitration Court of the International Chamber of Commerce (ICC Rules). The arbitration shall be conducted in Milan. The language of the arbitration shall be English.

(vii) Decisions of the arbitrators shall be final and binding on all persons submitting to arbitration. Nothing in this Arbitration shall affect the powers of the Commission to take decisions in relation to the Commitments in accordance with its powers under the Merger Regulation and the EC Treaty. Nothing in the arbitration process above shall affect the powers of the ICA under the relevant national regulations."

34. General Electric/Instrumentarium (2003)

In the framework of this concentration, a quite substantial Commitments Package had to be offered to the Commission, including divestment commitments and behavioural commitments. The body of the Decision reflects the following provision:

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"(355) Finally, the commitment includes provisions designed to ensure its compliance. GE will have an obligation to report to the Commission upon request. The Commission will also have the ability to monitor compliance through the appointment of an independent trustee which will be appointed from the moment GE acquires control over Instrumentarium. The trustee will be assisted by an independent expert with knowledge of the relevant industry. In addition, third parties would have recourse to a fast track arbitration dispute resolution procedure (as set out in the Annex to the Interface Commitment) which would enable third parties to receive speedy and effective adjudication through independent arbitrators. Importantly, the Commission would retain control of the procedure as the arbitrators would have to seek and be bound by the Commission's interpretation of the Commitments where necessary."

The arbitration procedure is further mailed down in the Annex I to the Interfacing Commitment which had to be offered by GE/Instrumentarium. It contains the following arbitration provision:

“ Fast Track Dispute Resolution

1. In the event that a third party supplier has reason to believe that GE/Instrumentarium is failing to comply with the requirements of the Commitments vis-à-vis this third party supplier and, in particular, has reason to believe that:

i. GE/Instrumentarium refuses or fails to provide an open Interface in accordance with paragraphs 1-3 of the Commitments; or

ii. GE/Instrumentarium refuses or fails to provide interfacing information in accordance with paragraph 4 of the Commitments; or

iii. GE/Instrumentarium refuses or fails to provide interface certification cooperation in accordance with paragraphs 5 and 6 of the Commitments;

the fast track dispute resolution procedure below will apply.

2. Any third party supplier who wishes to avail itself of the fast track dispute resolution procedure (a "requesting party") must notify GE/Instrumentarium in writing specifying the reasons leading that party to believe that GE/Instrumentarium is failing to comply with the requirements of the Commitments (the "Notice"). The requesting party and GE/Instrumentarium will use their best efforts to resolve all differences of opinion and to settle all disputes that may arise through co-operation and consultation within a reasonable period of time not to exceed fifteen (15) Working Days after receipt of the Notice.

3. Should the requesting party and GE/Instrumentarium fail to resolve their differences of opinion through cooperation and consultation as provided for in paragraph 2, the requesting party shall nominate an arbitrator.

i. GE/Instrumentarium shall, within two weeks of receiving a notification in writing from a requesting party of the appointment of an arbitrator, nominate its arbitrator and provide to the requesting party in writing detailed reasons for its challenged conduct.

ii. The arbitrators nominated by GE/Instrumentarium and the requesting party shall, within one week from the nomination of the former, agree to appoint a third arbitrator. If the arbitrators nominated by GE/Instrumentarium and the requesting party cannot agree on the nomination of a third arbitrator, they shall request that the President of the London Court of Arbitration appoint the third arbitrator.

iii. The arbitrators shall be instructed to establish an arbitration tribunal and to make a decision within one month of the appointment of the third arbitrator as to the compliance by GE/Instrumentarium with its obligation under the Commitments;

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iv. In their decision, the arbitrators shall also decide the action to be taken by GE/Instrumentarium in order to ensure compliance with the Commitments vis-à-vis the requesting party;

v. Any of the arbitrators will be entitled to request any relevant information from GE/Instrumentarium or the requesting party in order to enable the arbitrators to reach a decision.

vi. The burden of proof in any dispute under this fast track dispute resolution procedure is as follows: i) the requesting party must produce evidence of a prima facie case, and ii) if the requesting party produces evidence of a prima facie case, the arbitrator must find in favour of the requesting party unless GE/Instrumentarium can produce evidence to the contrary.

vii. The arbitrators shall be instructed not to disclose confidential information. Throughout the Commitments the standard attributed to confidential information and business secrets are those as set out in accordance with European Community competition law.

viii. The arbitration shall be in English and shall be conducted in accordance with the rules of the London Court of Arbitration and the rules of the London Court of Arbitration will be amended accordingly. In the event of disagreement between the parties to the arbitration regarding the interpretation of the Commitments, the arbitrators shall seek and be bound by the Commission's interpretation of the Commitments before finding in favour of any party to the arbitration.

ix. All notices provided under the fast track dispute resolution procedure shall be in English and delivered between 09:00 and 17:00 on a Working Day.

x. The arbitration award shall, in addition to dealing with the merits of the claim, impose the fees and costs of the prevailing party upon the party that is unsuccessful.”

35. Alcan/Pechiney II (2003)

In the framework of this concentration, arbitration was provided for determining the terms of a licence to be granted to a requesting third party. Once again, the Commission has adopted a pendulum arbitration; moreover, the Commission required to be informed on any arbitration proceedings and their outcome. The provisions read as follows:

"1.3.3. Arbitration

6. If, within a period of [...] of the making of a request by a third party seeking a License pursuant to paragraph 2, Alcan and the third party are unable to reach agreement on the terms of a Licence, either party may submit the matter to arbitration in accordance with the following provisions:

(a) the arbitration shall be conducted in London under the rules of the International Chamber of Commerce in the English language;

(b) the party wishing to initiate arbitration proceedings shall specify its reasons for doing so, nominate its arbitrator and communicate this to the other party, which shall then nominate its own arbitrator, and to the Licensing Trustee. The arbitrators appointed by the parties shall jointly nominate a third arbitrator, who shall act as chairman of the arbitration panel;

(c) unless the parties agree or the arbitration panel orders otherwise, the arbitration hearing shall be established within [...] of the nomination of the third arbitrator. The

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arbitration panel shall be entitled to request any relevant information from the parties, provided that it may not disclose confidential information and business secrets that are protected by Community law;

(d) each party shall submit a single proposal for the terms of the Licence to the arbitration panel. The arbitration panel must select, within [...] of the arbitration hearing and by majority decision, one of the two submitted proposals in its entirety. The third party seeking a Licence must provide prima facie evidence that the terms and conditions proposed by Alcan are not in accordance with the requirements of paragraph 2. If it is able to do so to the satisfaction of the arbitration panel, Alcan must then produce evidence to the satisfaction if the arbitration panel that the terms and conditions proposed by it are in accordance with the requirements of paragraph 2 (sic! the sentence, as published, is incomplete!). If a party is unable to meet its burden of proof, the arbitration panel shall decide in favour of the other party's proposal; and

(e) if the third party seeking a Licence does not enter into a Licence in the form of the award of the arbitration panel within [...] following its communication to the parties, Alcan may request (with notice to the Licensing Trustee) the Commission to relieve it of its obligations under paragraph 2 to grant a Licence to the third party in question.

1.3.5. Reporting Obligations

9. Alcan will report to the Licensing Trustee without delay, and [...] to the Commission, on any requests received by it from third parties to enter into Licences for the Technologies (or any of them), the progress of negotiations with them, the grant of any Licences of the Technologies (or any of them) and any arbitration proceedings commenced pursuant to paragraph 6 and their outcome. It shall also provide without delay to the Licensing Trustee and the Commission copies of any agreements that it enters into for the Licensing of the Technologies (or any of them) and copies of any arbitration awards made pursuant to paragraph 6."

4. Summary: The Major Striking Elements in the Arbitration Provisions Used So Far

As shown above, most of the arbitration clauses adopted or approved by the Commission contain special elements, some of which are clearly flawed or even pathological, and may need to be “rescued”, should a dispute arise. For ease of an overview, the most striking elements are tabled below, and the “Q” puts the obvious question mark we may have:

• Campari-Milano:

- the Commission reserves its right to review the arbitral award

- → Q: Is this justified?

• UIP:

- ICC Rules, but appointment by the president of the court of Appeals;

- arbitrators to fix deposits (!);→ Incompatible with the ICC Rules!

- the weaker claimant party’s substantive and procedural law, and its language, are to be applied

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• EBU:

- “arbitration by an independent expert”; → Mixing two different “animals”!

- EBU to inform the Commission on the procedure and on all decisions


• Elf / Thyssen:

- “Arbitration by mutually agreed independent experts…”

- → Q: Is this going to be arbitration, or is it expert determination?

• British Airways /TAT:

- Appointment of the arbitrator in case of disagreement: by BA alone (!)

- → Highly problematic!- but subject to confirmation by the European Commission


• Swissair / Sabena: same provision !

• Alcatel / Thomson:

- the arbitrator is pre-designated (the manager of the European Space Agency); quite an unusual situation!

- Terms of Reference within 15 days (!); is this realistic, at all? - award within 2 months; - Commission to be informed and award to be submitted to it


• Carrefour / Promodès:

- award within 3 months; - Carrefour must notify the arbitration provision to all suppliers, with copy to the

Commission; probably a very good requirement!

• BskyB / Kirch:

- Reversal of the burden of proof (“prima facie evidence rule”)

- → Q: Is this justified?- the arbitral process to be proposed to the Commission - and the Commission shall decide on its approval


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• Telia / Sonera:

- Prima facie evidence rule; → Q: Is this justified?- procedure either in Finnish or in Swedish;

- award within 1 month → Q: Is this feasible?

• Shell / BASF / JV-Nicole:

- Pendulum arbitration (a “Russian roulette”); a courageous and highly pragmatic way to deal with the problem; not all will like it, though!

• Vodafone / Mannesmann:

- reversal of the burden of proof (“prima facie evidence rule”);- award within one month

→ Q: Is this at all feasible, is it really necessary?

• Glaxo Wellcome / SmithKline Beecham:

- LCIA rules, but appointment by the President of the Law Society (!)

→ Incompatible with the LCIA Rules!

• Vivendi / Canal +/Seagram:

- Prima facie evidence rule; - sanction for not submitting information;

- award within 1 month; → Q: Is this feasible?

- arbitrators to fix the advances (although the ICC Rules apply) → Incompatible !

• SEB / Moulinex:

- Award within 4 months (Paper p. 68) - but a party can challenge the award by submitting the challenge to the President of the

Commercial Court of Lyon as a référé (!)

• Air France / KLM:

- ruling on interim relief within 1 month: → Q: Feasible?- ICC Rules; - final award within 6 months; - prima facie evidence rule; - interpretation of the commitments: Commission to be asked; - the Commission is allowed to file amicus curiae briefs;

→ Q: Is this justified?- review clause

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• Piaggio/Aprilia:

- the claiming party shall inform the Commission of any notification under the arbitration provision- within 15 days, the parties shall negotiate a solution - in case the two arbitrators can not reach agreement on the chairperson, they shall refer the matter to the Director General of the ANCMA - Associazione Ciclo Motociclo Accessori (which represents all the Italian manufacturers of 2 and 3 wheel vehicles since 1920), based in Milano.

→ Q: Is this a sufficiently neutral appointing authority, being so close to the Italian industry; how well does this look from the perspective of e.g. the Japanese Honda as a claimant? How much confidence does this inspire? - no designation of the seat (!) - no designation of the language (!) - hence, most probably this will result in an arbitration in Italy, conducted in the Italian language;

→ Q: Again: this is not a reasonable proposition in view of the fact that the potential claimants will be manufacturers of the Far East; neutrality of the place of arbitration is a truly important concern; a Swiss city or any other city in Europe should have been designated as the place of arbitration, and a neutral appointing authority should have been selected.

→ Q: How confident would Piaggio be in respect of a dispute resolution if, in a reversedsituation of a claim of Piaggio against Kimco it would have to refer the designation of the chairperson to the South Korean Scooter Manufacturers’ Association, with a seat of the arbitral tribunal in South Korea, with local arbitration rules, and with the Korean language being applied?- most probably, the arbitral tribunal will have no authority, under Italian law, to order interim relief (and an application for interim relief addressed to the local Italian court will take a long time, and thus will be of no remedy) - no institution is chosen; this would have been particularly advisable in this context; - Comment: Probably, this clause is so unsatisfactory that a potential claimant (competitor) will have to think twice to at all believe to have a satisfactory control at its disposal; should the Commission at all have accepted such an arbitration commitment?- the Commission can at all times submit an amicus curiae brief;- the award to be rendered within 45 business days; - in case of interpretation of the commitments: the commission to be asked; - the arbitral decision shall be promptly notified to the Commission - review clause.

• Danish Crown / Slagterier:

- arbitrator to decide in case of contradicting expert opinions

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• Sanitec / Sphinx:

- the nominated arbitrator to be approved by the Commission

→ Q: Is this justified?

• Allied Signal /Honeywell:

- unlimited duration of certain commitments; - arbitrator to be approved by the Commission (if necessary: permanent arbitrator)

→ Q: Is this justified?- Commission to be kept informed on the procedure

→ Q: Is this justified?- special explicit powers re investigation, access to documents and interim measures; - written submissions of the parties to be copied to the European Commission - arguments to be submitted within 15 days

→ Q: Is this justified?

- award within 1 month, with copy to the Commission: → Q: Feasible?- no possible appeal; - report by the parties as to their compliance with the award

→ Q: Is this justified?- compliance moreover monitored by an expert: concurrent appointment of arbitrator and

expert (the expert may probably take part in the arbitral proceedings as a silent listener/observer)

→ Q: Is this justified?- the Commission has an almost full and water-tight control on the compliance with

behavioural undertaking → Q: Is this justified?

• Dow Chemical / Union Carbide:

- Erga omnes – offer to grant a license to any interested third party; - Pendulum arbitration in respect of the terms - If the third party/licensee does not abide by the terms of the arbitral award, Dow may

request the Commission to be relieved from its commitment - Furthermore: pendulum arbitration for selling technology to its competitor Amoco; - Netherlands Arbitration Institute

• Shell / DEA:

- Commitment during 10 years (!) - ICC arbitration, in London, but the tribunal to fix the deposits (!)

- Prima facie evidence rule; → Q: Is this justified?

- Award within 1 month (!);→ Q: Feasible?

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• Newscorp / Telepiù:

- Two-tier dispute mechanism: Italian Communications Authority and Arbitration - Negotiations to come first - Prima facie evidence rule - ICC arbitration in Milano - The EU Commission shall not be bound by the award

• General Electric / Instrumentarium:

- 15 day mandatory consultation phase - LCIA Rules to apply

- Prima facie evidence rule; → Q: Is this justified?- Award to specify action to be taken for complying with the commitments - for interpretation of commitments: arbitrators must seek the interpretation from the

Commission which shall be binding


• Alcan / Péchiney II:

- ICC, in London - Pendulum arbitration - Prima facie evidence rule - In case of non-compliance with the award by the third party (regarding the license):

Alcan may request the Commission for being relieved of its behavioural obligation

The short review shows: Consistency of the approach is missing; hence, a Model Text would seem to be urgently needed!

• Quite a few pathological provisions, or provisions that will not easily work in practice and will need to be “rescued”.

• even the most recent arbitration commitment accepted by the Commission, i.e. the one in Piaggio/Aprilia, appears to be significantly unsatisfactory (certainly from the viewpoint of a potential Korean or Japanese claimant).

• There is no systematic/considered approach of the Commission so far, and no “unité de doctrine”.

• For instance, while the arbitration provision in Air France/KLM was significantly improved (as compared to earlier arbitration commitments accepted by the commission), the most recent decision in Piaggio/Aprilia reflects a commitment which is so obviously unsatisfactory that it should not have been approved by the Commission.

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• Nevertheless, there is quite a body of particular requirements on which the Commission insists.

• This “body” sets the flags for drafting a better organized and improved Model Arbitration Commitment.

• There is a strong need to have a carefully considered Model available; why?

- Commitments are typically bargained for up to the last minute.

- Arbitration provisions are then drafted at the 11th hour and 59 minutes, and a Model would be extremely helpful.

- The Commission itself does not seem to have a clear view as to what it requires in terms of monitoring and supervising the process as a matter of good practice and policy (which makes it even more difficult for the parties to propose the terms of an arbitration commitment).

• All of these elements should be factored into a proposed draft for the Arbitration Commitment; they are reflected in the Model Text proposed below under Part F.

5. Elements of the Arbitration Commitment

The following comments are provided in connection with the author’s Draft Model Arbitration Commitment, as reflected in Part F below.

5.1 General Comments

5.1.1 Why Providing For Arbitration? Why Not the Ordinary State Courts?

The review of numerous Commission Decisions has shown that the Commission - although with little enthusiasm, as it seems - has referred parties to arbitration in connection with disputes as may arise in respect of behavioural commitments (whether arising under Article 81 (3) EC, or under the ECMR. But why not the ordinary State courts?

The answer seems to be rather obvious in that, essentially, State court proceedings would hardly ever be accomplished within the timeframe required by the Commission. In fact, as the above review has shown, the Commission typically expects a very swift fast track procedure, with a result and final decision on the table within a few months only. However, it does not seem possible to achieve such a result in State court proceedings governed by local/national procedural codes which, moreover, will provide for a second or even third court instance for reviewing any decision. Hence, State court proceedings may easily last one year, if not at the end several years.

Understandably, such a timeframe cannot be acceptable to the Commission, for a simple reason: If it does take so much time for a third party (typically a competitor) to exercise its rights under behavioural commitments promised by a party under Article 81 (3) EC, or under

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the ECMR, the third party may, depending on the circumstances, be pushed out of business, or may even go bankrupt (for instance in a situation where a third party competitor's business is depending on a continued supply of goods on share and non-discriminatory terms, or where such third party's business is dependent on access to an essential facility or a network). And in any event, during such time as ordinary court proceedings may be pending, the core goal and concern of the European Commission, i.e. the maintenance of an adequate level of competition, may not be achieved or satisfied.

There are quite a few other reasons why ordinary State court proceedings are less suitable than arbitration, such as some residual concerns (although mostly unjustified) regarding judicial independence (in cases where a foreign third party competitor has to file a suit in the local court against the major local enterprise); concerns regarding the necessity (as it may arise) to translate a massive amount of documents (existing in the English language) into a local language, such as a Scandinavian language; concerns regarding the availability and effectiveness of interim relief in ordinary State court proceedings.

Hence, it is quite clear that litigation in State courts may have disadvantages and impacts which may leave a claiming third party without any effective judicial remedy, thus forcing the third party to file a complaint with the respective Competition Authority or, typically, with the European Commission. While the latter (a complaint with the Competition Authority or the European Commission) may always seem to be a possible avenue for the third party, the trouble remains, for the third party, that its main goal (i.e. to achieve a civil law remedy, or a contractual remedy) may hardly seem to be possible. Such remedy, however, is and must be available through well-conducted arbitral proceedings.

5.1.2 Fast track Arbitration Therefore Appears to be the Ideal and Indeed Only Solution

Today, international business disputes are typically referred to international arbitration as the most normal dispute resolution mechanism. Only an indeed minor percentage of international disputes are today referred to local State courts. There are many reasons for this phenomenon which are discussed elsewhere and need not be reported here.

However, arbitrations in the context of commitments under Article 81 (3) as well as under the ECMR show numerous very specific features which may briefly be described further herein below.

In all cases so far, the Commission has allowed very short time frames only; the dispute resolution will therefore be on a “real” fast track basis.

5.1.3 Arbitration Should be Preceded by a Short Consultation Phase, Initiated by a Written Notice of the Requesting Party

In most cases, the parties involved may not have an established contractual relationship. Typically, it will be a third party (such as a competitor) intending to raise a claim against

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the merged party, taking the latter up on its promise to honour the behavioural commitment. At the beginning, the third party may address some written or oral communications to the merged party, voicing its request. If such initial contacts do not seem to provide a result satisfactory to the third party, it would seem advisable to then line up, as a first stage, a consultation phase. The idea of such consultation phase is to provide for a structured process, rather than simply providing for loose exchanges of communications.

Hence, the Requesting Party will be expected to submit a written notice to the Responding Party, setting out its contentions in detail, supported by sufficient data so as to allow the Responding Party (which normally will be the Merged Entity) to consider the matter, and stating the reasons why the Requesting Party is of the opinion that the terms of the commitments had not been respected.

The Responding Party will be expected to examine the matter promptly and to embark on a bona fide negotiation with the Requesting Party with the view to solve the matter within the consultation phase. Such consultation phase should be accomplished within a relatively short time-window of normally not exceeding 15 days (see hereto for instance in Newscorp/Telepiù, General Electric//Instrumentarium, Piaggio/Aprilia). However, the parties should be free to extend such timeframe, particularly in those cases where a resolution does not appear to be highly time-critical, or where the Requesting Party is satisfied that, within an extended timeframe, a negotiated solution can be found.

5.1.4 Initiation of the Arbitral Proceedings

Should the consultation not bring about a satisfactory result, the Requesting Party may then serve onto the Responding Party its Notice of Arbitration and Request for Arbitration. Basically, such Notice and Request for Arbitration will essentially consist of the Notice submitted in the framework of the Consultation Phase, possibly with some further details or amendments. Having prepared a carefully established Notice for the Consultation Phase will then have the advantage that, for the purpose of filing the Notice and Request for Arbitration, no significant further work will have to be done.

5.1.5 Answer by the Responding Party

The Responding Party (mostly the merged enterprise), will have to file a written Answer within a very short period of time, such as 10 business days from the receipt of the Notice and Request for Arbitration. It will be expected to explain its conduct and position in sufficient detail.

5.1.6 Effective erga omnes Offer

The commitment to arbitrate reflected in the merging party's commitment letter (most frequently attached to, and thereby incorporated in, the Commission Decision, constitutes an erga omnes offer of the merging parties (or of the merged entity) to subject themselves to an arbitration process. Any third party (claimant) may accept the offer by initiating

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arbitral proceedings. This is another type of "arbitration without privity"143, i.e. a valid submission to arbitration without the existence of an arbitration clause or arbitration agreement. The situation here is similar to the situation as we know it from some 2000 or more Bilateral Investment Treaties which typically also contain a commitment, by the contracting States, to accept arbitration in relation to any claims as may be raised by third party investors.

Therefore, whenever a third party wishes to complain and raise a claim against the merged party, it may make use of and trigger the arbitral process as per the commitment letter which had been submitted to the European Commission and which, by the reference made to it within the Commission 's decision, became a part of the acte communautaire.Hence, clearly, the existence of a prior contract or a prior arbitration clause between the third party claimant and the merged entity is not a requirement for validly establishing arbitral jurisdiction.

Of course, the third party claimant is not as such bound to arbitrate any claim it may wish to pursue against the merged entity, and it will be entirely free to seize the ordinary State courts instead of resorting to arbitration. However, for many reasons, this option may not be attractive and may have significant downside implications such as, for mentioning only a few: (i) in most cases, the merged entity may have to be sued at its seat, hence not at a neutral venue; (ii) the local court proceedings may have to be conducted in a language such as Finnish, or Portuguese, or Hungarian, while an arbitration may normally be conducted in the English language; (iii) local start court proceedings are not really famous for their speed, and proceedings may be entertained through two or even three court levels up to the Supreme Court (whereas arbitration proceedings may be and indeed must be swift and must produce a result and a decision within a very short timeframe such as a few months, otherwise the remedy would be entirely futile.

5.1.7 Language

Choosing arbitration also allows the parties to use the language of their free choice. English would seem to be the most logical choice, occasionally French, and the burden of translating voluminous files of documents should wherever possible be avoided. Again, this cannot normally be achieved in the framework of ordinary State court proceedings.

The Arbitration Commitment should specify the language so as to do away with any queries or delays otherwise arising. Only a few decisions so far had indicated the language, which is a matter that should be improved in future.

143 Regarding this term, see Jan Paulsson, Arbitration Without Privity, ICSID Review Vol. 10 No. 2, 1995, 232-257.

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5.1.8 Choosing Between ad hoc Arbitration or Institutional Arbitration

The pros and cons of either ad hoc or institutional arbitration have ever so often been discussed during the past 50 years, and we need not add to that discussion. In fact, both types work well, and in any event almost everything will at the end of the day depend on the personality, experience and case management skills of the arbitrator (or of the chairman in the case of a three person arbitral tribunal).

Where institutional arbitration is chosen, I will expect the institution (such as e.g. the ICC or the LCIA) to be fully aware of the very specific needs of this type of arbitration (further addressed herein below), particularly in respect of the time-constraints. Hence, the institution will have to understand that, in case of need, an appointment of a sole arbitrator or of a chair-person has to be made within a few days only, and the ICC in particular will have to understand that an arbitral award will have to be approved by the ICC Court within a few days only (and not within the normal time-span of a few weeks). In fact, the ICC has shown its ability to live up to such expectations in the past, and ICC arbitrators have handled several fast track arbitrations which were concluded within a few months only.

The reference to an experienced arbitral institution might provide advantages, particularly in case of a need for default appointment of an arbitrator; moreover, the involvement of a prestigious arbitral institution may enhance the recognition of the process. Other advantages may be involved, such as the wide discussion platform offered by arbitral institutions for discussing the requirements and needs of this specific type of arbitration, their ability to table the topic at the occasion of international seminars and conferences, and to build up a think-tank as well as, possibly, a body of Best Practices in handling this type of arbitration.

5.1.9 Constitution of a Three-person Arbitral Tribunal, or Sole Arbitrator

Where a matter is not highly time-critical, and where the matter is of significant importance (for instance involving monetary interests beyond € 4 mio.), a three person arbitral tribunal would seem to respond best to the expectations of the parties, and may enhance the parties' confidence in the process. Hence, this is the solution I have adopted in the Model Arbitration Clause. The Requesting Party will have designated its party-nominated arbitrator in its Notice and Request for Arbitration, and the Responding Party will be expected to make its nomination known in its Answer. Thereupon, within a very short time period such as five business days, the two arbitrators shall have to nominate the presiding arbitrator, making such nomination known to the parties (and to the arbitral institution, if the Arbitration Commitment provides for institutional arbitration). Thereupon, the arbitral institution will have to confirm the appointment forthwith, i.e. typically within one or two days. The ICC and the LCIA, both, have shown their capabilities to move swiftly, wherever a matter is particularly time-critical.

In other cases, a sole arbitrator (jointly designated by the parties or, failing an agreement, designated by an appointing authority such as an arbitral institution) would seem to be the

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preferable solution. It allows a swift appointment and will avoid further organizational difficulties of scheduling the proceedings on a fast track basis. Parties will have to agree on the nomination of the sole arbitrator within (say) five business days from the communication of the Answer, and any arbitral institution involved will have to confirm the appointment forthwith.

Hereinafter, the sole arbitrator or a three-person arbitral tribunal will be referred to as “theArbitral Tribunal”.

5.1.10 Default Appointment

A correct appointment procedure is important: The above review of Commission Decisions has shown that quite inconsistent or inoperable provisions had been adopted for making default appointments (i.e. for making an appointment where one or more parties fail to appoint an arbitrator, or where no consensus in respect of a sole arbitrator or the chair person can be reached). For instance, it is not really useful to provide for ICC arbitration, but determine, that the third arbitrator be appointed by the President of the Court of Appeals (as for instance in the UIP case). Moreover, very certainly, the appointing authority must be a truly independent/impartial body, and must be seen as that; this basic requirement was not satisfied in the most recent Piaggio/Aprilia decision.

It is in this context recommended to use, and make reference to, a well established and highly respected arbitral institution, such as the ICC or the LCIA. Both institutions have a very considerable amount of expertise in making appointments, based on their own internal network and, in the case of the ICC, through its national committees. The reference to an institution will best ensure neutrality of the venue (where such venue had not been determined) and professional experience in respect of the candidate as may have to be selected by the institution absent an agreement of the parties.

Moreover, I would expect that major arbitral institutions such as the ICC and the LCIA will be particularly well suited to identify candidates to serve as sole arbitrator or presiding arbitrator who are known for their longstanding practice and experience in handling arbitrations and who, at the same time, are known to be knowledgeable in antitrust matters.

One important element needs to be stressed particularly and will have to be explored in respect of each and every appointment of an arbitrator: This is the time-wise availability of the arbitrator. Indeed, the candidate must be able to carve out, during the process of 1-6 months, most of his professional time in order to being able to accomplish the mission.

5.1.11 Arbitrator, or “only” an Expert?

Sometimes the parties and the European Commission have mixed up the functions of an arbitrator and that of an expert, for instance by using the formula: "arbitration by mutually

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agreed independent experts"144. However, we all know that these are "different animals", and their functions are different.

Obviously, where the European Commission requires the appointment of a Divestiture Trustee and/or of a Monitoring Trustee, such function will not be an arbitral function but much more the function of an independent expert or advisor, in the sense of an advisor performing a function for and on behalf of the European Commission in the framework of its monitoring compliance with a divestiture imposed by the Commission.

However, in the framework of behavioural commitments, the assignment is of a significantly different nature, in that, typically, claims directly or indirectly involving monetary claims or interests will be at stake. Hence, the mission to examine whether or not access to an essential facility (such as a pipeline, or a telecommunication network, or a port facility) has been granted by the merging parties (or the merged party) on fair and non-discriminatory terms necessarily involves a determination of the claiming party's financial claims. This is a civil law matter, typically to be determined by a judicial function and not as such only an administrative matter (such as the mandate to be fulfilled by the Divestiture Trustee and/or the Monitoring Trustee in the framework of the administrative proceedings under the ECMR and the administrative monitoring of compliance entrusted to the Enforcement Unit of DG Comp.

In other words, while an expert may be missioned to make certain factual or financial determinations, the opinion rendered by such expert will not have the value of a binding court judgment or arbitral award which would provide an enforceable legal title.

Hence, an expert can at best achieve an interim result which, in most cases, will not be satisfactory for the purpose.

There are other strong reasons for not simply appointing an expert, but indeed for appointing an arbitrator, or for constituting a three person arbitral tribunal. The main reason has to do with notions of procedure and due process. In fact, the procedure for expert determination is a wide field of controversy and indeed uncertainties. Will the expert be committed to equal treatment in the same way as applicable to an arbitrator or arbitral tribunal? Will the expert be fully experienced in respecting notions of an adversarial process based on an equal right to be heard? Or will he feel free (as experts frequently do) to take one-sided information from one party only?

While the procedural requirements of due process in connection with an expert procedure has frequently been debated and is at best uncertain, the rules of due process for an arbitrator or arbitral tribunal are very clearly established through deeply routed notions dealt on longstanding practice.

144 See the decisions in EBU, Elf Aquitaine-Thyssen/Minol, as well as in Danish Crown/Vesjske Slagterier.

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For these reasons, it is clearly preferable that any claims in connection with a violation of behavioural commitments should be determined by an arbitrator or an arbitral tribunal, and not only by an expert. Of course, the arbitrator or tribunal may, for the purpose of the investigation, consider the appointment of an expert, after consultation with the parties.

5.1.12. Independence and Impartiality

Obviously, each arbitrator will be expected to be and remain independent of any of the parties, and will understand the mission to serve as an impartial arbitrator. It is good practice, in international arbitration, that each arbitrator will certify this in a written Statement of Independence, and it is equally good practice that a detailed professional CVbe attached for information of the parties and the other arbitrators.

It may be useful to provide for a Model of the Arbitrator’s Mandate, since the handling of this specific type of arbitration involves some unique features. For instance, one important element is the availability time-wise: the acceptance of such a mandate is likely to require of each arbitrator an immediate almost full-time devotion to the matter during several months (and those who have been involved in fast track arbitrations will know what it means to immediately carve out, on very short notice, several month of their professional time). I would also take the view that candidates to serve as arbitrator need to have a good understanding of competition law as well as of the related economics.

A Model of the Arbitrator’s Mandate is reflected in Part 6 below.

5.1.13. Place of arbitration at a Neutral Venue

Arbitration will have the advantage that a neutral venue may be chosen for conducting the arbitration at the most convenient place and in the most convenient legal environment.

Neutrality of the venue is an important factor for the potential claimant who may or may not have confidence in the full neutrality of the arbitral process. Hence, merging entities should preferably not impose a “home-town or home-country arbitration”, but propose an arbitration in a third country (at least in a country which is not the country where the merged entity has its principal seat; I would regard it non-critical to provide for the seat in another European country where only a subsidiary is established). Specifically, Non-European parties may attach psychological importance to such neutrality; a requirement which was not satisfied for instance in the recent Piaggio/Aprilia commitment.

The place of arbitration will provide the rattachement (in the French sense of the term) to that country's Arbitration Act, i.e. to the most basic provisions governing international arbitral proceedings.

This, however, will by no means establish a reference to any local procedural codes as are applicable at the place of arbitration for proceedings before ordinary State courts. Indeed, it would be wrong to import into arbitral proceedings the "bag and baggage" of purely local procedures. Instead, arbitration (and in particular arbitration relating to merger

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remedies and commitments) must be strictly focused, efficient and tailored to the purpose, and at the same time must be swift and cost-effective. Nothing of this is normally achieved when applying the complex rules burdening the local Codes of Civil Procedure. Experienced counsel and arbitrators understand this well from their long-standing practice; nevertheless, it is important to emphasise this element very particularly.

While the place of arbitration will provide the juridical seat and anchor of the arbitral tribunal, hearings or proceedings may of course be held elsewhere, i.e. wherever convenient; a consultation on that with the parties pertains to the standards of “good practice”.

5.1.14 Rules Governing the Proceedings

For good reasons, the European Commission attaches quite importance to a speedy resolution. In fact, it requests, as a matter of public interest involved, that competition concerns be removed promptly. Any lengthy arbitral procedure, or indeed any lengthy litigation before ordinary State courts, would not satisfy this requirement. Hence, the proceedings shall have to be organized and accomplished on a fast track basis. Within such parameter, the parties, in cooperation with the arbitral tribunal, are basically free to agree on the procedure. Absent an agreement, the arbitral tribunal will issue the appropriate directions. There is no requirement to adopt any local rules of civil procedure (as otherwise would apply to proceedings before State courts), and parties and arbitrators are discouraged to apply such rules, as they are not normally satisfying the needs of the present type of arbitration. Instead, however, any truly mandatory provisions of the Arbitration Act (as applicable at the place of arbitration) should be respected and, where the matter is referred to an arbitral institution such as the ICC or the LCIA, those institutional arbitration rules should be respected, however tailored to satisfy the particular requirement of a fast track procedure. It is useful, for the Model Arbitration Commitment, to spell out the most general yet fundamental requirement that, in all cases, the arbitrators shall have to act fairly and impartially between the parties, ensuring that each party has a reasonable opportunity to present its case.

5.1.15 Specificity of the Arbitral Process: An Arbitration sui generis

Several elements of this type of arbitration are specific:

First, arbitral jurisdiction is not based on a contract and an arbitration clause embedded therein, but in fact is based on the merging parties offer to submit to arbitration in case any third party (typically a competitor) would invoke a violation of a behavioural commitment provided to the European Commission (be it a commitment under Article 81 (3) EC, or a commitment in the framework of merger control).

Second, the factual and legal parameters to be examined by the arbitrator or arbitral tribunal will not normally result from a contractual relationship, but will be based on the European Commission's decision, for instance a decision that access must be granted to

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a network, or a decision that any third party satisfying certain criteria may request to be granted a license. Hence, the criteria and reasoning established in the Commission's decision will have to serve as the yardsticks and goal-posts for measuring compliance and for determining each party's obligations in the framework of the arbitral decision.

Third, speed of the process is a characteristic element. It is for good reasons an important element of concern also to the European Commission, since the goal of maintaining the required level of competition would not be addressed, unless an arbitral decision will be available within the timeframe determined by the Commission's decision.

Fourth, it is in the nature of such arbitration that the Commission itself will take an interest in being appraised of the process and its result. This is an inevitable and at the same time necessary implication which must be understood against the background that the European Commission cannot delegate out of its own hands its responsibility of supervising compliance with EC competition rules.

5.1.16 A Speedy Resolution Must be Available

This element has already been discussed above. It suffices to add that the European Commission attaches a very significant importance to the time-element. In several cases, the Commission had required an arbitral process to be accomplished within one month (for instance in the cases Shell/DEA, Vodafone/Mannesmann, Allied Signal/Honeywell and Telia/Sonera). The Commission was slightly "more generous" in allowing 45 days in Piaggio/Aprilia, two months in Alcatel/Thomson, and three months or even five months in other cases, calculated from the day of appointment of the arbitrator, or from the constitution of the arbitral tribunal.

However, the "wisdom" of such time-constraints needs to be discussed. Experience tells us that it will almost be impossible to satisfy the needs of due process, and the needs of a thorough arbitral review and examination, if a decision has to be rendered in anything less than a timeframe of between 3-6 months. Such a timeframe would seem to be the minimum required for a careful and lege artis examination of the matter. After all, in most cases, lawyers advising the parties may take their time to submit their written submissions and, most essentially, for collecting the economic data and market data as might be required under the circumstances, for filing, if need be, economic reports prepared by experts, and for setting aside several days if not weeks for hearings.

Moreover, depending on the matter, a particular speed (as had frequently been imposed by the Commission) may not always be necessary: For instance, if the arbitral decision only will have to determine the pricing for access to a network, or the pricing of royalties under a license to be granted to a third party, time would not really seem to be as critical relevant as in totally different cases where indeed a third party would be pushed out of business in case access to a market or to a facility, or to continued deliveries of goods, would be denied. Hence, the time-constraints must be considered carefully and in each case under a rule of reason approach.

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Two elements are of particular importance in this context: first, the discussion of the time-requirements at the occasion of an upfront Organizational Meeting (see the next paragraph) and second, the important function of interim measures in this particular context (see further below).

5.1.17 The Upfront Organizational Conference

A very important aspect of the process is the holding of an Organizational Meeting to be attended by the parties, their counsel and the arbitrators, right at the beginning of the proceedings. It sometimes might be possible to simply hold a telephone conference for one or two hours to discuss the procedure and the timing. However, experience tells us that in almost all cases it will be much preferable to hold an Organizational Meeting at the place of arbitration (or any other more convenient location), and to set aside at least one full day for the purpose. There will be a good dozen or more points to be discussed and settled:

• Typically, an Organizational Meeting will start with summary presentations of each party's case (typically during something like 15-45 minutes for each side), providing the essence of the case and the positions as may already have been explained in the earlier request for arbitration and any answer that may have been filed in response to that.

• In most cases, the arbitral tribunal will have prepared, on the basis of the Notice and Request for Arbitration and the subsequent Answer, an ICC-type of Terms of Reference, wherein briefly setting out the parties, the background of the dispute (including a reference to the underlying Commission Decision and the commitments reflected therein or in its pertaining attachment), the arguments and requests of each party, the issues to be determined and some further procedural matters to be laid down in such document. See hereto also the next paragraph.

• Thereafter, the particular needs of further written submissions, the gathering of evidence and the milestone-dates will have to be discussed and laid down in a Procedural Order.

• Matters of the collection of documentary evidence, economic data and market information will need to be discussed.

• Parties may wish to involve economic/commercial experts, and the presentation and reception of their evidence and reports will require discussion, including their availability for examinations at the occasion of the main Hearing.

• Possibly, further fact witnesses and legal experts may have to be asked to submit written statements and reports, and may moreover be asked to testify at the occasion of the main Hearing.

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• Typically, the confidentiality of economic data/financial data will most likely be a critical issue, and the arbitrator or arbitral tribunal may have to devise particular measures for safeguarding legitimate concerns of confidentiality and business secrets. For instance, access to confidential documents may be strictly restricted on the basis of a Protective Order to be issued by the arbitrator (or arbitral tribunal); or else, sometimes, the arbitral tribunal might have to appoint a special Confidentiality Advisor for reviewing certain confidential matters who will then render a "sanitized" report on his findings.

• The question also arises whether the arbitrator himself (or the arbitral tribunal) should appoint an independent expert (such as an economic expert, or technical expert) to be assisted in his/its task. If so, such an appointment will trigger a good dozen of separate issues which will need to be discussed carefully with the parties so as to define the tasks of such independent expert, his function, the defining of the mode of communications and the like. For instance, a question will be whether such independent expert may carry out his own investigations at the premises of one of the parties, or whether such investigations can also be carried out in the presence of the other party. Further issues will be whether such independent expert should render a written Opinion prior to the Hearing, and whether he shall be examined and cross-examined on the basis of the Opinion rendered by the parties, their counsel and moreover by the experts of the parties themselves.

• A further major issue at the occasion of the Organizational Meeting will be the need, if any, to consider interim relief (in the sense of provisional measures). We may expect that this aspect will be crucial in all cases where, as a matter of urgency, matters of an efficient and workable competition are at stake. The European Commission therefore, for good reasons, attaches great importance to the availability of interim measures. See below.

• The venue and time-budget for the main Hearing will require discussion. Sometimes, one or two days for the Hearing may suffice. Sometimes, one, two or more weeks will have to be assigned for the purpose. Again, there are one or two dozen items to be discussed so as to properly set the stage for such Hearings, including further presentations by the parties, examination of witnesses (including party representatives such as the CEO, the CFO, managers, inhouse counsel, third party witnesses, inhouse experts and external experts), the mode of examinations, the presence of other persons (such as subsequent witnesses) during the examinations, the reporting (typically through professional court reporters establishing a verbatim transcript of the Hearings), post-hearing oral pleadings, post-hearing written submissions, subsequent further steps as may have to be directed by the tribunal, and ultimately cost-filings by the parties.

• A further point of discussion might be the information required by the European Commission on the process and, as the case may be, the involvement of the Commission if so required, for instance the considering of an amicus curiae brief. See below.

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• Finally, financial matters need to be discussed (unless this is catered for in the framework of institutional arbitration). It may very well be that the arbitrators' tasks will involve hundreds of working-hours, and an appropriate mode of remuneration will have to be agreed.

5.1.18 Terms of Reference and Procedural Timetable

The establishment of Terms of Reference in this context is particularly important because, in most cases, no arbitration agreement pre-exists between the disputing parties. Hence, the Terms of Reference, to be signed by the parties and the arbitrators, will in itself constitute an arbitration submission pursuant to the terms of Article II of the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards.

It is equally important and indeed good practice to lay down the procedural time-table in a separate document, indicating all of the milestones of the arbitral process, with exact dates for the sequence of further written submissions, filing of documents, filing of witness statements, expert reports, dates and venue of hearings, post-hearing memorials etc.

5.1.19 Paramount Importance of Conservatory and Interim Measures

It is inherent in this particular process that the availability of interim relief will be of paramount importance with but a few exceptions, all modern arbitration acts confer such an authority on the arbitral tribunal, and all modern institutional arbitration rules likewise confer such authority on the arbitrator (it being understood that arbitral jurisdiction in respect of interim measures is not meant to be exclusive, and the requesting party will have the choice, if deemed preferable or more conducive for the purpose, to address itself to ordinary State courts. However, the latter avenue will normally be an exception and it would seem much more advisable to seek an order for interim relief from the arbitrator or arbitral tribunal, specifically in the framework of this kind of arbitration).

The availability of interim relief will be particularly important and critical for the third party claimant which otherwise (absent an interim order) would be pushed out of the market, or would indeed have to face bankruptcy if the other party for instance persisted in a refusal to effectuate supplies, or persisted in its refusal in its refusal to grant access to an essential facility.

Due to importance of this measure, it must be expected that arbitral tribunals will take a robust view and, where so warranted, will in fact promptly and efficiently issue interim orders for protecting properly supported and justified claims for interim measures.

Where an interim measure is granted, one would normally expect that the competition concern will, thereby, be either softened or altogether removed during the pendency of the interim measure. Hence, the advantage will be that, under such premise, the arbitral procedure might be conducted on a more relaxed timeframe, allowing each party as well as the arbitrators to very carefully examine all of the issues involved.

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5.1.20 Confidentiality

Maintaining confidentiality and respecting the confidential nature of information obtained in the framework of the arbitral process is a keyconcern and probably of more significance than in many other types of arbitrations. Many recent arbitration commitments accepted by the Commission contain a specific clause.

The arbitral tribunal must be particularly attentive to matters of confidentiality, and the model arbitration commitment should clearly spell out the confidentiality obligation incumbent on all those who may be involved in the proceedings in any capacity. Moreover, as the case may require, legitimate interests may require particular protection, for instance through more specific Protective Orders issued by the arbitral tribunal which, for instance, may clearly define the persons who will have access to particular confidential information, and each of them might be required to sign a confidentiality undertaking. In some cases, the arbitral tribunal may have to devise an even more restrictive approach, for instance by providing that certain confidential data will only have to be made available to an outside (so-called) Confidentiality Advisor, not connected to any parties, who will get access to the particular trade secret or other confidential data and will thereupon render a "sanitized" report.

5.1.21. Burden of Proof and the prima facie Evidence Rule

A remarkable element of several Commission Decisions is the fact that, in several of them, the Commission has set the essential parameters for the carrying of the burden of proof. It did so in the sense that the claiming third party only has to establish a prima faciecase, and the burden of proof would then lie on the responding merged party/parties to disprove the allegations. I have termed this the "prima facie Evidence Rule" which, for instance, was reflected in all of the most recent Commission's decisions, particularly in respect of Vodafone Airtouch/Mannesmann, Vivendi/Canal+/Seagram, Shell/DEA,Telia/Sonera, Newscorp/Telepiù, GE/Instrumentarium and Air France/KLM.

Such an allocation of the burden of proof clearly operates in favour of the claiming third party and makes the arbitration-avenue particularly attractive to it. For this reason alone, we would be surprised if a third party would indeed prefer to bring its case before ordinary State courts where such benefit may indeed not be available. In fact, State courts might take the view that the burden of proof must be allocated to the claiming party, for instance for a full substantiation of an unfair or unequal treatment, and if so, the claiming party might run into very significant difficulties, since it may not have access to the materials, and may not obtain such access through requests for production of documents (unless local court procedures would allow US-style discovery or UK-style of disclosure of documents).

The shifting of the burden of proof, as reflected in numerous Commission Decisions, will appear to be justified in most cases, since all the relevant materials might be in the files of the responding merged party.

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5.1.22 Tribunal-appointed Experts and Investigative Powers of the Arbitral Tribunal

Quite typically, Arbitration Acts as well as institutional arbitration rules do confer upon an arbitral tribunal the power to appoint its own expert(s), and authorize the arbitral tribunal to investigate the matter "by all appropriate means" (for quoting the most famous succinct wording reflected in Article 20.1 of the ICC Arbitration Rules). However, in the framework of commitments-related arbitrations, this authority is of a particular importance, and discussion with members of the Enforcement Unit of DG COMP has underlined the importance attached to this authority. It is therefore appropriate to express this authority very clearly and explicitly in the framework of the Model Arbitration Commitment. It gives a signal to the parties that the arbitral tribunal may not simply be satisfied with materials put to it by the parties but that, beyond such materials, the arbitral tribunal will have the authority to require any further information deemed necessary for enabling it to render a fully informed decision on the matter. This authority includes, more particularly, the authority to appoint independent experts, and arbitral tribunals should indeed be more prepared to make use of such authority even in those cases where none of the parties would request such appointments.145

Wherever the arbitral tribunal appoints an expert or experts of its own, it will be particularly important for the tribunal to lay down the parameters of such expert(s) mission. Certainly, the expert(s) should have access to all of the files, and should participate in the entire proceedings so as to have the same "learning curve" as the arbitrators themselves. However, further questions will arise as to whether or not the expert(s) can or should embark on further fact-finding, for instance by taking up further documents and gathering further information from each of the arbitrating parties, whether such investigation by the expert(s) can be carried out independently (or whether due process in this context would require that the other party will be able to assist and accompany any such step through one or more of its own delegates or of its own experts). Moreover, the question will arise whether the independent expert(s) shall have to voice its/their findings or comments in unstructured oral communications with the arbitrators, or whether this should only be done

145 In "normal/ordinary" arbitration cases, arbitrators will normally be very hesitant to appoint their own neutral (tribunal-appointed) expert where none of the parties so request, or where both parties would find such an appointment superfluous (normally on the argument that the parties would prefer to instruct the arbitral tribunal through their own party-nominated experts, making a further appointment by the tribunal itself superfluous). In those "ordinary/normal" cases, arbitral tribunals tend to accept such proposition and will consider it as an explicit authority and indeed mandate, conferred onto the arbitral tribunal by both parties, that the tribunal would render its decision on the basis of the materials put to the tribunal by the parties, thereby implying the explicit authority to the tribunal that it should appreciate such materials (and the information received from party-nominated experts) to the very best of its own ability, without any further guidance by a neutral expert. While this is fine for "normal/ordinary" arbitrations, we need to appreciate, in the framework of commitments-arbitrations, that there is an angle of public interest involved in the matter. Hence, there is a considerable "edge" of the arbitral tribunal's duty to "get it right", not only as a matter of a purely private interest between the arbitrating parties, but also as a matter of the underlying public interest. Hence, arbitral tribunals - when arbitrating commitments under Articles 81/82 or the ECMR - should take a different and possibly more robust stand, and should not shy away from appointing experts, such as economic experts or scientific experts. The European Commissions, for good reasons, attaches importance to this aspect.

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based on a written neutral Expert(s) Opinion, also communicated to the parties, which then would have to "stand its test" at examinations and cross-examinations at the Hearing. Hence, numerous important aspects need to be considered, discussed and agreed, and typically, this should be tabled for the Organizational Meeting.

It requires no further discussion to indicate that the appointment as such of a neutral expert(s) may require very particular care so as to make sure that the expert(s) is/are truly independent of the parties, and obviously the parties must be given an opportunity to comment on any candidate (whether proposed by a party or proposed by the arbitral tribunal). Experienced arbitrators are very well familiar with all of these matters, and this therefore does not need to be further elaborated here.

5.1.23 Legal Framework: The Arbitral Review is Clearly and Narrowly Focused

In most cases, the focus for arbitral examination will be rather narrow. The basic orientation for the arbitral tribunal will have to be derived from the Commission's decision and from a proper understanding of the competition concerns voiced therein. However, the factual analysis of the parameters may nevertheless be complicated, may be heavily fact-related, and may involve a very thorough examination of financial data, market data and related economics. For instance, the determination of a fair and non-discriminatory pricing for the access to a pipeline network, or a telecommunication network, may be overly complex, particularly in situations where such network has not so far been opened to other competitors, and where no comparative market data are readily available.

The yardsticks and goal-posts are set by the Commission: In the same sense, the most significant legal orientation will have to come from a correct application and interpretation of the Commission's decision, and it does not seem that particular national laws would be relevant. Rather, the legal ground for a third party's claim is the commitment given by the merging parties to the Commission, which as such implies an undertaking of the merging parties to treat third parties (typically competitors, suppliers, buyers, licensees or consumers) in compliance with such commitment. It may be expected that all relevant national laws will recognize the validity and binding nature of such commitment. However, slight differences may nevertheless exist in respect for the remedies available. An example may highlight this: Assume the merged Party A, a dominant market player, charged an excessive access fee for the use of a network to its competitor B, and assume that B, nevertheless, was able to pass on such excessive access fee to its own customers/users, it could be argued that B as such does not suffer any damage. Nevertheless, the question might arise whether party B may sue the party A for surrendering the illegitimate gain ("Herausgabe des unrechtmässig erzielten Gewinnes").National laws might differ on this aspect.

A delicate question may arise, particularly in those cases where a behavioural commitment is to remain in place for a longer period of time such as several years. During the passage of time, the micro-economic as well as the macro-economic landscape may significantly change, and the question may arise whether an arbitral tribunal will have to

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"religiously comply" with the yardsticks set by the Commission's decision irrespective of the fact that the economic landscape has meanwhile changed. A most striking example how things may change rather unexpectedly is the development in the aircraft market. It needs no particular economic insight, for instance, to realize that the famous Boeing/McDonnell Douglas decision, and the significant competition concerns voiced therein by the European Commission, and its prognosis made regarding the aircraft market for the next 10-15 years, proved to be significantly wrong, essentially as a repercussion of 11 September 2001 and the impact of that event on the airline industry. What then can the parties do? And what should the arbitrator do when realizing that parameters important for the assessment of the competition parameters have significantly changed since the rendering of the Commission's decision?

An obvious answer would be that the interested party addresses itself to the Commission, asking it to amend its decision, or relax the compliance with a particular commitment.

Alternatively, the interested party might convince the arbitral tribunal to apply or interpret the commitment taking into account changed circumstances. It will then be for the arbitral tribunal to carefully consider the issue, and it will have to reflect on whether it may adapt the "goal-posts" to changed circumstances. This, however, should not be understood as a carte blanche for an arbitral tribunal to ignore the decisions made by the Commission, or to supplant its own view over that expressed by the Commission. However, a proper administration of justice always requires a rule of reason approach, and if an arbitral tribunal carefully explains in its decision why competition concerns are not or no longer justified, there will be a good chance for any reasonable competition authority to find such a view acceptable under the circumstances. In this context, it might be particularly helpful and indeed beneficial for the process if the European Commission, through a delegate, would comment on such issues during the arbitral process, for instance by filing an amicus curiae brief. Moreover, if the parties so agree, any other and further participation or involvement of such a delegate in the arbitral process might be desirable. Certainly, the arbitrator(s) would benefit greatly from also considering, for the purpose of the decision, any comments as may be voiced by such delegate of the Commission.

Quid, if the arbitral decision departs from the yardsticks set by the Commission's decision, and where the Commission disagrees with the finding of the arbitrator(s)? The answer to this question would seem to be obvious: The European Commission is in no way bound by the arbitral decision. Rather, the Commission may draw its own conclusions, for instance by concluding that - despite the arbitral decision - the merged party did not satisfy and live up to its commitments and, as a consequence, the Commission may be prompted to revoke its decision taken under Article 6 or 8 ECMR, or order any other appropriate measures to ensure that a sufficient level of effective competition be maintained. Hence, it should be clear that, in any event, the European Commission remains entirely free to draw its own conclusions on the matter and will not as such be bound by an arbitral decision. Finally, at the end of the day, an arbitral decision would not ultimately succeed in enforcement proceedings if the arbitral decision would stand in

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conflict with a decision taken by the European Commission. This seems to be sufficiently clear on the basis of the Eco Swiss/Benetton Decision and, more particularly, Article 16 of Regulation 1/2003.

5.1.24 The Arbitral Decision

In any preliminary ruling on interim relief as well as in the framework of the final arbitral decision, the Tribunal shall decide on any action to be taken by any of the parties in order to ensure compliance with the commitments.

Moreover, the Final Arbitral Award shall have to determine any and all claims, motions or requests which the arbitrating parties have submitted to it.

5.1.25 Pendulum Arbitration

If so laid down in the commitment accepted in the framework of the Commission's Decision, the arbitral decision shall be in the form of a decision of either adopting a particular proposal of the Requesting Party, or the proposal of the Responding Party (but not in between the two). The European Commission has adopted this formula in several earlier decisions, for instance in Shell/BASF, Dow Chemical/Union Carbide, and most recently in Alcan/Pechiney II. This type of arbitration procedure is also practiced in other commercial arbitrations, for instance in deciding on a deadlock between 50:50 joint venture partners. The procedure has frequently been termed "last Offer Arbitration", and US lawyers have imported that message from their "base ball arbitrations".

5.1.26 Decision on Costs

Again, it is recommended to specifically spell out that the Arbitral tribunal shall decide on all cost implications to be borne by either party. Many Commission Decisions do make a specific reference to this aspect.

5.1.27 Information of the European Commission

In several past Decisions, the Commission has required to be appraised of the arbitral process and, thereby, to be informed on the development of the procedure. This matter involves delicate issues between the confidentiality of the arbitral process (and legitimate claims of confidentiality by the arbitrating parties) on the one side, and the interest (and indeed task and responsibility) of the European Commission to properly exercise its core mandate based on the EC Treaty.

Hence, the burning question is to define how much control may (or should) be exercised by the Commission which would still be acceptable to the arbitrating parties. Clearly, it would be beyond what is reasonably needed to suggest that any and all documents submitted in the framework of the arbitral process should also be made available to the Commission, or should be available for inspection. On the other hand it appears legitimate that the Commission be informed on the initiation of arbitral proceedings, that it be kept

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appraised of the arbitral process, and that it receives copies of the Terms of Reference, the Timetable, any Order for Interim Relief and the Final Award.

Such information would, however, not include the parties detailed written submissions (memorials), would not include any particular documents submitted by the parties, would not include witness statements and expert reports, and would not include the normal procedural Orders emanating from the arbitral tribunal, nor the verbatim transcripts of the Hearings.

Understandably, the "arbitration community" would wish to keep this flow of information to a strict minimum, whereas the Commission may wish to have a rather broad right of access to any materials submitted in the framework of the arbitral process (although it would seem rather unlikely that the Commission would indeed wish to make any broad use of such access).

The Draft Model Arbitration Commitment aims to strike a middle way by defining the access to information; however, obviously, the need and requirement of the Commission to such information may be a matter of further reflection and discussion in each individual case.

5.1.28 Further Participation of the Commission

Discussion with members of the Enforcement Unit has shown that, really in exceptional cases only, the Commission may wish to be more closely appraised of the process, and may wish to retain or reserve its right to moreover request copies of the parties' memorials and other written submissions, documents and reports. Moreover, the Commission may wish to reserve its right to take part in the Hearings, for instance by delegating a "silent listener", or by delegating someone who also may be questioned by the Tribunal, or may share, at the Hearing, any particular views, concerns or proposals of the Commission.

It should clearly be understood that any such further participation of the Commission would be a truly exceptional matter and, most probably, such further participation would only be requested if required by a strong public interest in the matter. Some past experience in this field has shown that the parties and the Arbitral Tribunal should indeed benefit from such a participation, and it is certainly justified to attest to such representative of the Commission a sound portion of reasonableness.146

146 Some cases have been handled, with the agreement of the parties, on an "open book basis" and in contact with a member of the relevant competition authority, and the experience gained therefrom was indeed positive for the parties involved. Moreover, the procedure handled in that manner was able to build up a strong level of confidence, such that no further proceedings or measures had to be contemplated by the competition authority and (in another case) by a local court which had been seized in parallel to the arbitral proceedings.

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5.1.29 Assistance by the Commission

The Commission's decision is likely to circumscribe in general terms the precautions and measures to be taken by merging parties so as to maintain a satisfactory level of competition. Such directions will not normally be case-specific, and it is quite likely that questions as to the correct interpretation of the commitments and the requirements of the Commission may arise.

In this scenario, the question will arise as to whether the Arbitral Tribunal may, should or indeed must inform the Commission in order to seek the Commission's view and interpretation. In the Air France/KLM arbitration commitment, the Commission has requested a "shall clause", and the same solution was previously adopted in the GE/Instrumentarium clause. In both Decisions, it was also made clear that the Arbitral Tribunal shall be bound by the interpretation provided by the Commission. In contrast, in the Piaggio/Aprilia commitment, only a “may clause” was used.

It seems more appropriate to provide that the Arbitral Tribunal may seek the Commission's interpretation, rather than to make this an imperative obligation. Moreover, it seems appropriate to provide that the parties should be consulted first, so as to avoid that the Tribunal would address itself to the Commission unbeknownst to the parties.

Moreover, it does not really seem appropriate or necessary to reflect, in the Model Arbitration Commitment, that the Arbitral Tribunal would be bound by the Commission's interpretation. The reason for this is twofold:

First, the Commission's interpretation may have been provided on a rather abstract basis, and the inquiry put to the Commission may not have been burdened by all the very detailed factual parameters. Hence, it should be left to the authority of the Arbitral Tribunal to integrate the interpretation provided by the Commission into the set of very particular facts.

Second, the arbitral decision will anyhow not as such be binding upon the Commission, and the Commission is entirely free to draw its own conclusions when analysing the matter or when reviewing the Arbitral Award communicated to it. In any event, where the arbitration has been conducted, as I expect, on a high professional standard, it would seem quite unlikely that the Commission would draw different conclusions, different from those of the Arbitral Tribunal, or even disregarding them.

However, obviously, while the Arbitral Tribunal will decide on the civil law implications(i.e. the obligations of the merged party vis-à-vis a claimant/competitor in terms of, as an example, access to a network, an essential facility or a technology), and will possibly have to rule on damages, it will be for the Commission to consider whether, in case the behavioural commitments had not been honoured, administrative sanctions (i.e. fines) will have to be imposed over and above the civil law determinations made by the Arbitral Tribunal.

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5.1.30 Obtaining Information

In addition to any issues regarding the proper interpretation of the Commission's decision, an arbitral tribunal might be helped by any further comments or opinions the Commission may have on questions concerning the application of the commitments, or e.g. on market data. Again, it would not seem appropriate to require the Arbitral Tribunal to address itself to the Commission for providing any such further comments or information. However, it appears useful to consider such a possibility, provided the Arbitral Tribunal has carefully consulted thereon with the parties.

The question may arise whether such comments received from the Commission should then be binding upon the arbitral tribunal, quite in the sense as the Commission, in its most recent Decisions, required that its interpretation shall be binding upon the Arbitral Tribunal.

However, it seems appropriate to distinguish these two types of communication:

• The Commission's interpretation on matters of its own Decision is likely to be of a general/abstract nature and will not necessarily be tied to the appreciation of a precise individual issue (to be appreciated and determined by the Arbitral Tribunal). Hence, for the sake of such a general interpretation, it is understandable that the Commission has so far required that its interpretation be binding on the Arbitral Tribunal.147

• Any further comments or opinion of the Commission in respect of a question or issue raised by the Tribunal would in most cases, however, be rendered on a specific issue within the broader context under examination before the Arbitral Tribunal; such comments or opinion of the Commission will be akin to just one (out of many) elements within the broader “mosaic” of fact-elements to be analysed by the Tribunal. Hence, it stands to reason to conclude that the Tribunal should not be bound by the Commission’s comments or opinion, but should be free - on a rule of reason - basis - to consider the Commission’s point of view within the overall assessment and determinations to be made.

147 Compare hereto the very extensive debate regarding the Masterfoods Decision which gave rise to the new provisions of Articles 15/16 of Regulation 1/2003 (with the distinction that, in cases where the Commission has only rendered an opinion under Article 15 (3), such opinion would not as such be binding on National courts, whereas, in those cases where the Commission has in fact already rendered a Decision, such Decision would be binding upon National courts (and a court judgment therefore must not contradict a Commission Decision); see hereto Article 16 (1) of Regulation 1/2003. This distinction was justified on the argument that, for rendering an opinion under Article 15 (3), the Commission may not have examined the overall context in the same depth and thoroughness as in the quite different context where the Commission has already rendered a Decision, and where therefore the Commission had to examine all relevant aspects. -- It appears justified to use the same distinction in the framework of an interpretation provided by the Commission in respect of the commitments it had required in its Decision on the merger (and where the Commission has required that its interpretation be binding) on the one hand, and - on the other hand - any further comments or opinions the Commission may render upon an inquiry of the Arbitral Tribunal (the latter, as such, would rather be akin to an opinion under Article 15 (3), and thus be of a non-binding nature). In any event, such a distinction makes a good and logical sense.

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5.1.31 Amicus curiae Briefs

In discussions held so far, the Commission has stressed the point that it may wish to have the possibility to file, in the framework of the arbitral proceedings, an amicus curiae brief. In explaining this position, reference was made to Article 15 (3) of Regulation 1/2003 as a matter of analogy. In the latter context, the Commission likewise does have the right to file amicus curiae briefs in the framework of ordinary state court proceedings, and it does not seem critical, under the aspect of maintaining a sufficient degree of independence of the arbitral process, to also allow the filing of an amicus curiae brief in the framework of arbitral proceedings on merger-related commitments. See for instance in the most recent Piaggio/Aprilia arbitration commitment accepted by the Commission.

Again, it is quite clear that an opinion expressed therein by the Commission would not as such be binding on the Arbitral Tribunal.148

5.1.32 Overall Timeframe

The overall timeframe for the arbitral decision, in previous decisions rendered by the Commission, was characterized by extremely short time-budgets, with time-limits as short as one month (for instance in Telia/Sonera, Allied Signal/Honeywell and Shell/DEA), 45 days in Piaggio/Aprilia, or two months (in Alcatel/Thomson CSF-SCS), four months (in SEB/Moulinex), or five months (in UIP).

Probably anything less than six months might appear to be an almost unreasonable speed which, quite inevitably, would have a negative impact on the integrity of the arbitral process and the thoroughness of the arbitral decision.

Hence, it appears justified to basically provide for a timeframe of six months. Such a timeframe, considering the numerous steps as will be involved in a proper handling of the matter, will result in very short time-limits for organizing the arbitral proceedings, for holding the Organizational Meeting, for considering matters of interim relief, for exchanging further written submissions, including documentary requests and the like, for filing written witness statements and expert reports and for holding hearings (which indeed may last several days), and for further post-hearing briefs as the parties may be required to file, and for the rendering of a reasoned arbitral award.

5.1.33 Extension of the Timeframe

The Arbitral Tribunal should have the possibility to submit an application to the Commission (and, if an arbitral institution is involved, to the institution as well) to apply for an extension of the time-limit, where so required. It will be appropriate for the Tribunal to state therein the particular reasons, the further steps yet to be accomplished until a final

148 Nevertheless, in this context, it would not be justified to fear that the Commission, in all such cases, would deploy an over-enthusiastic eagerness to file an amicus curiae brief; rather, any such filing will probably be a very rare exception, and where the matter submitted to the Arbitral Tribunal would indeed seem to be of a very particular or even general nature, and thereby implying a public interest.

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decision can be rendered, and to comment from its perspective on any particular impact on competition.

In this context, it may make a considerable difference whether the Arbitral Tribunal has already issued an Order for interim relief which, as such, may properly remove competition concerns during the pendency of the arbitral proceedings.

5.1.34 General Provision

It appears useful to reflect the notion that the Arbitral Tribunal shall have a wide discretion to discharge its duties. Moreover, it is useful to recall the Tribunal's duty to make sure that the resulting award is legally enforceable.149

5.1.35 Non-Binding on the European Commission

It has already been mentioned that the Arbitral Award will not as such be legally binding upon the Commission.150 The Commission has and maintains its own independent duty as the regulator and, as such, will be free to draw its own conclusions under the circumstances, and in particular may impose administrative sanctions as provided for under the ECMR 2004 in case an obligation (imposed by the Commission's Decision on the merger) has not been fulfilled.

5.1.36 The Review Clause

A review clause has found its way into the most recent arbitration provisions reflected in the Commission decisions. It appears useful to provide that, where an arbitral tribunal is seized with the matter, the Commission may invite the Arbitral Tribunal to comment on any review in respect of behavioural commitments, for instance on their necessity, their impact, or on an adaptation to changed circumstances, or relaxation.

The Arbitral Tribunal, if so invited, will certainly wish to consult with the parties prior to submitting any comments. Likewise, it appears justified to provide, within the Model Arbitration Commitment, that the Arbitral Tribunal may also submit its own recommendations to the Commission, and again, an arbitral tribunal will be well advised to first consult with the parties.

5.2 Elements Not Reflected in the Proposed Model Arbitration Commitment

There are certain element (which we have seen reflected in past Commission decisions and pertaining commitments of the Parties) which I have not reflected in the Model Arbitration Commitment proposed as per Part F below, for instance:

149 Compare hereto the "famous" general rule of Article 35 of the ICC Rules and Article 32.2 of the LCIA Rules.

150 See explicitly in BSkyB/Kirch Pay TV, Newscorp/Telepiù.

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• No requirement that arbitrators need to be approved by the Commission (←→BA/TAT, Sanitec/Sphinx, Allied Signal/Honeywell)

• Designation of an arbitrator (avoiding the confusion with an expert)

• No provision that the weaker party’s law (procedural and substantive be applied,

and its language (←→ UIP)

• No requirement that the arbitral process as such should be approved by the

Commission (←→ EBU, BSkyB/Kirch); information only

• No requirement that the parties submissions (memorials) be copied to the

Commission (←→ Allied Signal/Honeywell)

• No requirement that the arbitral award must be reviewed by the Commission (←→Campari-Milano)

• No provision that compliance with the award be monitored by an expert reporting to

the Commission (←→ Allied Signal/Honeywell)

• No provision that appeals should not be possible; waiver of appeal (←→ Allied

Signal/Honeywell), or should be directed to a particular instance (←→SEB/Moulinex)

6. Proposed draft Model Text of the Arbitration Commitment

I suggest a draft Model Arbitration Commitment along the following lines:

Quote:

In the event that a third party such as a prospective new entrant, service provider,

competitor or a prospective licensee, customer or user (hereinafter referred to as “the

Requesting Party”) claims, or has reasons to believe, that the Merged Entity, or an

undertaking pertaining to or controlled by it (hereinafter “the Responding Party”), has failed

to comply with the requirements of the commitments as defined in the Commitment Letter

and/or the Commission Decision (“the Commitments”) given to, and approved by, the European

Commission in the framework of the merger control proceedings pursuant to Council

Regulation No. [4064/89 or] 139/2004, the fast-track dispute resolution procedure as

described herein below will apply, consisting of a consultation phase according to Clause 2

herein below, followed, if necessary, by an arbitration phase pursuant to Clauses 3 ss.

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Consultation

Any Requesting Party who wishes to avail itself of the fast-track dispute resolution

procedure shall submit a written notice (“the Notice” 151) to the Responding Party, setting

out in detail the dispute, difference or claim (“the Dispute” 152), by stating the reasons

leading that party to claim or believe that the Merged Entity is failing, or has failed, to

comply with the requirements of the Commitments, and setting out its claims.

The Requesting Party and the Responding Party will use their best efforts to resolve the

Dispute through consultation153 within a reasonable period of time, however not exceeding

fifteen (15) business days after receipt of the Notice.

Arbitration

Notice: Should the Requesting Party and the Responding Party fail to resolve the Dispute

through consultation, the Requesting Party shall file the Notice, in the sense of a Request for

Arbitration, to the [� insert an institution154, hereinafter “the Arbitral Institution”], with a

copy of such Notice and Request for Arbitration to the Responding Party.

Answer: The Responding Party shall, within ten (10) business days from receipt of the Notice

and Request for Arbitration, submit its Answer, providing detailed reasons for its conduct.

Language: The arbitration shall be conducted in the � [English] language.

Constitution of a Three-person Arbitral Tribunal: The Arbitral Tribunal shall consist of

three persons. The requesting party shall designate its Arbitrator in the Notice. The

responding Party shall designate its Arbitrator in the Answer. The two nominated Arbitrators

shall, within five business days, nominate the Presiding Arbitrator, making such nomination

151 The Notice should be specific enough setting out the relevant factual, economic and, if necessary, legal parameters in sufficient detail, and should include precise requests. The Notice should be supported by the most relevant documents. - The reason for this requirement is twofold: The consultation period is very short and, typically, such a Notice will have to be considered by the upper management of the Merged Party. Hence, in the interest of time, the Notice should in itself be a comprehensive document. There is, however, a second reason for this requirement. In case the consultation should not result in a settlement and if, therefore, the matter should proceed into the arbitration phase, the Notice will, in essence serve as the Request for Arbitration and Statement of Claimant’s Case. Important time can be saved if, therefore, the Notice would at the same time be sufficiently detailed for initiating the arbitral proceedings. A detailed Notice will also have the advantage that prospective arbitrators can check whether they feel fit to accept a mandate, and if the arbitration should be administered by an institution (such as the ICC, the LCIA, the DIS etc.) which will equally be important that the institution has a comprehensive understanding of the parameters of the case.

152 It appears useful to define this term. 153 I deleted the words “through co-operation” from the Air France/KLM model text. 154 Such as the ICC Court of Arbitration, head-quartered in Paris, or LCIA (London Court of International

Arbitration).

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known to the Parties and the Arbitral Institution. The Arbitral Institution shall forthwith

confirm the appointments of all three Arbitrators.

[� Alternatively: Nomination of a Sole Arbitrator: Within five business days from the

communication of the Answer, the Parties shall agree on the nomination of a Sole Arbitrator,

communicating the nomination to the Parties and the Arbitral Institution. The Arbitral

Institution shall forthwith confirm the appointment.]

The three-person Arbitral Tribunal or, as the case may be, the Sole Arbitrator, will be

hereinafter referred to as “the Arbitral Tribunal”.

Default Appointment(s): Should the Responding Party fail to nominate an arbitrator, or if the

two arbitrators fail to agree on the presiding arbitrator, or should the parties fail to agree

on the sole arbitrator, the default appointment(s) shall be made by the Arbitral

Institution.155

Independence and Impartiality: Each arbitrator shall be expected to be and remain

independent of the parties and to serve as impartial arbitrator. Each arbitrator shall be

expected to communicate his/her detailed professional CV as well as a Statement of

Independence [in the form as required by the Arbitral Institution].

Place of Arbitration: The place of arbitration shall be [� insert a city].156 Hearings and

meetings may, after consultation with the parties, be held at any place the Arbitral Tribunal

considers appropriate.

Rules Governing the Proceedings: The proceedings shall be a fast-track procedure governed

by the then applicable institutional Arbitration Rules, with such modifications or adaptations

as may be necessary under the circumstances, and shall be in line with any Best Practice

Notice or Guideline issued by the European Commission (if any) and the Arbitral Institution

(if any). Procedural issues shall be agreed between the parties and the Arbitral Tribunal, or

else determined by the Arbitral Tribunal, without a requirement to have regard to the

provisions of any national Code of Civil Procedure.157

In all cases, the Arbitrators shall act fairly and impartially as between the parties and shall

ensure that each party has a reasonable opportunity to present its case.

155 In case the arbitration should be non-institutional (so called “ad hoc arbitration”), a truly independent appointing authority should be selected. Or, if the arbitration should be governed by the UNCITRAL Arbitration Rules, the appointing authority may be designated via Article 3.2 of those Rules (referring the designation of the appointing authority to the Secretary-General of the Permanent Court of Justice at The Hague); this, however, may have some impact on the time-line.

156 Again, a neutral place (not in the home country where the merged entity is registered or has its principal place of business) appears to be preferable.

157 See hereto e.g. Article 15.1 of the ICC Rules. [It may appear useful to spell this out, as local rules may not be conducive for such a fast track procedure.]

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Organizational Conference: The Arbitral Tribunal shall, as soon as practical after their

confirmation, hold an Organizational Conference by way of convening a meeting, exceptionally

by way of a telephone conference or video conference, for the purpose of discussing and

settling the steps to be taken in the upcoming proceeding, the submissions to be filed by the

parties, the filing of documents, the dealing with requests for submitting additional

documents, the collecting of relevant data as may be necessary, the filing of witness

statements and opinions of party-nominated technical, economical or legal experts, the

appointment (where deemed necessary) of a Tribunal-appointed technical or economical

expert), matters of bifurcation of the proceedings, the basic parameters for the Hearings

and for post-hearing submissions, and the like.

Terms of Reference and Procedural Timetable: Short-form Terms of Reference158 shall be

drawn up and signed by the parties and the arbitrators at the Organizational Meeting or

thereafter, and a separate Procedural Timetable shall be established by the Arbitral

Tribunal.

Conservatory and Interim Measures: The Arbitral Tribunal shall be empowered to make a

preliminary ruling on the contested issues (in the sense of an order for interim relief or

provisional measures) within one month, or the shortest possible time period159 after the

confirmation of the presiding arbitrator. The preliminary ruling shall be applicable

immediately and, as a rule160, remain in force until a final decision is rendered.

Confidentiality: All parties and persons involved in the arbitral proceedings, including the

arbitrators, counsel, party-representatives, witnesses, experts shall respect the

confidentiality of the proceedings and shall not disclose or make use of any confidential

information outside the proceedings; the standards attributable to confidential information

and business secrets by European Community Competition Law shall apply.161 The Tribunal may

take the measures for protecting trade secrets and other confidential information and

documents. Such measures may include the issuance of protective orders, or the use of a

neutral person serving as a confidentiality advisor reporting to the Tribunal and the parties in

a manner without divulging confidential information.

Burden of Proof: When allocating the burden of proof, the Arbitral Tribunal shall take into

account each party’s availability of, and access to, the relevant documents. As a rule, the

158 This will be a very useful document; the ToR re-confirm the parties agreement to submit the matter to arbitration; the Terms of Reference also constitute an explicit/written arbitration agreement under the terms of the 1958 New York Convention. The Procedural Timetable is likewise an important tool.

159 I added this, in order to avoid a dispute that such an order, if issued on the 31st day, would no longer be permissible.

160 “As a rule” denotes the understanding that the Tribunal may decide otherwise; the Tribunal will be free to re-visit the matter and to amend such an Order, if deemed necessary; such orders do not have a resjudicata effect.

161 See for instance explicitly in GE/Instrumentarium.

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Requesting Party must produce evidence of a prima facie case, and, if the Requesting Party

produces such evidence of a prima facie case, the Arbitral Tribunal must find in favour of the

Requesting Party, unless the Responding Party can produce evidence to the contrary.162

Tribunal-appointed Expert(s) and Investigative Powers of the Arbitral Tribunal: The

Arbitral Tribunal may decide to appoint its own technical, economic or other Expert(s), define

their terms of reference, receive their reports and, if deemed necessary, examine them at

the Hearing. The Arbitral Tribunal may summon any party to provide additional evidence and

may collect market information and market data from other sources, establishing the facts

of the case by all appropriate means.

Legal Framework: The Arbitral Tribunal shall render its decision by having regard to the

parameters laid down in the relevant Commission Decision, and by applying general principles

of law, without a requirement to apply a particular national legal system; in determining the

rules of law to be applied, the Tribunal shall consider163 inter alia any choice of the rules of

law as may have been made by the parties.

Arbitral Decision: The Arbitral Tribunal, in its preliminary ruling (if any) on interim relief as

well as in its Final Award, shall also decide the action, if any, to be taken by the Responding

Party in order to ensure compliance with the commitments vis-à-vis the Requesting Party164,

and shall render a final arbitral award determining any and all claims, motions or requests

submitted to the Arbitral Tribunal.

Decision on Costs: The Arbitral Award shall, in order to dealing with the merits of the claim,

determine the reimbursement of the reasonable party-costs to the successful party and the

allocation of the arbitration costs (administrative costs, fees and disbursements of the

Arbitral Tribunal).

Information of the Commission: The Commission will be kept informed on the procedure as

follows, and shall in any event receive copies of the following:

• the Notice of Arbitration and the Answer

• any and all Orders of the Arbitral Tribunal

• the Terms of Reference and the Procedural Timetable

• any Orders for Interim Relief

162 Compare hereto many recent clauses accepted or required by the Commission, e.g. in Telia/Sonera, Vivendi/Canal+/Seagram, Air France/KLM, Shell/DEA, Newscorp/Telepiù, Alcan/Péchiney.

163 The word “consider” indicates that the Tribunal will have the authority to disregard a choice of law of the parties where such choice was made with the intention to frustrate the effectiveness of the Tribunal’s scrutiny, or if such choice would stand in contradiction to the mission of the Arbitral Tribunal. However, this may be a remote eventuality.

164 See hereto explicitly in GE/Instrumentarium.

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• the Final Award.165

Further Participation of the Commission: In exceptional cases, the Commission may require

to monitor the arbitral proceedings more closely, by requesting copies of the parties

memorials and other written submissions, documents and reports submitted to the Tribunal,

and may require to take part in any Hearings.166 The Tribunal shall determine the parameters

in consultation with the parties.

Assistance by the Commission: In the event of disagreement between the parties to the

arbitration regarding the interpretation of the Commitments, or in the case of uncertainty of

the Tribunal, the Arbitral Tribunal may167, after consultation with the parties168, inform the

Commission and may seek the Commission’s interpretation of the Commitments prior to

rendering a Decision.

Obtaining Information: Likewise, the Arbitral Tribunal, after consultation with the parties169,

may ask the Commission to transmit to it its opinion on questions concerning the application of

the Commitments.

Amicus curiae Briefs: The Commission may, at any time, submit amicus curiae briefs during

the arbitral proceedings.170

Timeframe: The Arbitral Tribunal shall, as a rule, render its Final Award within [� six]

months of the confirmation of the appointment of the third arbitrator.171

165 Quite a number of arbitration commitments required by the Commission do provide for such information in respect of the arbitral process and its outcome; however, the parties submissions are not to be made known to the Commission; the confidentiality of the arbitral process should be maintained to the greatest extent possible, except to the extent the Commission will have a legitimate claim of being informed, for instance on the procedural timetable and the resulting award.

166 This should be a truly exceptional situation, for instance in a matter where important public interests are at stake. In any event, the Commission always has the possibility of carrying out its own investigation through its own instrumentarium. If however, in a given case, the initiation of a parallel investigation by the Commission can be avoided by affording the Commission a closer monitoring of the arbitral process, and granting the Commission an opportunity of submitting its comments on the matter from its perspective as the regulator, through an amicus curiae brief or otherwise, then the parties may be significantly helped, and they may very readily agree that the Commission may have such closer information on the matter. In any event, as this is a particularly critical issue, it seems necessary for the Arbitral Tribunal to thoroughly discuss these aspects with the parties in question.

167 See hereto the Air France/KLM clause, which however contains a “shall”-provision; this should only be a “may”-provision, as in Piaggio/Aprilia.

168 The term “consultation” leaves a freedom to the Tribunal to decide on its own; it is not proposed that the parties must necessarily agree.

169 A Tribunal should be very reluctant to ask for that, unless the parties agree to it; however, they may have very good reasons to agree that the Tribunal can ask for such opinion.

170 The Tribunal may be helped to have such input; moreover, a careful consideration of the Commission’s input by the Tribunal will have a good chance of avoiding a further parallel investigation into the matter by the Commission itself, and hence may avoid the significant impacts of such further administrative procedure.

171 Thoroughness of the arbitral investigation and the proper respecting of due process should rank higher than merely the concern of a speedy resolution. Speed is not always of the same importance; if the essential claim only is for a monetary determination between regular business parties, it is difficult to see why it would matter that the ultimate monetary determination be available by a particular date. However,

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Extension of the Timeframe: Should an extension of the timeframe provided for in the

preceding paragraph be necessary, the Arbitral Tribunal shall submit an application to the

Arbitral Institution as well as to the Commission, stating the reasons for the additional time

required, describing the further steps as are contemplated until a final decision is reached

and communicated, and where appropriate commenting on the likelihood of any impact on

competition.

General Provisions: In all matters not expressly provided for in these clauses, the parties

shall act bona fide in the spirit of these clauses and shall be taken to have agreed that the

Arbitral Tribunal shall have the widest discretion to discharge their duties within the spirit

of an efficient and fair case management. The parties and the Arbitral Tribunal shall make

every reasonable effort to ensure that the resulting award is legally enforceable.172

Not Binding on the Commission: Nothing in the arbitration procedure shall affect the powers

of the Commission to take decisions in relation to the Commitments in accordance with its

powers under the Merger Regulation and the EC Treaty.173

Review clause: The Commission may, in response to a request from the Responding Party

justified by exceptional circumstances or by a significant change in market conditions, waive,

modify, or substitute any one or more Commitment.174

It may ask the Tribunal to comment thereon from its perspective, or to make a

recommendation.175

Unquote

7. Proposed draft Model Text of the Arbitrator’s Mandate

It may be helpful to also have to hand a Model for the Arbitrator’s Mandate. Such

draft model could read as follows:

matters of access as such to a facility, network or technology, or availability of uninterrupted supplies, will be of prime importance, as a competitor may be pushed out of the market. In this context, it will be important for the Tribunal to address such matters in an appropriate Order on Interim Relief, and if the competition-sensitive matters are thereby fixed for the time being and complied with by the parties, the arbitration may proceed on a normal pace. Hence, the time-frame requirement should be handled under a “rule of reason – approach”. However, the Commission has always been adamant in providing for very short time-limits; we may expect that the Commission agrees to a normal pace where it is satisfied that the competitive concerns have been adequately addressed, for instance in an Order for Interim Relief.

172 It appears well justified to insert such a general provision; compare hereto the famous ICC General Rule of Article 35, and the LCIA Article 32.2.

173 This provision states the obvious. However, one may reasonably expect that a well-handled arbitration may avoid further investigations or sanctions by the Commission.

174 A review clause has been used in several recent decisions, including Alcan/Péchiney II, Air France/KLM, Piaggio/Aprilia.

175 This sentence was added to the corresponding provision in the Air France/KLM clause. Certainly, the Tribunal will consult with the Parties prior to providing any comments or recommendation.

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Quote:

The undersigned, having been designated by […] / appointed by […] to serve as Arbitrator,

confirms as follows:

• The Arbitrator has read and studied the Commission Decision in Case M. [No. …] [title

…] and such other pertaining documents as deemed necessary.

• The Arbitrator has read and studied the remedies offered by the Parties and, in

particular, the behavioural commitments imposed by the Commission, or conceded by

one or more of the merging parties or the merged entity.

• The Arbitrator has moreover read and studied the arbitration commitment (in the

sense of commitment of the merging party or parties, or of the merged entity,

hereinafter “the Arbitration Commitment”) to accept, in the event of a dispute with a

third party (such as a competitor, supplier, buyer, licensee, customer or consumer)

the adjudication of the behavioural commitments by a sole arbitrator or a three-

person arbitral tribunal.

• The Arbitrator has read and studied all further details deemed important for

accepting his/her mission, including the short time-parameters for a fast-track

arbitration as may be imposed on the basis of the Commission’s decision.

• The Arbitrator declares that he is independent of any of the parties involved in the

arbitration and understands his/her duty to remain so throughout the proceedings

and to serve as an impartial arbitrator. His/her detailed professional cv is attached

to the present declaration.

• The Arbitrator recognises the desirability of establishing Terms of Reference very

early on in the proceedings, and to discuss and settle the provisional time-table for

the arbitral review to be made, setting out the various steps to be taken in the

proceedings.

• The Arbitrator moreover recognises the importance of ruling on interim measures,

where so required by the circumstances

• The Arbitrator acknowledges the specificity of this particular type of arbitration

and, in particular, recognises that the European Commission retains its powers and

prerogatives under the ECMR and may draw its own conclusions in respect of the

matter; the Commission may require to be informed on certain aspects of the arbitral

process, on decisions taken in respect of interim relief, and of the resulting arbitral

award, all as may have been further defined in the Arbitration Commitment.

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• On the other hand, it is understood that the Arbitrator, in exercising his/her

function, does not act on behalf of the European Commission, but carries out an

independent judicial/arbitral function.

• The Arbitrator may – after consultations with the parties - address questions to the

European Commission and may make proposals where a modification of conditions or

obligations (including behavioural commitments) would appear to be justified.

• The Arbitrator shall keep confidential all matters relating to the arbitral proceedings

or the arbitral award.

[Place/date and signature]

Unquote

8. Concluding Remarks

The author hopes that the discussion on these matters will bear fruit and will result in a concept which will equally satisfy (i) the regulators (foremost the European Commission, but of course also any national competition authority) as well as (ii) the merging parties and (iii) their partners in the market place (be the competitors, users, buyers, suppliers, licensees, customers or consumers).

And it is also hoped that in future behavioural commitments may be looked at morefavourably by the regulators, wherever such “softer” remedy (as opposed to “hard and fast” divestiture requirements) would seem to be appropriate and sufficient. They should no longer be treated as a “Stiefkind”.

The arbitration community and the competition lawyers will be challenged to see to it that this process works well and will lead to a very careful, thorough and professional adjudication of issues as may arise between the parties in the market place.

Arbitral institutions such as the ICC and the LCIA will be expected to recognise the specificity of this arbitration sui generis, and to make sure that their system fully enables and supports the speedy but careful resolution of any matters referred to them.

At this time, the ball is in the corner of the European Commission to present its proposal in the near future, and to submit it to the usual public consultation process.

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THE INTERACTION BETWEEN EXPERT DETERMINATION AND

ARBITRATION

Klaus Sachs1

1. Introduction

The topic of this presentation is the concept of expert determination proceedings and their demarcation from, and interaction with, arbitration proceedings. Hence, it will not deal with party-appointed expert witnesses or tribunal-appointed experts, but rather with third parties acting as experts who are called by the parties to intervene in their transaction and to make binding decisions on specific matters. Thus, the mechanism under review is what under the German and the Swiss legal systems is called “Schiedsgutachten” and its equivalent in other legal systems, such as “expert determination” in English law, “appraisal” under US law, “arbitraggio” under Italian law2 or “bindend advies” (binding advice) under Dutch law.3

In fact, many of today’s M&A contracts provide for two parallel and different types of dispute resolution mechanisms: on the one hand, expert determination for specific questions of fact or, more rarely, and when the law permits it, even questions of law and, on the other hand, the general arbitration mechanism for all disputes between the parties arising out of or in connection with the contract. Both expert determination and arbitration are intended to be binding on the parties. However, contrary to arbitration, expert determination does not result in an enforceable title.

The issues that typically are subject to expert determination relate to valuation matters, such as determining the net equity of the target company as a basis for calculating the purchase price or the company’s future earnings in the context of EBIT or EBITDA guarantees or earn-out clauses. Other applications also exist for example, real estate valuations, patent or environmental matters, but the focus of this presentation will be on valuation issues.4

Expert determination is considered to be a very suitable tool for solving disputes on such matters. It particularly makes sense in cases where the issue is a limited factual one and of such a nature that an arbitral tribunal would also call in an expert, or hear party-appointed expert witnesses, to clarify the issue.5 This is true, for example, when the result of the

1 Dr. Klaus Sachs, CMS Hasche Sigle Eschenlohr Peltzer, Munich. 2 cf. Art. 1349 Codice Civile (which describes the process of “arbitraggio” without using the term that has been developed by legal doctrine, cf. Hartl, Das Schiedsgutachten im italienischen Recht, 1993, p. 8 3 cf., for example, Section 12 of the Netherlands Arbitration Institute (NAI) Arbitration Rules. 4 cf. Examples of expert determination clauses in business contracts: Lachmann, Handbuch für die Schiedsgerichtspraxis, 2d ed. 2002, no. 50. 5 cf. Sessler/ Leimert, The Role of Expert Determination in Mergers and Acquisitions under German Law, Arbitration International 2004, Vol. 20, no. 2, p. 151 et seq.

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valuation depends on the proper application of accounting rules, such as specified national GAAP or the International Financial Reporting Standards (IFRS). By choosing expert determination, the parties can thus rely on the specific know-how of the expert and avoid time-consuming and costly arbitration proceedings.

Expert determination is intended to be a mechanism independent and distinct from the general arbitration mechanism. This is reflected in the practice of M&A contracts where, as a rule, expert determination clauses are embedded in the price adjustment provisions. By contrast, arbitration clauses typically are found at the end of the contract. It is interesting and even surprising to note that M&A contracts rarely provide any specific language as to the demarcation of the two proceedings from each other. In most cases, they simply stand in parallel. Since M&A contracts are generally drafted by experienced lawyers, this could suggest that the demarcation between the two mechanisms is not seen as a problem. However, arbitral practice shows both that the demarcation of the two mechanisms from each other and the interaction between them is not always easy.

Nevertheless, as a starting point, it is generally held both in civil and common law jurisdictions that to the extent a matter has been contractually referred to expert determination, the arbitral tribunal or state court lacks jurisdiction.6 Under German and Swiss law, this effect is referred to as “Ausschlusswirkung”, and this effect of exclusion of competence is reciprocal between the two mechanisms.7 Hence, if a party were to start arbitration proceedings, introducing a claim the factual basis of which, pursuant to the contract, is subject to expert determination, for example, by claiming a reduction from the purchase price on the ground of an alleged shortfall in the target company’s net equity, such request for arbitration would have to be dismissed as premature.

2. Typical Expert Determination Clauses

According to my experience, the detail with which expert determination clauses are drafted varies considerably. Quite often such clauses are relatively short and simply state that if the parties fail to agree on a certain valuation issue, then this matter shall be referred for determination by a neutral expert whose decision shall be final and binding on the parties. As a rule, expert determination clauses further state the required qualifications of the expert, e.g., neutrality, specific know-how, and provide – quite similar to arbitration clauses – that failing an agreement between the parties on the neutral expert to be appointed, such expert shall be nominated by an appointing authority, so that one party cannot prevent the proceedings from taking place. Quite a few clauses end there.

6 Borowsky, Das Schiedsgutachten im Common Law, 1998, p. 191. 7 cf. Blessing in: Honsell/ Vogt/ Schnyder, Internationales Privatrecht, 1st ed. 1996, Einleitung zum ZwölftenKapitel, no. 278; Kantonsgericht St. Gallen (III. ZK), decision dated 19 June 2000, SJZ 96 (2000), p. 453; Handelsgericht Zürich, decision dated 21 March 1994, ZR 94/1995), p. 208 (considering that the complaint is not inadmissible even though the expert determination has not yet occurred).

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But many clauses are more elaborate defining the powers of the expert and the proceedings to be followed in detail, such as the following one:

Seller and Buyer shall make available to the Expert the Closing Date Accounts to make the required decisions and determination. The Expert shall immediately submit copies of all documents and other data made available by Seller or Buyer to the respective other Party as well. Before making the decisions the Expert shall grant Seller and Buyer the opportunity to present their positions, which shall include the opportunity of at least one oral hearing in the presence of Seller and their professional advisers. To the extent necessary for the decisions the Expert shall also be entitled to decide on the interpretation of this Agreement. The Expert shall use best efforts to deliver its written opinion with reasons for the decisions as soon as reasonably practical, but not later than 2 (two) months after the issues in dispute have been referred to the Expert. The Expert’s decisions and the Closing Date Accounts as determined by the Expert shall be final and binding upon the Parties. The costs and expenses of the Expert shall be borne by Seller and Buyer in accordance with Section 91 et seq. German Civil Procedure Code (ZPO).”

Often such clauses expressly state:

“The Expert shall act as an expert (Schiedsgutachter within the meaning of Section 317 German Civil Code) and not as an arbitrator.”

However, there are cases in which it is questionable whether a clause providing for expert determination must not in reality be interpreted as an arbitration clause. Thus, in Baulderstone Hornibrook Engineering Pty Ltd v. Kayah Holdings Pty Ltd, the Supreme Court of Western Australia had to deal with a clause that read:8

“If any dispute arises out of this Agreement, the Parties shall in the first instance attempt to resolve such dispute by mutual consultation between the Chief Executive Officers of the Parties, and any Party may at any time serve a notice on the other Party requesting such consultation and stating the nature of the dispute.

If after fourteen [14] days of service of such notice the dispute has not been settled, either party may serve a notice on the other requiring that the dispute be resolved by the determination of an independent third party [the “Referee”] acceptable to both parties. If the parties cannot agree on the Referee within seven [7] days of the date of service of the notice then either party may request the Chairman of the Institute of Arbitrators Australia to nominate the Referee.

8 cf. R.H.B. Pringle, Agreements to Submit Disputes in the Construction Industry for „Expert Determination“, in: The International Construction Law Review 1999, p. 620 (623 et seq.).

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The Referee who has been agreed upon or appointed shall act as an expert and not as an arbitrator. ”

Despite the clear wording that the so-called referee shall act as an expert and not as an arbitrator, the Court found that because the referee was entrusted to decide any dispute arising out of the contract, the clause operated “to oust the jurisdiction” and should therefore not be recognized. Certainly, this is a rather extreme case which probably hardly ever occurs in the context of M&A contracts where the scope of the expert determination, as a rule, does not encompass any disputes between the parties, but is limited to specific valuation issues. Nevertheless, even in M&A contracts, the question sometimes arises whether the parties agreed on an expert determination or on an arbitral proceeding. In most jurisdictions, the terminology used by the parties is not ultimately decisive. Rather, one has to examine the true intention of the parties: Did they want the expert, or the referee, or whatever the term chosen, to decide on a specific question of fact; or did they intend that such third party be authorized to decide any disputes between them as a whole.9

3. Some Cases from the Practice

In arbitral practice, it is often the parallelism between the expert determination and the arbitration mechanism that creates problems. The following examples may illustrate this:

Case No. 1: The parties had agreed on a sophisticated EBITDA guarantee which provided for various limitations, exceptions, thresholds and other specific agreements as to how to evaluate the EBITDA. A dispute arose between the parties as to the proper meaning of an accounting term used in the contract. Since any dispute regarding the correct EBITDA was to be decided by the expert, the question came up whether such expert was empowered to decide on the correct interpretation of the contract term used by the parties. Absent any specific agreement of the parties, is this a task which the expert is empowered to fulfil in the context of his evaluation of the EBITDA or is this a legal matter to be decided by the arbitral tribunal? If it is a legal matter, how do the two proceedings interact?

Case No. 2: The parties had a dispute on the correct Net Equity of the sold Company. An expert determination proceeding was commenced. It lasted for one year and a half, and at the end the Buyer commenced arbitration to challenge the result of the expert determination on the ground that it had not been heard sufficiently and that the result was materially wrong. What rules of procedure apply to an expert determination proceeding? Is an expert determination result final and binding even though it is materially wrong? Can it be challenged on the ground that procedural rights have been violated? What happens if the challenge is successful?

9 German law: cf. German Federal Supreme Court BGHZ 6, p. 335 (338); regarding Italian law: cf. Hartl, Das Schiedsgutachten im italienischen Recht (1993), p. 92 et seq.; Borowsky, op. cit., p. 73 regarding English law and p. 139 et seq. regarding US law; Swiss law: cf. Blessing in: Honsell/ Vogt/ Schnyder, op. cit., Einleitung zum Zwölften Kapitel, no. 275.

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Case No. 3: The parties had agreed that the Buyer of the Company was to prepare and submit to the Seller the Closing Date Accounts within 180 days after the Closing. For various reasons this did not happen in time. Therefore, the Seller, who still had access to the sold Company, arranged for the Closing Date Accounts to be prepared and claimed them to be the ones foreseen in the expert determination clause. The Buyer rejected those Accounts on the ground that he had not prepared them and prepared and submitted his own Accounts, but long after the elapse of the 180-day period. There was a disagreement between the parties as to the correct Net Equity value. Neither of the two Accounts fulfilled the formal prerequisites for the expert determination proceedings – Seller’s Accounts having not been submitted by the Buyer and Buyer’s Accounts having not been submitted in a timely manner. What has to happen in such a situation? Can the Seller’s Accounts be considered as replacing the Accounts required under the contract? Can the expert determination clause work on this basis? Or shall the case be submitted first to the arbitral tribunal in order to decide which Accounts are relevant and if neither of them are relevant, to decide the correct Net Equity itself, with the help of a tribunal-appointed expert?

4. Discussion of Specific Issues

4.1 Expert determination is a contractual concept

When analysing the issues raised by these case examples, it is important to understand that the concept of expert determination is a contractual one. Most jurisdictions concur that arbitration laws do not apply to expert determination proceedings.10 This has important consequences: There are no binding procedural rules; there is no court support available regarding procedural incidences, e.g., making a challenge against an expert; and, most importantly, the result of the expert determination cannot be enforced.

A further consequence of expert determination being a contractual concept is that all relevant issues are ultimately matters of the law applicable to the contract. If one compares the legal treatment of expert determination under the various national laws, such as German, Swiss, French, Italian, English or US law, one finds that even though there are similarities, also considerable differences exist – not only in the dogmatic approach, but also in very practical terms.

4.2 Different dogmatic approaches

For example, under German and Swiss law, the “Schiedsgutachten” is a well-established and broadly used legal concept. In Germany, expert determination proceedings in the narrower sense of the term – and these are the ones which typically are provided for in M&A contracts

10 German law: RG 152, p. 201 (204) and Federal Supreme Court BGHZ 6, p. 335 (340); regarding the Italian law: cf. Hartl, op. cit., p. 37; Borowsky, op. cit. p. 52 with further references in footnotes 196, 197 regarding English law and p. 137 regarding US law; Swiss law: cf. Blessing, op. cit. Einleitung zum Zwölften Kapitel, no. 274 ; French law: La détermination du prix dans les contrats (étude de droit comparé), sous la direction de Denis Tallon, Institut de droit comparé de l’Université de Paris II, série Harmonisation du droit des affaires, p. 70, no. 2.2.1.25.

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– are governed by Sections 315 et seq. of the BGB, though only by analogy.11 In Switzerland, even though not expressly mentioned in the Code of Obligations, expert determination is recognized as a contractual concept12 and reference to it can be found in the cantonal Codes of civil procedure – such as § 258 of the Zurich ZPO. In addition, there is abundant case law in both countries which has further developed the concept.

In common law countries as well, expert determination is a recognized legal institution which is understood as purely contractual.13 It is today probably more often used in England than in the United States where other ADR techniques have become more popular. Interestingly, some US states, such as California and Nevada have completely abolished expert determination altogether by introducing a concept of arbitration broad enough to include the former expert determination as a form of arbitration.14

By contrast, French law has not developed a comparable legal concept. French scholars look sceptically at the German approach. Professor Jarosson, for example, wrote that he found the German institution of expert determination “très floue” and “fort peu maniable”.15 The concept existing under French law is price determination and is dealt with under Article 1592 Code Civil which states that failing an agreement on the purchase price between the parties, the price may be determined by “l’arbitrage d’un tiers”. Even though this wording would suggest a reference to arbitration, the unanimous view under French law is that “arbitrage” is to be understood as price determination by a third person acting as price determiner. The reasons for the misleading wording date back to Roman law and have been interestingly described by Professor Clay from Paris in one of his recent articles16 on the occasion of the “bicentennaire” of the Code Civil on March 21, 2004.

Under French law, the third person acting as price determiner under Article 1592 Code Civile, is considered to be the “mandataire commun”17 of the parties, i.e., their joint representative, whose task is to make the contract perfect by determining the price. Without such price determination, the contract is null and void.

Under Italian law, things are further complicated by the fact that there are at least four different dispute resolution mechanisms to be considered: The “arbitrato rituale”, the “arbitrato irrituale”, the “arbitraggio” and the “perizia contrattuale”.18 A typical expert determination clause in an M&A contract under Italian law would as a rule qualify as an

11 cf. RG 69, p. 57; BGH DB 70, 827. 12 cf. BGE 129 (2003) III, 535, 538 ; Blessing, op. cit., Einleitung zum zwölften Kapitel, note 274. A different opinion is expressed by Frank/Sträuli/Messmer, Kommentar zur zürcherischen ZPO, 3d edition 1997, § 258 note 2 with further references.13 cf. Borowsky, op. cit., p. 184 et seq.14 cf. Borowsky, op. cit., p. 43 et seq.15 Charles Jarrosson, La notion d’arbitrage, coll. « Bibliothèque de droit privé », LGDJ, 1987, p. 134, no. 248.16 Thomas Clay, Une erreur de codification dans le Code civil: les dispositions sur l’arbitrage, in 1804-2004. Le

Code civil. Un passé. Un présent. Un avenir. Dalloz 2004, p. 693 et seq.17 Charles Jarrosson, La notion d’arbitrage, coll. « Bibliothèque de droit privé », LGDJ, 1987, p. 159, no. 302. 18 cf. Hartl, Das Schiedsgutachten im italienischen Recht (1993), p. 8 et seq.; Wenger, Zum obligationenrechtlichen Schiedsverfahren im Schweizerischen Recht, 1968, p. 16 et seq.

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“arbitraggio” in the sense of Article 1349 Codice Civile. The concept is that the contract in question is still imperfect, and that the third person has to determine an element of the contract, such as the price, to make it perfect. This concept is similar to, but broader than, the French one because it is not limited to price determination.19

Considering these different dogmatic approaches, it is not surprising that they lead to different results, at least in some respects. The following three issues may illustrate this: (i) the challenge of the expert determination, (ii) the rules of due process to be applied to the expert determination proceedings and (iii) the question whether an expert may interpret the contract if this is necessary for him to fulfil his task.

4.3 Challenging the expert determination

What most jurisdictions have in common is that the usual contract wording according to which the expert determination shall be “final and binding”, as a matter of law, does not necessarily mean that it cannot be challenged. Rather, they all more or less concur that in certain, though narrow, circumstances the expert determination loses its binding effect. Even though there are differences in detail, most civil law jurisdictions concur that the expert determination can be challenged if the result is materially wrong, e.g., is “offensichtlichunrichtig” under German law,20 contains an “erreur grossière” under the French terminology or is “manifestamente iniqua o erronea” under Article 1349 of the Italian Codice Civile. By comparison English law focuses more and nearly exclusively on the conduct of the expert determination than on the result; the prevailing view seems to be that the expert determination may be challenged in case of “gross fraud”, “improper motive” or “collusion” or in case of a material departure from the parties’ instructions, as now established under the recent case Veba Oil Supply & Trading GmbH v. Petrotrade Inc. 21

An interesting feature of German law is that the parties may opt out of this statutory control regime by stipulating that the determination is final whatever the result – but this has to be an express agreement by the parties; the use of the words “final and binding” has been held as not sufficient for this purpose.22 One must, however, add that such exclusion hardly ever occurs in M&A contracts since here the parties typically want to have this control.

The court competent to decide on such challenge is either the state court23 or, if arbitration has been agreed on, the arbitral tribunal since the challenge of the expert determination is a

19 cf. Hartl, op. cit., p. 8 et seq.20 Heinrichts in: Palandt, BGB, 63d ed., § 319, note 3b; Swiss law; cf. Rüede/ Hadenfeldt, Schweizerisches Schiedsgerichtsrecht, 2d ed. 1993, p. 25 regarding the departure from the instructions, cf. Frank/ Sträuli/ Messmer, Kommentar zur zürcherischen ZPO, 3d ed. 1997, § 258 no. 6. 21 [2001] EWCA Civ. 1832; [2002] 1 All E. R. 703; commented on by Kuscher, Überprüfung von Schiedsgutachten durch englische Gerichte, IDR 4/ 04, p. 178 (180). US law also considers „fraud“, „corruption“, „partiality“ and „collusion“ as grounds for challenging the expert determination, cf. Borowsky, op. cit., p. 173 et seq.22 Gottwald in: MünchKomm-BGB, Vol. II a, 4th ed. 2003, § 319, no. 3 23 French law: Alain Viandier, Observations under Cass 2e. civ., 8 avril 1999, JCP ed. E. 1999, p. 1149 ff. no. 16.; German law: Gottwald in: MünchKomm-BGB, Vol. II a, 4th ed. 2003, § 319, no. 26.; Italian law: Article 1349 Codice Civile.

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dispute in relation to the contract, and thus normally covered by the arbitration clause. Interestingly, in German contract practice, some expert determination clauses expressly state that any challenge of the expert determination has to be brought before the arbitral tribunal. This is more a matter of clarification, but as such is useful.

Whether the challenge is justified on the merits, again depends on the applicable national law. For example, according to German case law, an expert determination is materially wrong if it deviates more than 25 % from the correct value to be assessed. 24 The Swiss standard – not surprisingly – seems to be even stricter: There is case law, at least in the field of insurance law, applying a tolerance of only 10 – 15 %.25 Comparable guidelines do not seem to exist in other jurisdictions, but most of them seem to apply a test of materiality.

4.4 Consequences of a successful challenge

What are the consequences if the challenge is declared justified? Again, this is a matter of applicable national law. Under French law, the successful challenge of the expert determination leads to the result that the price determination has failed so the contract is null and void. The state court or the arbitral tribunal is not in the position to substitute itself for the expert and to determine the price itself, even with the assistance of a court-appointed expert. As a rule, this is a rather unpleasant result for the parties to an M&A transaction26. To avoid this result, the parties should stipulate in their contract that in the event the price determination has failed, a new expert will be appointed.

By contrast, most other civil and common law jurisdictions aim at upholding the contract if for some reason the expert determination does not work27. Under German law, it is now for the state court or the arbitral tribunal to proceed to the relevant determination, if necessary with the assistance of a court-appointed expert. Thus, Section 319 (1) of the German Civil Code provides that if the result of the expert determination is materially wrong, the determination has to be made by the court (or the arbitral tribunal, as the case may be); the same rule applies if the “Schiedsgutachter” fails to proceed to the required determination or if he is in delay.

The same is true under Italian law since Article 1349 Codice Civile expressly states that if the result of the expert determination is evidently inequitable or incorrect, the determination shall be made by the judge (and if arbitration is agreed on this means by the arbitrators). However, in the case of a price determination, the judge is not authorized to replace the determination

24 Gottwald in: MünchKomm-BGB, Vol. II a, 4th ed. 2003, § 319, nos. 17, 8; Heinrichs in: Palandt, BGB, 63d ed., 2004, § 319, no. 3.25 Obergericht Luzern, decision of 21 November 2002, LVGE 2003 I, p. 59, 60 with further references; BGE 129 (2003) III, p. 535, 538 which makes reference to the German case law. 26 Alain Viandier, Observations under Cass 2e. civ., 8 avril 1999, JCP ed. E. 1999, p. 1149 et seq. no. 11. 27 Under English and US law the tribunal replaces the expert determination in those cases, cf. Borowsky, op. cit.,p. 93 (England) and pp. 171, 178 (USA). As an exception, such replacement decision is not allowed if the parties had a particular interest in having a certain individual acting as third party expert, cf. Borowsky, op. cit., p. 200; however, under the English Sale of Goods Act 1979, the sale agreement is avoided if the third party cannot or does not make the price valuation (Sec. 9).

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himself; rather he has to appoint an expert for that purpose, if one of the parties so requests (Article 1473 Codice Civile).28

4.5 Procedural rules

Another issue is whether the expert must comply with certain minimum procedural standards. According to an early ruling of the German Bundesgerichtshof, the “Schiedsgutachter” is not bound by any procedural rules and is completely free to determine the proceedings in his discretion.29 This has been criticized by certain German scholars, including Professor Peter Schlosser who goes so far as to request the application of the German Arbitration Act, by way of analogy, to all procedural issues for expert determination.30 Other German authors are of the opinion that at least the most fundamental procedural rules, such as due process, the right to be heard and the right to have an independent arbitrator, should also apply to expert determination proceedings.31

Notably, more recently it has been held by German courts that non-compliance with basic minimum standards may lead to the result that the findings of the expert are not binding on the parties.32 The disadvantage of this solution, however, is that such non-compliance may only be brought forward once the expert determination proceedings have been terminated, and not during such proceedings, except in case of bias when the contract with the expert may be terminated for cause.33

Under Swiss law, the prevailing view is that fundamental procedural rules must be respected.34 Under French law, the principle of independence of the expert has been confirmed by the Cour de Cassation.35 Under English law, there are no binding procedural rules and, for that reason, even the right to be heard is not a fundamental principle of an expert determination proceeding.36 The same is true in Italy37 and in some of the states of the US.38

4.6 Interpretation of the contract

Another issue which often comes up in practice is whether the expert may interpret the contract or whether this is the exclusive task of the court or the arbitral tribunal. Indeed, one of the most common problems the parties may face in an expert determination proceeding is the temptation of the expert, having been appointed for the sole purpose of price

28 cf. Hartl, op. cit., p. 11 29 German Federal Supreme Court BGHZ 6, 335 (340 et seq.).30 Stein/Jonas/Schlosser, ZPO, Vol. IX, 22d ed. 2002, before § 1025, no. 31. 31 Gottwald in: MünchKomm-BGB, Vol. II a, 4th ed. 2003, § 317, no. 42. 32 cf. Heinrichs in: Palandt, BGB, 63d ed. 2004, § 319 no. 5a. 33 BGH DB 1980, p. 967 et seq.34 Frank/ Sträuli/ Messmer, Kommentar zur zürcherischen ZPO, 3d ed. 1997, § 258 no. 6; Blessing in: Honsell/ Vogt/ Schnyder, Internationales Privatrecht, Einleitung zum Zwölften Kapitel, no. 279. 35 Cass. 1re Civ., 2 décembre 1997, Bull. cir., I, no 393. 36 Borowsky, op. cit., p. 104; Kendall, Expert Determination, 2d ed. 1996, p. 129. 37 Hartl, op. cit., p. 102 et seq.38 Borowsky, op. cit., p. 166.

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determination, to undertake to interpret the contract in order to fulfil his task. Under French law, due to the particular concept of the “mandataire commun”, this is not permissible.French law makes a clear distinction between the powers of the value determiner, on the one hand, and the ones of the court, on the other. Art. 1592 Code Civil is part of the principle of contractual freedom. Hence, the experts should not be involved in the interpretation of the contract. On the other hand, the judge is the “guardian of the contract” - which means that the contract is necessarily interpreted by the judge or the arbitrator.

Under the traditional view of French law, in the case described above, for example, the correct interpretation of the accounting term in question could not be left to decision by the expert, but would have to be decided by the judge or the arbitrator. However, in a more recent decision, the Paris Court of Appeal39 rejected a challenge based on the ground that the expert had interpreted the contract. The Paris Court of Appeal held that the powers of the expert included the possibility to “apprécier” the meaning of those contract provisions that relate to his task so that he can fulfil the same. The interpretation related to a technical issue and was therefore still within the competence of the expert.

Under German40 and English41 law the expert may be authorised to decide preliminary questions of law and to interpret the contract where necessary but it is held, at least under German law, that such authority must be granted expressly.42 By contrast, under the laws of most of the US states the interpretation of the contract is a question of law exclusively reserved to the court or the arbitral tribunal.43

Whether or not the expert should be given the authority to decide on contract interpretation issues can only be answered with due regard to the circumstances of the case. In the case mentioned above where a specific accounting term was in dispute, the economic impact of the correct meaning amounted to more than 200 million Euro. For that reason, the parties both preferred to submit this interpretation issue to the tribunal first - before calling the expert to proceed to the value determination. But there may be other cases where it would be in the interest of all the parties to give the expert such authority, for example, to decide on interpretation of issues relating to technical terms falling in the specific field of the expert’s professional knowledge.

39 Cour d’Appel de Paris, 25ème Chambre, Section B, arrèt du 17 septembre 2004. 40 German Federal Supreme Court BGHZ 48, 25 (30 et seq.); Heinrichs in: Palandt, op. cit., § 317 no. 6 with further references. 41 cf. Borowsky, op. cit., p. 189. 42 Raeschke-Kessler, Die deutsche Rechtsprechung zur Schiedsgerichtsbarkeit von 1989 und die neuere Rechtsprechung zu Schiedsgutachten, in: Jahrbuch für die Praxis der Schiedsgerichtsbarkeit, Volume 3, 1989, p. 213.43 cf. Borowsky, op. cit., p. 189.

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5. Conclusions

Expert determination proceedings often relate to issues with considerable economic consequences. In the context of M&A contracts, the value of such disputes can easily amount to millions of Euro.

The main advantage of expert determination proceedings, as compared to arbitration proceedings, is that they offer a quicker and less costly procedure for resolving disputes that are mainly decided by facts.44 The main disadvantage is that the proceedings do not result in an enforceable title so that enforcement against the defaulting party requires additional court or arbitration proceedings.

What one should bear in mind is that, unlike in the field of arbitration, there are no harmonized rules regarding the proceedings, the power of the expert, the challenge of the expert determination and the interaction between the state or arbitral court and the expert determination proceedings. Rather, all these are matters governed by the applicable law and the solution thereunder may vary quite considerably. For that reason, expert determination clauses in M&A contracts should be carefully drafted, by clearly demarcating expert determination proceedings and arbitration proceedings from each other, determining the interaction between the two proceedings and, very importantly, defining the precise task and the powers of the expert, the standards to be applied and the rules of due process which shall govern the expert determination proceedings.

On a more general level, and considering the increasing importance of such proceedings in the course of M&A transactions, one should favour any initiative to develop harmonized transnational rules for expert arbitration. The ICC Rules of Expertise in force as from 1 January 2004 and the ICC Rules for a Pre-arbitral Referee Procedure of 1 January 1999, constitute rules which could serve as examples for that purpose, although they would probably have to be adapted to the special needs of M&A transactions.

44 cf. Lachmann, op. cit., no. 56; Sessler/ Leimert, The Role of Expert Determination in Mergers and Acquisitions under German Law, Arbitration International 2004, Vol. 20, no. 2, p. 151 (165).

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CASE MANAGEMENT AND ADVOCACY IN THE ARBITRATIONOF MERGER AND ACQUISITION DISPUTES

Nicholas Fletcher1

1. Overview

International arbitration practitioners will be well aware that disputes of different types may require to be managed in different ways. The arbitral process is extremely flexible and the procedures adopted by counsel and the tribunal can be adapted to take account of different factors and considerations that a particular dispute or type of dispute presents in terms of case management and presentation. This is certainly true of merger and acquisition ("M&A") disputes which tend to have a number of characteristics which give rise either to very specific problems or to particularly extreme examples of general case management concerns. The purpose of this paper is to examine some of those issues, to identify some of the relevant considerations from the view of the parties, the tribunal and counsel and to suggest possible solutions.

Other, more distinguished, colleagues have given papers which will have dealt with the main types of dispute which arise in an M&A context. For the benefit of those not in attendance at the conference and who may be reading this paper subsequently, it may be helpful broadly to define the main types of dispute which might arise:

• disputes which arise prior to the closing of the transaction, such as the non-performance of preparatory conditions or conditions precedent by one party or the other and the breach of confidentiality clauses or exclusivity arrangements;

• post-closing disputes over the price in circumstances where there is provision in the relevant contract document for an adjustment of the price to be effected through an agreed mechanism;

• the share purchase agreement or other relevant document will undoubtedly contain a raft of representations and warranties given by the vendor as to the financial health and general condition of the target business. Breach of these warranties and representations may give rise to a straightforward claim for an indemnity or to a claim for damages;

• disputes concerning the breach of other terms of the transaction such as corporate governance provisions in a joint venture agreement, or breaches of restrictive covenants or restrictions on the use of technology;

• there may also be scope for an aggrieved party to the transaction to claim some form of tortious remedy. This might comprise a claim by the purchaser of a business that the vendor has made material misrepresentations either as part of or separate from its contractual representations and warranties, which have induced the purchaser to enter into the transaction.

1 Nicholas Fletcher is a partner in the International Arbitration Group of Clifford Chance LLP, based in their London office.

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It is, of course, perfectly possible for an M&A dispute to raise relatively simple, straightforward and discrete points. Very often, however, M&A disputes will raise an array of complex issues. In these circumstances there is a critical need for a balance to be drawn between, on the one hand, the risk of oversimplifying the disputes and, on the other, the danger that the dispute is made untriable. Clearly, the parties may have different interests and approaches in this regard.

Most disputes referred to arbitration these days tend to involve a requirement for expert evidence of some sort. This is particularly so of M&A disputes. They are likely to throw up significant technical issues upon which the parties are very likely to take differing positions and upon which the tribunal will need guidance. The way in which that expertise is introduced into the arbitral process will have a significant bearing on the way in which the matter is run.

Access to documentation is a critical issue and a potential flash point. The scope and range of discovery can cause tension in the management of any arbitration. M&A disputes raise a number of particular difficulties, including the fact that the vast majority of the relevant documents may have followed the target company into the hands of the purchaser, imposing a particular burden and responsibility on that party. Further, both parties may wish to protect highly sensitive internal information concerning their corporate strategies.

A complex merger and acquisition dispute may generate tens- if not hundreds- of thousands of pages of documents, to say nothing of CD-ROMs containing spreadsheets and other financial information in electronic form. The production, management and presentation of this documentation to the tribunal needs careful thought.

Some disputes spring into life before the transaction has closed. This may necessitate prompt action to ensure an urgent hearing. More frequently, the dispute arises after the transaction has been consummated. In these cases, the complaint may come to light almost immediately, or it may surface over time as the purchaser becomes more involved in the running of the business. Indeed, it may be some time before the circumstances giving rise to the claim become apparent to the purchaser. Consideration needs to be given to the impact that the amount of time that has elapsed since the deal was consummated has upon the management of the dispute.

Timetabling is another important issue. One party may have sold a business and want to close its books and to move on. The other may have a new and difficult business to run and have different demands on its resources. In the case of a merger, the existence of an ongoing dispute may have an extremely destabilising impact on the consolidation and bedding down of the new business. How fast, or slow, should the dispute move?

Finally, how is the evidence, be it documentary, testamentary or expert to be presented to the tribunal in an efficient and coherent manner? If difficult issues are not made readily accessible to the tribunal, their task will become harder and the service that they are able to provide to the parties may suffer.

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2. Discussion

This paper does not purport to address each and every issue which might arise in a complex M&A dispute. Much will depend upon the facts, issues and circumstances underlying a particular dispute. Tactical considerations may also, from counsel's point of view, be relevant. What follows is an attempt to analyse some of the more common case management issues thrown up by the considerations identified above.

2.1 Composition of the tribunal

Careful thought needs to be given to the composition of and qualifications of the arbitral tribunal. That much is true, of course, of any arbitral appointment. However the technical nature of many of the issues which arise in M&A disputes make it particularly important. M&A disputes are especially likely to be scrutinised by decision makers who are senior commercial "players" in their respective organisations who will expect a tribunal to bring commerciality, a realistic view of the market and an understanding of the real impact of the matters in dispute on their businesses. It may be, of course, that the transactional documentation will already impose some guidance or restrictions, setting out the qualifications or expertise required of the arbitrators. If there is a clear price adjustment mechanism, there may be provision for the adjustment to be dealt with by a truncated tribunal consisting of an accountant, either sitting alone or with lawyers.

Where there is complete freedom over the choice of arbitrator, each party will need to give the issue careful thought. What is the balance of legal and accounting issues? Is there any merit in having an accountant on the tribunal? Should the Chairman be an accountant? Can the technical issues be adequately dealt with by a legally qualified tribunal without adequate assistance from expert witnesses? Much will depend upon the nature and complexity of individual cases. A familiarity with the nature and structure of merger and acquisition practice and of the general nature of the disputes that may arise is clearly a pre-requisite.

2.2 Early Identification of Issues and Expertise

It is, of course, perfectly possible that the dispute which arises in connection with an M&A transaction may be a simple matter which turns on the interpretation of the transaction documents. In these circumstances, resolution of the dispute will be relatively straightforward. Most M&A disputes, however, are likely to focus on the value of the company being sold and the price being paid by the purchaser. In such cases, the question of quantum, which is so often in commercial disputes treated as simply one of the component parts of the dispute (and which not infrequently is hived off to a separate hearing), assumes a central relevance and can become a very large part of the case.

Thought needs to be given at an early stage to both the critical issues and the need for expertise in particular areas. Assistance will often be required from accounting experts. Indeed, it may be the case that the sale and purchase agreement contains a clause requiring the matter to be referred to independent accountants by way of expert determination, whether binding or not. Similarly, expert accounting evidence will very often be required to assist in the interpretation of relevant accounting principles, to advise on how particular matters were or should have been accounted for and to

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determine whether particular representations and warranties have been complied with as a matter of accounting practice.

It will be important, in appropriate cases, to instruct an expert witness with experience in the valuation of companies. This will undoubtedly be so in cases where the true value of a company, rather than simply discrete issues of accounting practice, is an issue.

It may, of course, also be necessary to instruct people with expertise in other disciplines if, for example, there is a dispute over the performance of a particular product in respect of which the vendor has given a relevant representation or warranty or the nature of a particular industry or the particular type of sale and purchase transaction in dispute or in relation to intellectual property issues where deemed royalties might be sought by way of damages.

Whenever experts are instructed it is important to ensure that they both confine themselves to their particular areas of expertise and do not trespass into areas in which they do not have genuine expertise. Identifying the key issues and expertise required at an early stage will assist in the setting of a realistic and structured timetable and efficient case management.

2.3 Simplifying the Dispute by way of Preliminary Issues

Once the issues have been identified, it may be that resolution of the dispute can be simplified by the determination of one or more preliminary issues. It may be, for example, that one of the issues in dispute is the interpretation of a particular provision of the sale and purchase agreement, such as the meaning of a particular warranty. It might be that, if that issue is decided in a particular way, the dispute as a whole is greatly simplified and the scope of discovery is reduced. Identifying precise issues in appropriate circumstances can greatly assist in reducing the cost and complexity of the case. Care does however need to be taken. The selection of inappropriate preliminary issues can prove to be a distraction, adding to the cost, length and complexity of a dispute. It may also be that, for tactical reasons, one side or the other seeks to propose inappropriate issues or to resist the determination of points that will genuinely save time. The tribunal will need to form a view as to the advantages and disadvantages of each proposal.

2.4 Managing Expert Evidence Throughout the Arbitration Process

Once the issues calling for expert evidence have been identified, careful consideration needs to be given to the way in which expert evidence is structured, adduced and presented during the arbitration process. Some or all of the following issues might arise:

2.4.1 Are the experts to be appointed by the tribunal, the parties or both?

The rules of most arbitral institutions allow the tribunal to appoint their own independent expert to report or to advise them in appropriate cases. Traditionally, this approach appears to have received a greater degree of acceptance in civil law jurisdictions than in common law ones. The advantage of an expert appointed by the tribunal is that the tribunal has access to an expert truly independent of the parties who is able to advise the members of the tribunal on specific issues. He or she may be required to examine

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the documentation, the submission and the issues and to prepare a detailed report on all relevant aspects of the case before the tribunal. Alternatively, he or she may be asked to advise the tribunal on discrete issues.

The more usual practice in international arbitration is for the parties to appoint their own experts to review the documentation and the witness evidence, to prepare reports which are exchanged with the other side and upon which the experts can be cross-examined at an evidential hearing. With party-appointed experts, the tribunal is able to assess the degree to which there is agreement between the parties and to test and probe conflicting viewpoints. It is a more thorough process which can, in the long term, lead to a more robust decision. It removes the temptation upon the parties, wherever the tribunal appoints its own expert, to seek to persuade and influence the tribunal-appointed expert. It also limits the capacity of a disappointed party to argue with the tribunal about the expert's report. Despite the attractions of the independent expert from the tribunal's perspective, it is the writer's view that separate, party-appointed experts gain a greater degree of acceptance by the protagonists in the arbitration proceedings.2

It may be that, in appropriate cases, it would be appropriate to have both party-appointed experts and an individual expert advising the tribunal. Such cases will, however, be rare. A dual arrangement of this sort is likely to lead to a complex and lengthy procedure and increase the overall cost of the arbitral process. If both parties appoint experts, the tribunal should be more than capable of deciding between them.

A further alternative is for the parties to consider the appointment of a joint expert, whose identity they agree upon, and who is appointed and instructed by them both. However, although this has a number of advantages, it is rare that the parties are able to reach agreement on one individual.

2.4.2 Having the experts address all the issues

Not only is it important to identify, and agree with the tribunal, the relevant disciplines in respect of which expert evidence will be necessary, it is also important that both the parties and the tribunal try at an early stage of the proceedings to identify the particular issues that each expert will address. It is unhelpful for the tribunal (and ultimately for the parties) if the experts address different issues. In these circumstances the experts' reports "pass in the night" and it can be extraordinarily difficult for the tribunal effectively to rule on the relevant issues. This can, to some extent, be overcome by the procedure of permitting reply reports, although this can give rise to a situation in which one party holds back on a particular issue to see if its opponent deals with it, and then tries to ambush the opponent by having the expert address it for the first time in the reply report. It is to be preferred if the experts can address the same issues from the outset. It may be that such an approach will not also appeal, for tactical reasons, to one or other of the parties, so strong guidance from the tribunal can be very helpful.

2 It is, of course, important that party-appointed experts exercise independent judgment and are not improperly swayed by those instructing them. Experts who are overly partisan simply serve to undermine a party's case.

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2.4.3 Meetings between experts and joint reports

The common practice at the present time is for there to be meetings between experts of like disciplines after the service of their reply reports. The purpose of meetings of this nature is to see whether it is possible for the experts to narrow the differences between them and even to reach agreement on particular areas. From the tribunal's perspective, it is useful if the experts can prepare a joint report or statement identifying (i) those areas on which they are in agreement (ii) those where they continue to disagree and (iii) those points which are still in issue where the tribunal is likely to have to decide between them. Such an approach can be invaluable in the context of a complex merger and acquisition dispute with numerous accounting issues. Ultimately, the experts should be able to make the tribunal's task simpler by reducing the outstanding issues, distilling the key points on issues which remain in dispute and identifying the areas where significant value is to be found, so that time and costs are not wasted on issues of low value.

Consideration might also be given to the possibility of reversing the usual order in which the experts approach their task. The experts could be invited to meet before they prepare their reports to discuss the principles and issues at play in the dispute. They could be invited to produce a joint report at that stage covering the issues upon which they are agreed and then move on to individual reports dealing only with those issues where there is a disagreement. This minimises the risk of having reports which simply pass each other by and provides a clear agenda for the expert evidence. It also identifies at a very early stage the issues upon which the Tribunal must rule. In practice, some form of overview is likely already to have been given by the expert to the party instructing him or her before the experts meet, but this structure can be very helpful in managing, and restricting the scope of, expert evidence.

Meetings between experts are usually held on a "without prejudice" basis to facilitate freedom of discussion between the experts. It is for the parties to decide whether lawyers should also be in attendance at such meetings. Their presence can sometimes hinder, rather than help, the distillation of the issues.

2.4.4 Early investigation by experts

In a complex dispute, it may well be necessary for the experts to engage in a greater or lesser degree of investigation than is normally the case. This may be required both to draw a picture for the tribunal of the company, its products and its operations but also to "bottom out" and probe the precise nature and validity of the complaints being made. If the dispute is largely of a technical nature, counsel on both sides will need the help of the experts in identifying the issues, assessing the nature of the damages and formulating discovery requests.

There may be merit in allowing or encouraging the experts jointly to undertake the investigation of discrete issues. Records could be provided and analysed either by the experts for both sides or by the expert for the side challenging the evidence duly and properly observed by his counterpart. The parties might agree that the results of such an investigation will be treated as determinative of the whole issue or conclude that a particular set of results justifies further and fuller investigation.

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2.5 Documentation and Discovery

One of the most significant challenges imposed by complex M&A disputes is the management of documentation. This can start at an extremely early stage with competing interests vying for primacy in the discovery and disclosure process and continue right through to the hearing itself with the need carefully to manage the distillation and presentation of what might be vast quantities of documents and complex technical or accounting information.

2.5.1 The battle over discovery

Discovery, or the disclosure of documents, is all too often a battleground in international arbitration. Frequently, one party perceives it as being in their interest to seek wide-ranging, American-style, discovery. The tendency in international arbitration has been for tribunals to be rather more restrictive in the material that they require to be produced, both in the interests of efficiency and focus. Such an approach is entirely justified. It is remarkable how few cases ultimately prove to turn on a mass of documents which has materialised only through the discovery process.

A complex M&A dispute may, however, turn up detailed issues which require a careful investigation of significant portions of a company's accounting and transaction records. In these circumstances, a fair assessment of the case will require disclosure of a significant volume of material.

Care needs to be taken by the tribunal in balancing the competing interests of the parties. Whilst some of the categories of documents sought may be relatively easy to locate and/or to compile, many may still be in use as part of the ongoing running of the business. Further, in a complex case, it is important not to underestimate the amount of disruption that may be caused by the need to produce significant quantities of transactional material and the need to download and print-off spreadsheets and other financial material from computer systems. The printing of detailed and lengthy ledgers can, quite literally, take days, occupying valuable computer and printer time and extensive company resources in the process.

Unlike other commercial disputes where two established companies may be battling over documents which they suspect or anticipate the other side may have in its possession, M&A disputes frequently involve a situation where one party has disposed of a company and is seeking access to documents which used to be in its possession but which it has passed over to the purchaser. In the circumstances a vendor may request the production of large quantities of documents either because it genuinely believes them to exist and to be of potential assistance to its case or, perhaps, for purely tactical reasons. The tribunal needs to ensure that a purchaser who has taken over a business complies with its obligation reasonably to produce relevant documents without suffering unreasonable intrusions into the running of its new business. In order to do this, the tribunal will need at an early stage to understand the company and its business to appreciate what documents might be produced, what that would involve and how useful those documents are likely to be.

2.5.2 Electronic access

Both the parties and the tribunal need to consider whether it is necessary or appropriate to provide electronic access to accounting materials and records. A

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number of the forensic accounting specialists offer a facility whereby they can run investigative software programs on a company's computer systems to identify discrepancies and to attempt to match accounting entries. It may be suggested by one party or the other that access to the business should be afforded to a team of experts to enable them to conduct such investigations and run their diagnostic software problems. In certain cases it may be entirely appropriate for the tribunal to allow such access. However, it also can be hugely disruptive to the business in question. Such an investigation can, equally, be hard for the tribunal to control and there is always the danger that it might turn into the sort of "fishing expedition" that arbitral tribunals have always been reluctant to sanction. Care needs to be taken to balance the conflicting interests of the parties.

The running of appropriate investigative software can, if necessary, be conducted to some extent with less intrusion. This may be done by the parties agreeing, or the tribunal ordering, that electronic copies of certain information be produced. The information can be downloaded onto a CD-ROM or DVD (usually in a fraction of the time that it would take to print them out) and made available to the other party for them to analyse as they see fit. It is hard to conceive of a genuine basis for objecting to the production of information in this form, subject, of course, to being satisfied as to its relevance in the first place. It should be encouraged wherever and whenever possible.

A couple of final points need to be made in relation to records, and particularly accounting records, which are kept solely in an electronic form. The first is to recognise that some systems overwrite data on a daily, weekly or monthly basis. The parties need to recognise this and, as soon as the existence of a dispute becomes apparent, ensure that efforts are made to take a snapshot of the particular system or ledger at the time either by printing it off or, preferably, by downloading a version in electronic form. The live system can then continue to function whilst the parties and the tribunal have access to a version of the records which is as close to contemporaneous as possible.

The other point to note is that, as systems are being updated, the parties need to ensure that an appropriate archive is kept in the event that an issue arises in relation to historic material. This applies not only to data that may be overwritten from time to time, but also to systems that may be subject to renewal by new management.

2.5.3 What is truly relevant?

This is, of course, an issue which is in no way unique to M&A disputes. A depressing number of arbitrations involve disputes as to the relevance of particular categories of documents and information. One of the strengths of arbitration has been the general willingness of tribunals to keep a tight rein on discovery, particularly where tribunals composed largely of civil lawyers are concerned. The advantage of this is that it should lead to a more efficient resolution of disputes and, hopefully, prevent costs spiralling out of control as the result of an uncontrolled disclosure exercise. In complex M&A disputes it is particularly important for the parties to be both focused and restrained in their discovery requests. Equally, the tribunal must be alert to ensure that an appropriate balance is drawn between the interests of the parties. They must ensure that discovery is given of those categories of documents which are genuinely necessary for the parties to test each others case whilst at the same time ensuring that

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neither party is using discovery as either a fishing expedition or as a tactic to swamp its opponents with requests and queries.

The early and active involvement of the tribunal in managing discovery in such cases is critical. It may be sensible for the initial procedural order to set out a clear mechanism by which each party sets out the categories of documents that it wishes to see and the other party has an opportunity to make early and reasoned objections. A right of reply should be built in for the requesting party. If the parties are unable to resolve any resulting disagreements, time should be made available within the timetable at an early stage for the matter to be resolved by the tribunal. This might be done by the full tribunal or, in the case of a three-member tribunal, by the Chair acting alone.

When the tribunal is required to intervene, it should act firmly and identify clearly what specific categories of document it expects to see. Although it is always possible for a party to invite the tribunal to draw adverse inferences where documents are not produced - a strong indication that they are required is much more likely to result in their production.

2.5.4 Involving the experts

Depending upon the qualifications and experience of the tribunal, it may, of course, be difficult for them to form a clear view on what documents may or may not be relevant. This may be particularly acute in the early stages of a dispute when the tribunal may not be as familiar with the issues as the parties. In such circumstances, the tribunal may want to give consideration to adopting a procedure whereby they discuss these issues with experts of the relevant discipline appointed by the parties. Diligent and responsible experts will be able to reach a measure of agreement. At the very least, they will be able clearly to articulate for the tribunal why they believe particular categories of documents are relevant. In extreme cases, this may be an example of a situation where the tribunal would be assisted by the appointment of its own expert. Care would need to be taken, however, to ensure that he or she was properly briefed and that the introduction of such a person would not disrupt or unnecessarily prolong the proceedings.

2.5.5 Setting up a database

It is fairly common practice now in international arbitration for any dispute involving large quantities of documents to be managed using some form of database. There are a number of systems available, of differing levels of sophistication. These can range from a simple record of the characteristics of each document given and received on discovery - which enables a rudimentary search to be conducted and the document retrieved in hard-copy from a file - to a library containing a scanned image of every document. This latter system in theory permits a full word-search to be carried out enabling counsel to search not only the author, date, recipient and subject of a document but the full text.

2.5.6 Sampling or selection

A situation may arise where the parties are in dispute over particular aspects of the target company's business. It might be the case, for example, that the issue at the heart of the breach of warranty or misrepresentation is related to the existence of transactions or the alleged failure of a process through which transactions pass. The

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vendor may well dispute this and will want to test whether or not what the purchaser is saying is true. The vendor is clearly entitled to do so. The difficulty is that there may be tens of thousands of such transactions, each of which may involve numerous documents such as purchase orders, transmission documents, invoices, receipts, etc. To produce tens of documents, relating to thousands of small transactions is likely to be an extremely time consuming and costly exercise. It will cause the discovery process to be long drawn out and will add to the overall length of the case as counsel and relevant experts pore over the detail. At the same time, experience suggests that such a full-blown exercise is extremely unlikely to add greatly to the enlightenment of the tribunal.

One solution that may be adopted in these circumstances is to agree that groups of contentious transactions like this will be "sampled". This involves taking a selection of the transactions in issue and producing the documents relating solely to the transactions in that sample. Submissions can then be made to the tribunal on the basis of that sample or, if the circumstances require, the sample might be extended. This might be the case if, for example, the results of the testing of the sample are substantially at odds with the case being advanced by the party suggesting sampling.

It is important that a number of safeguards are observed. It would, of course, be inappropriate for the sample to be chosen solely by the proponent of the sampling process. The party wishing to test the sample should be free to choose an appropriate sample, working on a random basis. If the transactions are listed in a database which is available electronically, it may be possible for a software program to be used to generate the selected transactions. It is advisable if the party's experts can be involved in this process and for them to be encouraged to do as much as possible by agreement.

Sampling or selection should not remove the requirement for the purchaser to provide adequate support for the claim being made. Summary documents or printouts from systems would still need to be provided which underpin the value of the claim. This is important as the selection of the sample will need to be taken from the summary of transactions. The documents requested for each transaction would then also be the choice of the selecting party. However, it is important here to balance the purchaser's burden of proving the claim (by ensuring that it documents each transaction required to illustrate the issues) and the vendor's desire to seek documents that relate to steps which may not be relevant.

The conclusions to be drawn are also important - is sampling a "test" or an illustration of the issues? Much will depend on the circumstances of each case. The tribunal must understand the purpose of the sampling and whether the results are really relevant to their understanding of the wider issues in dispute.

2.6 Obtaining Documents from Third Parties

From time to time, it can be necessary in commercial disputes to seek documents from third parties. This situation may arise in relation to M&A disputes in a number of different ways involving documents held by bankers, lawyers, accountants, customers, consultants, etc. If the third party is not under the control of one of the parties to the arbitration, and is unwilling to produce documents voluntarily, it may be necessary to compel production. The arbitral tribunal will have no power to order documents to be

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produced by a third party. Whilst they may be prepared to indicate that they believe such documents would be of assistance to them in the arbitration, it will usually be necessary for the party which wishes to have access to those documents to seek relief from a court of competent jurisdiction. It is beyond the scope of this paper to examine the procedure by which production might be obtained in various jurisdictions. Suffice it to say that counsel will need to check whether an appropriate disclosure order can be obtained and the time and procedure required to do so.

In some jurisdictions, including England and Wales, the agreement of the parties to the arbitration or a ruling from the tribunal that the documents are required is a pre-requisite of any application against a third party.3 Even where it is not a requirement, such agreement or an indication from the tribunal can be very helpful to the court called upon to determine the application.

2.7 What does the tribunal need and when do they need it?

The members of the tribunal are not going to welcome counsel in a document-intensive case sending them copies of all documents produced on discovery. It is unlikely that the tribunal will have cause to look at the documents unless and until a particular issue arises. The unnecessary copying of documents can also greatly add to the costs of a case. It is difficult to set down firm guidelines as much depends upon the matters at issue in a particular case and the amount of documentation that is generated. The following are, however, a few suggestions:

• do not provide the tribunal with the documents produced on discovery as a matter of course;

• when it is necessary for the tribunal to receive documents, the parties should try to reach agreement as to precisely what the tribunal really needs to see;

• duplication should be avoided. If a certain group of documents has been made available to the tribunal as part of one interlocutory application, and the same set of documents is relevant to a subsequent application, it is not necessary for the tribunal to receive them again and they can be referred back to the relevant materials. The tribunal may, of course, wish to have a fresh set for ease of reference. The key point is that the parties should discuss between themselves and with the tribunal the most cost-effective means of meeting the needs of the application.

2.8 Presenting the documents at the hearing

It seems to be an inevitable fact of life in arbitration that the number of documents that achieve critical importance in a party's closing submissions or argument is always pitifully small compared to the size of the hearing bundle. This is, of course, in large part a result of the sifting process which inevitably takes place following cross-examination during the course of an evidential hearing. The purpose of this paper is not to teach practitioners how to compile a hearing bundle. Suffice it to say that it is important in document-heavy technical hearings to ensure that the material is made available to the tribunal in a sensible and coherent manner. Cooperation between

3 See, e.g., s.44(4) of the English Arbitration Act 1996.

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counsel is essential. In appropriate cases, guidance from the tribunal as to what will assist them may also be helpful as may be the input of experts.

The parties should also consider how best individual documents may be presented. Long spreadsheets in Excel format may take up hundreds of pages if printed out in a format which makes them easily readable. The spreadsheet may not, however, print out on the same page, with the "correct" continuation page being tens or hundreds of pages further on. If it does print out on the same page, the figures may be, at best, hard to read and, at worst, wholly illegible. In these circumstances, consideration should be given by counsel either to agreeing relevant extracts of the document or, if it is inappropriate to do so (perhaps because it forms part of a crucial line of questioning on cross-examination which counsel understandably does not want to reveal in advance) the document may be made available in electronic form. This will necessitate monitors being made available in the hearing room.

There are also a number of sophisticated software packages that enable counsel to present, enlarge and highlight sections of documents on computer monitors for the benefit of the witness and of the arbitrators. Detailed preparation of documents is important if this sort of aid is to be used. If used well, it can be both helpful and effective. If inadequately prepared, the technology can become a hindrance and a distraction.

Depending upon the issues in dispute, it can sometimes be helpful for the tribunal to be provided with "screen captures" showing how important evidence is displayed on a computer screen or how complex a particular interrogation of a given computerised record system can be.

Another consequence of having a great deal of documentation or of having technical material is that cross-examination can become laboured and disrupted if the witness has to wait while different files are produced. The process can be streamlined by counsel preparing in advance cross-examination bundles containing all of the documents upon which they wish to examine a particular witness. These are ideally cross-reference to the chronological or other bundles so that everyone is aware of the documents' provenance and so that new material is not inserted without the other side's consent or the tribunal's permission. The bundle is not deployed until cross-examination of the relevant witness is due to start. If it were made available earlier, the witness would be able to prepare for his or her examination.

2.9 Separating Liability and Quantum

It may be appropriate from time to time to consider splitting the issues of liability and quantum. If quantum is still uncertain, there may be advantages to dealing with liability first and addressing quantum only if liability is established. This can also cut down on costs if liability is unclear. Liability and quantum may also raise entirely distinct issues such that dealing with them together would be a hindrance. This does, however, delay the final resolution of the dispute and that too is a factor to be weighed in the balance. There are also cases where liability and quantum are so closely related that there is nothing to be gained (and quite possibly something to be lost) by not addressing them together.

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2.10 The Procedural Timetable

As with any arbitration, both the parties and the tribunal need to give careful though to the steps in, and length of, the procedural timetable. A balance needs to be drawn between the parties' need to resolve the disputes and to achieve commercial certainty and to allowing adequate time within the timetable for all of the issues to be fairly addressed. Allowing appropriate time for a targeted discovery exercise and for any experts properly to prepare their reports is critical.

2.11 Conduct of the Hearing

As noted above, M&A disputes are perhaps more likely to throw up issues requiring expert evidence and a large amount of documentation than other commercial disputes. Those considerations aside, the issues which present themselves in terms of hearing management are little different from general commercial disputes. The following considerations could, however, usefully be borne in mind:

• how is the hearing best structured? Is it feasible to hear all of the evidence in one period? If there are discrete issues, or the evidence is particularly dense, it may be logical and kinder to both counsel, the witnesses and the tribunal if the evidential hearings are divided into separate tranches, with different issues being dealt with at different hearings;

• if divided into different tranches or issues, how are witnesses that may be common to two or more issues to be dealt with? Are they to be recalled to give evidence on another occasion or does that place an unfair burden on the witness and unnecessarily waste costs? If a witness is to be recalled, is his or her evidence to be confined to the matters relevant to that current tranche or should they be able to give evidence or be asked questions about matters on which they have already testified?

• where are the experts to be fitted into the order? If the hearing is divided up into separate issues, it may be sensible for the tribunal to hear the experts whose evidence is relevant to a particular issue immediately after the factual witnesses, notwithstanding that there may be further fact witnesses to come;

• is the traditional order whereby the claimant's factual witnesses are followed by all of the respondent's fact witnesses to be adhered to or does it make sense to have groups of witnesses on both sides who deal with identical issues taken at the same time? Whilst unusual, there can be situations where both the parties and the tribunal can be assisted by the latter approach;

• if there are particular clashes on the evidence, is there any merit in "conferencing" witnesses of fact and submitting them, side by side, to interrogation by the tribunal?

• similarly, can effective use be made of "confrontations" between the expert witnesses? This technique, which broadly involves putting the expert witnesses of identical discipline from both sides before the tribunal at the same time and inviting each of them to address specific questions, is an extremely effective way of testing the level of agreement between experts. It also enables the tribunal fairly quickly to isolate the key points of dispute between the experts following their cross-examination; and

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• finally, is there any merit in adopting some form of "chess clock" or guillotine procedure? Under the chess clock arrangement, each party is afforded a limited period of time within which to present its case, conduct any direct examination and cross-examine the other sides' witnesses. Counsel is free to use the time available as they see fit, subject to the requirement that they must not exceed the time available. There are variations on this theme but it basically requires the parties to be focused and economic in the running of their case. In a complex M&A dispute, this can make a significant difference to the length of the hearing. On occasion, the tribunal may hold a certain amount of hearing time in reserve, either for its own use or for allocation to one party or the other as circumstances require.

I have already addressed the presentation of documents. The use of monitors to make large spreadsheets accessible to the witnesses, the tribunal and counsel themselves can be useful. Thought may also be given to using other visual aids in order to assist both counsel, the witnesses and the experts in presenting the issues to the tribunal in as clear and helpful a manner as possible.

2.12 Closing Submissions

Closing submissions may of course be oral or written or a combination of the two. In an extremely complex dispute with a great deal of evidence, it is probably more helpful to the tribunal to have written closings which will be readily available to and searchable by the Tribunal members during their subsequent deliberations. If the submissions are to be written, should they be exchanged concurrently or sequentially. For complex closing submissions, concurrent exchange of main submissions and replies has the great advantage of avoiding the temptation experienced by almost all parties to have the last word.

If the dispute which has arisen is relatively straightforward, the post-hearing or closing, submissions may take care of themselves. If, on the other hand, the evidential hearings have been lengthy with extensive issues and complex documentation, it may be sensible for the parties and the tribunal to agree upon the broad structure of the submissions, including the issues to be addressed and the order in which they are to be approached. This will enable the tribunal to ensure that all key points are addressed and that the tribunal is able to navigate easily within and between the respective parties' submissions. If there is an aspect of the reference which the tribunal finds particularly troublesome, it can ask the parties to deal in detail with that issue.

Thought needs to be given, in conjunction with the tribunal, to the way in which accounting or valuation issues may be addressed. It may be helpful if key documents relating to individual accounting issues are brought together. This might involve combining in a bundle for each issue the discovery documents, the summary of the claim and/or defence with respect to the issue and the relevant sections of the experts' reports. A clear "trail" or structure is essential. The use of "interactive" closing submissions is particularly useful in this regard. The submissions, which are put on a CD-ROM or a DVD contain links to the relevant documents (which may include extracts from the transcript) which can be accessed from the body of the text by doubling clicking on the link.

It is not uncommon for tribunals to impose page or even word limits on submissions in reply. The parties should generally be left free to develop their main closing

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submissions at whatever length they feel is required fairly to put their case across (recognising of course the risk of "losing" or boring the tribunal). There is much to be said however for restricting reply submissions so that the parties do not start repeating themselves and focus instead on the key issues. The tribunal will need to bear in mind that circumstances may arise where one or even both parties may, due to unforeseen circumstances, need to expand their reply, and the procedural directions should permit this. The existence of a notional limit is, however, a useful discipline.

2.13 Interim Measures

Other papers will have given examples of circumstances in which it may be necessary to seek interim relief. It may be the case, for example, that a party has breached, or has evinced an intention to breach, a confidentiality undertaking or an exclusivity agreement. Negotiations may be proceeding with another party in breach of such an agreement and an order might be sought to restrain those negotiations from proceeding or an alternative deal from closing.

A vendor may be seeking to enter into an arrangement with customers or competitors which would be in breach of the terms of a share sale and purchase agreement. Rather than rely on its eventual entitlement to damages, the affected party may wish to try and seek an order preventing or restraining the offending action from being taken in the first place. Other issues may arise. The completion of the transaction may be dependent upon the fulfilment of a variety of conditions. Can action be taken to compel a party to comply with a condition if it is unreasonably failing to do so? Is a critical part of the business to be acquired or merged being damaged by improper action taken in advance of the completion of the transaction? If the transaction has been completed, is vital evidence not being preserved? Is business knowhow which has been sold on an exclusive basis improperly being used by the vendor? Is security required for the value of the claim? All of these issues may present a legitimate case for a party to apply for interim relief.

It is beyond the scope of this paper to deal with the various ways in which interim relief might be obtained. The aim will be instead to consider a few of the case management issues which arise.

2.13.1 Is the application strictly necessary?

Applying for interim relief frequently presents a number of obstacles. To whom should the application be made? Is it practically possible to make the application and obtain an order in time to prevent the damage being done? Will the fact of the application (at least if it is made inter partes) simply lead to the action objected to being rushed through? Will a court or tribunal require security to be provided if the application for interim relief is made on an expedited basis in case it ultimately proves to be unfounded?4

Very often, the answer to all of these questions will militate in favour of the application for interim relief proceeding. The various advantages and disadvantages need, however, to be carefully weighed. If damages for breach will ultimately be an adequate and acceptable remedy then an urgent application may simply not be justified (and,

4 The ICC Rules of Arbitration, for example, permit the Arbitral Tribunal to make the granting of an interim measure subject to appropriate security being provided.

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indeed, may well not succeed). In other cases, however, a failure to apply for and obtain interim relief may render valueless any further action. In such circumstances, an application will simply have to be made.

2.13.2 Tribunal or court

If action needs to be taken urgently, and no dispute has previously arisen, a problem is likely to be presented by the fact that no tribunal will have been constituted. The party seeking relief will then have to consider a number of factors. Is appropriate relief obtainable in a national court notwithstanding the presence of an arbitration clause? If it is, should the application be made to court or should an attempt be made to constitute a tribunal? Will the arbitration clause and/or the institutional rules permit or enable the constitution of the tribunal to be effected in a sufficiently short space of time? Remember, it is likely that the party against whom action is being taken is likely to be unwilling to cooperate. The constitution of a tribunal at short notice can be achieved, but examples are relatively rare.

One solution can be to pre-constitute a tribunal at an early stage before a dispute has arisen. This involves appointing the arbitrator or arbitrators at the outset of the transaction and empowering them to make appropriate orders upon the application of the parties should the need arise. Parties are inherently reluctant to enter into such an arrangement as there is a commercial reluctance to admit the possibility of a dispute arising at what is normally an overly optimistic phase in the commercial relationship. Further, the early appointment of an arbitrator is sometimes seen to fetter a party's choice to choose an arbitrator with the right qualifications for a particular dispute.

If application is made to a court or other judicial authority, most institutional rules require the arbitral tribunal (assuming one has been constituted) or the relevant secretariat to be advised without delay.5

2.13.3 Ex parte or inter partes

National courts in a number of jurisdictions will allow urgent applications to be made in appropriate circumstances on an ex parte basis - that is without giving notice to the offending party. Usually, any order obtained is limited in its effect and serves merely temporarily to restrain the party which is said to be in breach. An early hearing is usually scheduled for both parties to present their cases before the court. UNCITRAL is currently deliberating the revision of Article 17 of the Model Law. This, it has been suggested, should be extended so as to empower arbitrators to grant interim measures on an ex parte basis. This debate continues. For most, if not all jurisdictions, the current position is that arbitrators do not have the power to proceed ex parte. Thus, if the advantage of surprise is an important consideration, application should currently be made, assuming that it is possible, to a national court.

2.13.4 Documenting and supporting the application

An application for interim relief is usually, by its very nature, urgent. This can leave limited time for documenting and supporting the application. If such an application is necessary, early consideration needs to be given to providing the necessary evidence in the most efficient way. Key documents, and only key documents, will need to be

5 See, e.g., Article 25.3 of the LCIA Rules and Article 23(2) of the ICC Rules.

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collated swiftly and witness evidence will have to be provided either in person, or by way of affidavit or witness statement from the person most closely familiar with the facts underlying the dispute giving rise to the application for interim relief.

2.14 Advocacy

The style and approach to advocacy in M&A disputes will depend very much upon the make-up of the tribunal, the issues in dispute and the extent to which there is disputed factual and expert evidence. What is appropriate in one case may not be appropriate in another. Some limited comments might, however, be helpful.

Advocacy is, of course, about far more than the way in which counsel orally addresses the tribunal. Rather, it describes the entire process of presenting a party's case to the tribunal. In this context, some of the comments and suggestions made above are pertinent. Thus, clearly articulating the issues in dispute between the parties by means of pre-hearing memorials can be a considerable advantage. Using slides, charts or presentations to guide the tribunal through complex accounting issues is also likely to be helpful.

A difficult area can be the conduct of cross-examination. Clearly, it is important that counsel is given some leeway to question a witness as he or she sees fit. Unlike questioning on straightforward factual issues, however, it may be that in some particularly complex disputes, the immediate thrust of the questioning is not apparent. Counsel need to identify clearly and concisely the technical issue upon which the questions are being asked if confusion is to be avoided. Cross-examination on technical issues requires questions to be phrased with particular precision. In these circumstances it may be important to ensure that expert witnesses are invited to express their opinions drawing clearly on relevant evidence given by the factual witnesses. A presentation by the experts at the outset of their cross-examination may be useful in this regard. Equally, it may be important to the tribunal's understanding for both parties to draw together the threads of the cross-examination by way of closing submissions, whether they be oral or simply written. If there are a number of individual accounting elements to the claim, some form of schedule setting out the parties' positions and the conclusion to be drawn from the evidence may help the tribunal to decide between conflicting positions.

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LETTERS OF INTENT IN THE M&A CONTEXT

Henry Peter1 and Jean-Christophe Liebeskind2

Introduction

With the increasing number of mergers and acquisitions during the last two decades, the letter of intent, which precedes most forms of acquisitions of businesses3, has become a widespread tool and, indeed, is often considered as a sine qua non condition of any merger or acquisition (M&A). Nevertheless, this institution still enjoys - or suffers from - an almost total absence of specific regulation in Swiss law4, while its purpose, nature and effects are often uncertain and misunderstood5.

This paper attempts to provide an update on the legal status of letters of intent in a Swiss law perspective, and will focus on their use in an M&A context. Confidentiality provisions or agreements, a common or related feature6, will also be discussed. Emphasis will be placed on the practical consequences stemming from both instruments.

Letters of intent are usually executed between the end of the exploratory negotiations and the beginning of due diligence7. Thus, they govern due diligence but also the contractual negotiations which will flow from - and frequently overlap - the due diligence process, ultimately (and ideally) resulting in the acquisition contract8.

1. Notion, delimitations and distinctions9

1.1. Notion

Whenever negotiations are pursued they usually reach a stage where the parties wish to record their common intentions with respect to the nature of the envisaged deal, its main conditions and the process which will lead to the execution of the actual purchase agreement.

1 Professor, University of Geneva, Department of Commercial Law; Attorney-at-Law and Partner, Bernasconi Peter Gaggini, Lugano. 2 Attorney-at-Law. 3 See herein, HENRY PETER, M&A transactions: process and possible disputes, § 2.1.2. 4 As well as, to our knowledge, in most other countries. 5 See inter alia PETER R. ISLER, Letter of Intent, in Mergers & Acquisitions VI, Zürich 2004, p. 1 to 31; RUDOLF

TSCHÄNI, M&A-Transaktionen nach Schweizer Recht, Zürich 2003, p. 18 to 20, N. 8 to 13; RALF SCHLOSSER,Les lettres d'intention : Portée et sanction des accords précontractuels, in Jérôme Bénédict et al. (eds), Etudes en l'honneur de Baptiste Rusconi, Lausanne (Bis & Ter) 2000, p. 345, especially p. 348; DOMINIQUE

DREYER, National Legislations: Switzerland, in Formation of Contracts and Precontractual Liability, Paris (ICC) 1990, p. 65 to 88. For an extensive account in comparative and international law, see, e.g., RALPH

LAKE/ UGO DRAETTA, Letters of Intent and Other Precontractual Documents, 2nd ed., Salem 1994. 6 See herein, HENRY PETER, M&A transactions: process and possible disputes, § 2.1.1. 7 See herein, HENRY PETER, M&A transactions: process and possible disputes, § 2.1. 8 For a description of the M&A process, see herein, HENRY PETER, M&A transactions: process and possible disputes, § 2.1 and Schedule 1. 9 On terminology and the various uses of the letter of intent generally, see also, RALPH LAKE/ UGO DRAETTA,p. 3 to 17.

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2

At this stage the negotiations process is generally characterised by a conflict of interests - or at least contrasting positions - between the seller and the buyer:

- The seller is anxious to sell its business quickly and safely. He is willing to sell to the (potential) purchaser and is usually ready – or at least required – to negotiate exclusively with him, which puts the seller in a somewhat vulnerable position;

- in contrast, the buyer will, obviously, not commit before he has had a chance to get to know the business in depth. His concerns are both objective - is the business financially sound? - and subjective - will the business match the buyer's own business and/or commercial strategy10? The outcome of this inquiry will have an impact not only on the decision to buy, but also on the conditions of sale, including, obviously, the price, and other contractual provisions, not the least of which are the representations and warranties and related indemnity clauses11.

The letter of intent has developed over the years into the appropriate instrument to satisfy both parties' concerns. It plays a significant role – from a psychological standpoint at the very least – by documenting the facts and reassuring the parties that the negotiations - which often involve considerable expenses and commitment - are based on a serious and shared intent.

Hence the letter of intent, as appraised by this paper, may be defined as a declaration of intent of one or more parties to conclude a transaction, in which certain fundamental aspects of such envisaged transaction and of the procedure that should lead to its conclusion are recorded12. Letters of intent can portend any kind of deal, for instance the acquisition of shares, of assets, of a business, as well as a merger or a joint venture.

1.2. Delimitations and distinctions

1.2.1. Unrelated Instruments

A first delimitation may be drawn between letters of intent13, as assessed in this paper, and other instruments known under the same name but pursuing a fundamentally different purpose. In fact, in French the term “letter of intent” is sometimes used to designate "comfort letters" (lettre de confort, lettre de patronage, Patronatserklärung),i.e. letters issued by a party in favour of another by which the issuer makes certain statements and/or supplies certain information, typically regarding its shareholding and the solvency of a subsidiary. We consider that the use of "letter of intent" in the sense of

10 See herein, HENRY PETER, M&A transactions: process and possible disputes, § 2.1.3. 11 See herein, HENRY PETER, M&A transactions: process and possible disputes, § 2.1.3 in fine. 12 See ROLF WATTER, Unternehmensübernahmen, Zürich 1990, p. 130-132. Also herein HENRY PETER, M&A transactions: process and possible disputes, § 2.1.2. 13 "Lettre d'intention" in French. In German the Anglo-Saxon terminology prevails most of the time. Alternatively the expression "Absichtserlärung" (litt. "expression of intent") is used, but there appears to be no unanimity on such assimilation. See RALF Schlosser note 2; P. SIEBOURG, Der Letter of Intent, Bonn 1979, p. 16 and 116.

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3

"comfort letter" is improper; some authors however do acknowledge the double meaning of this expression14.

Although the boundaries are often unclear, other possible sources of confusion include instruments, at times improperly called "letters of intent", which are actually gentlemen's agreements15.

1.2.2. Related Instruments

Letters of intent have further to be distinguished from other instruments which pursue, at least in part, the same purpose but perform a different function, such as option agreements or confidentiality agreements.

1.2.2.1 Options

The option agreement has been defined as an agreement by which one of the parties grants the other a discretionary right to generate, by its sole declaration of intent, a given contract16.

1.2.2.2 Confidentiality agreements

It is inevitable that, if the negotiations are pursued, they will reach a stage where the potential buyer will expect to have access to certain confidential information regarding the subject matter of the prospected deal (the "target"), whereas the potential seller will be concerned by the disclosure of such information to competitors (including the potential buyer) especially if the negotiations ultimately fail. The sensitive information often includes the very fact that negotiations are being conducted.

The apprehensions with respect to confidentiality have to be dealt with at an early stage, usually before the parties are even ready to execute a letter of intent. This is why, although the confidentiality provisions can be part of the letter of intent, they often take the form of a separate and preliminary document17 the content of which will be briefly noted below.

14 Thus in French, such an institution appears to be indifferently known as "lettre d'intention", "de patronage","de confort" or "de parrainage". For Swiss law, see e.g. ANNE SCHOLLEN, Les lettres de parrainage ont-elles toujours de bonnes intentions ?, RDAI 1994, p. 793; ROLAND RUEDIN, La lettre d'intention en droit suisse, inHommage à Paul-René Rosset à l'occasion de son 70ème anniversaire, Neuchâtel 1977, p. 213 to 228 (on comfort instruments). For French law, see e.g. PHILIPPE SIMLER, Cautionnement et garanties autonomes, 2nd ed., Paris (Litec) 1991, p. 28; MICHEL CABRILLAC / CHRISTIAN MOULY, Droit des sûretés, 5th ed., Paris (Litec) 1999, p. 387. For U.S. law, see e.g. LARRY A. DIMATTEO / RENE SACASAS, Credit and Value Comfort Instruments: Crossing the Line from Assurance to Legally Significant Reliance and Toward a Theory of Enforceability, 47 Baylor L. Rev. 357. See also RALF SCHLOSSER, p. 348; MARKUS LUTTER, Der Letter of Intent, Köln 1982, p. 12. 15 The gentlemen's agreement has been defined as an understanding by which the parties commit themselves to moral obligations, i.e., to refrain from resorting to judiciary enforcement. See RALF SCHLOSSER,p. 348 and note 14. 16 See RALF SCHLOSSER, p. 346 and 347 and notes 6 and 7. Besides all which are more or less standardised, put and call options, such agreements are found, e.g., in the context of technology transfers, where the potential buyer shall have the right to appraise the know-how of the potential seller, and then to exercise his option at the time it believes appropriate. 17 See herein, HENRY PETER, M&A transactions: process and possible disputes, § 2.1.1.

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The key provisions of a confidentiality agreement are generally the following:

- Identity of the parties. These are usually the buyer and the seller. Occasionally, the target is also a party so that it may directly claim performance – or compensation - in the event of breach. Third parties may also be required to sign the confidentiality agreement, such as advisors or managers of the parties, including sometimes those of the target.

- Scope. The parties undertake to keep the confidential information secret and to use it strictly in compliance with the purpose of the agreement, i.e. the acquisition of the target.

- Confidential information. The definition of what is deemed to be confidential is a key provision. The mere existence of negotiations between the parties is often expressly designated as being confidential.

- Abortion. The fate of the information, and the related documents, is usually provided for should the acquisition not ultimately take place.

- Applicable law and dispute settlement. Applicable law and jurisdiction are, in most cases, specified.

1.2.3. Variations in Terminology

Several other expressions, such as memorandum of understanding, memorandum of agreement, heads of agreement or term sheet are encountered. The situation is hardly clearer in other languages: Punktuationen in German, protocole d'accord in French, etc.18.

For the purpose of this paper, suffice it to note that there seems to be no general understanding on whether these expressions represent substantially different instruments or are only variations in terminology19. And even if a certain consensus exists amongst academics, uncertainties often remain at the practitioner’s level.

In any event, and this is the main point, pursuant to a well-established principle of Swiss law, intent prevails over wording20. Thus, what matters is not the title of the document but its actual content as construed taking into account the parties' intentions.

1.2.4. Pre-Contractual Agreements and Promises to Contract

Pre-contractual agreements are defined as agreements made between two or more negotiating parties, seeking to arrive at the conclusion of a final contract21.

18 See RALF SCHLOSSER, p. 347 and 8 and notes 11 to 13; URS SCHENKER, Due Diligence beim Unternehmenskauf, in Mergers & Acquisitions III, Zürich 2001, p. 209, especially p. 220 and 221; RALPH

LAKE / UGO DRAETTA, p. 5. 19 See RALPH LAKE / UGO DRAETTA, p. 9 and note 27. 20 Art. 18 CO. See infra § 4.2. 21 RALF SCHLOSSER, p. 345. Also known as preliminary agreements in Anglo-Saxon legal terminology, "contrats de négociation" in French and either "Vorausvertrag" (to distinguish from "Vorvertrag", i.e., promise to contract), or "Vertragsverhandlungsvereinbarung" in German.

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Promises to contract are regulated by art. 22 CO pursuant to which the parties may contractually commit themselves to conclude a contract in the future22.

Whereas these notions are akin and sometimes overlapping with that of letters of intent, they are distinct legal concepts as will be discussed below.

1.2.5. Bilateral (or Multilateral) and Unilateral Letters of Intent

Letters of intent are usually bilateral, i.e. they are executed by two parties –– the (potential) seller and the (potential) buyer. Occasionally, they may be signed by more parties, for instance by several companies which are acting in concert or belonging to the same group, sometimes also by the target, in which cases the letter of intent may be described as multilateral.

Less frequently, a letter of intent may be unilateral, i.e. emanate from only one party, either the seller or the buyer, expressing a party's intent to sell or to buy23. How the latter qualifies legally will be addressed below.

2. Content

There is no standard pattern. Letters of intent vary considerably in form and substance. Certain basic provisions may, however, be identified and classified as "necessary" clauses, others as "optional" clauses.

2.1. Necessary Clauses

Necessary clauses usually include the following items:

- identity of the parties: who are the envisaged seller and the purchaser of the target?

- object of the transaction: what business, or part thereof, does the transaction relate to?

- nature of the transaction: what kind of transaction are the parties envisaging? A share deal, an asset deal, a capital increase, a spin off, a leveraged buy-out, the setting up of a joint-venture (whether corporate or contractual)?

- process: how is the envisaged transaction going to be achieved (a due diligence first, then the signing of a purchase agreement, thereafter a closing, etc.), what will the calendar be, etc?

2.2. Optional Clauses

Optional clauses may include the following items:

22 Lat. "pactum de contrahendo"; Fr. "précontrat"; Ger. "Vorvertrag" (to distinguish from "Vorausvertrag", i.e., pre-contractual agreement). In order to avoid confusion, in this paper we shall exclusively use the expression "promise to contract". 23 RALF SCHLOSSER, p. 356 and 357.

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- sale price (sometimes an exact figure, more often an estimate or range, valuation principles or the formula for determining the price, etc.)24;

- due diligence (scope, time schedule and procedural or methodological issues)25;

- exclusivity ("lock in"26 and/or "lock out"27)28;

- non-inducement29;

- costs;

- confidentiality (if not the subject matter of a separate agreement);

- applicable law and dispute settlement, including forum;

- compulsory nature of the letter of intent (none/partial/total).

3. Legal nature

The letter of intent is, as indicated by its very name, of a voluntary nature. Whether it has binding effects is a delicate and often controversial issue. We will, consecutively, discuss whether it can be considered a "full" contract (infra § 3.1), a promise to contract (infra §3.2) or an offer (infra § 3.3).

3.1. Is the Letter of Intent a Contract?

Pursuant to art. 1 § CO, a contract exists when the parties have reciprocally expressed matching intentions. To that effect it is sufficient for them to agree on the main elements of the deal (essentialia negotii)30. If secondary issues have not been agreed, they may be determined by the judge (art. 2 § 2 CO).

It is usually considered that a letter of intent is not an agreement. This is due to the fact that, in a standard M&A pattern31, letters of intent are meant to describe an envisaged transaction, not to confirm an agreed one. To dispel any doubts in this respect, this concept is often expressly indicated in the wording of letters of intent, by stating, for instance, that the deal is "subject to contract". The parties thus only express intentions, not decisions. The intent is to negotiate and – possibly – to conclude a final contract, without prejudice to the parties’ discretionary right not to do so.

24 RUDOLF TSCHÄNI / ANDREAS VON PLANTA / MATTHIAS OERTLE, Corporate Acquisitions and Mergers in Switzerland, Zürich 2000, p. 83 and 84, § 395 to 400 consider the price (or a formula enabling to determine the price) as an "essential point" of the letter of intent. 25 See herein HENRY PETER, M&A transactions: process and possible disputes, § 2.1.3. 26 The seller must negotiate with the buyer during a certain period of time. 27 The seller must not negotiate with third parties during a certain period of time. 28 This provision generally specifies that it shall cease to be binding as soon as a party declares in writing its intent to depart from the negotiation. 29 The potential buyer undertakes not to hire or induce away mangers or employees of the target. See URS

SCHENKER, p. 219. 30 ATF 103 II 190 (1977) c. 1 = JdT 1978 I 157 (summary). The judge may, however, exceptionally fix disagreements in accordance with the rule of good faith, i.e. by applying the principle of confidence, see infra § 4.2. 31 See herein, HENRY PETER, M&A transactions: process and possible disputes, § 2.1.

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However, often this does not – or at least not completely – stand up under closer analysis. The answer is a question of interpretation for which the rules of good faith (art. 2 §1 CC) play a central role. Applying the "principle of trust", the parties' intent will be interpreted according to their actual understanding, with a particular view to that of the addressee, bearing in mind the overall circumstances32.

In order to assess whether the letter of intent qualifies as a contract, a number of preliminary distinctions should be made with respect to its provisions. Firstly, the provisions typically contained in a letter of intent, as listed above, whether necessary or optional, can be divided into two categories: those which govern the negotiation of the final contract, irrespective of its outcome, and those which pertain to its actualimplementation.

(i) The provisions belonging to the first category (negotiation) involve the way negotiations will be conducted and related issues. These are, in particular, the following:

- description of the process;

- confidentiality;

- exclusivity;

- costs;

- applicable law and dispute settlement;

- non-inducement.

In most cases such provisions are intended to be binding, and whether this is expressed or implied is not relevant. To this extent, the letter of intent is, therefore, an agreement.

(ii) The second category (actual implementation) includes all clauses contained in the letter of intent which describe the actual (intended) deal, especially the envisaged target and the price. These provisions are not necessarily vague, and, on the contrary, sometimes the object and the price of the transaction, i.e. its essentialia negotii, are already quite clearly identified. What characterises a letter of intent is that the parties wish to preserve their discretionary right not to complete the deal or to do so at conditions which could be different from those initially envisaged.

The – still to be performed – due diligence will play a fundamental role in that respect. Thus, the actual purchase agreement still has to be agreed on and stipulated. This is never a formality in M&A transactions, quite the opposite. Any practitioner has experienced how fierce negotiations can be at this later stage, especially with regard to the representations, warranties and indemnification

32 See infra § 4.2.

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provisions, to the extent that we would even suggest that, in M&A transactions, such clauses should also be considered essentiala negotii.

In short, it can probably be said that the letter of intent is not binding as far as the provisions belonging to this second category are concerned. Any conclusion in this respect will, however, depend on the circumstances and on the actual intentions of the parties, whether expressed or implied. There might indeed be cases where a different conclusion could be reached.

Assuming that, in whole or in part, the contractual nature of a letter of intent has been assessed, a further question which might arise is the nature of the contractual relationship. Is it (i) synallagmatic, i.e. giving rise to an exchange of certain things ( e.g. shares against cash) or rather (ii) something akin to a partnership whereby it is considered that both parties are joining their efforts in order to achieve a common goal ( e.g. setting up a joint venture)?

The question is not at all academic. Should it be considered that the relationship is synallagmatic, the ordinary contractual regime will apply (art. 97 et seq. CO). Should it be considered that a letter of intent generates a partnership, art. 530ss CO will govern the relationship.

It would go beyond the scope of this paper to pretend to solve this issue, which is yet quite unexplored. We believe that, here as well, the answer will be fact-driven. If, for instance, the parties' intention is to enter into a share purchase agreement, the nature of the relationship is undoubtedly synallagmatic33. If, on the other hand, their purpose is to set up a contractual joint venture, to the extent that a letter of intent is binding, if anything by analogy, it could be considered that the provisions of Swiss law governing partnerships do apply34. This said however, it would probably be wrong to consider that the simple fact that the parties are willing to achieve a common goal (a certain M&A transaction) means that they are joining efforts to achieve this common goal and that, accordingly, art. 530 et seq. CO apply.

If a letter of intent is not considered a contract, in whole or in part, the question can arise as to whether it may qualify as a promise to contract.

33FRITZ VON STEIGER, Pactum de ineunda societate (Vorgründungsvertrag), in SAG 30, p. 174, especially p.

181 and 182; C. KERSTING, Die Vorgesellschaft im europäischen Gesellschaftrecht,Köln/Berlin/Bonn/München 2002 ; ULMER, in BODO RIEGGER / LUTZ WOIPORT, Münchener Kommentar zum Bürgerlichen Gesetzbuch, München 2002, ad § 705 p. 11 N. 19 ; MICHAEL SCHWIMANN, Praxiskommentar zum ABGB, Vienne 1997-2001, § 1175, N. 35; Y. GUYON, Traité des contrats, Paris 1997, p. 359 et seq. ; R. BESNARD-GOUDET, Promesse de société, Edition du jurisclasseur 2001, fasc. 7-30, § 10 et seq. ; P. SPADA,Contratto preliminare di società e qualificazione « preliminare » della società, in Giurisprudenza commerciale 1974 II, p. 662 ; PETER FORSTMOSER, Schweizerisches Aktienrecht, Band I, Zürich 1981, p. 220. 34 CLAUDE REYMOND, Le contrat de "Joint Venture", in Innominatverträge, Zürich 1988, p. 383 to 396.

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3.2. Is the Letter of Intent a Promise to Contract?

The promise to contract is covered by art. 22 CO, i.e. the case in which parties undertake to conclude a contract in the future. The contents and scope of such a promise are disputed, however.

Traditionally, the Swiss Federal Court has deemed that a promise to contract had to include all the essentialiae of the final contract35. A minority of scholars dissented, maintaining that a promise to contract may contain only part of the main elements of the final contract, or all of them but with a lesser degree of precision36.

In a 1977 case, said Court found that since the promise to contract contained all the main elements, it was equivalent to an enforceable final contract37. In an obiter dictum,the Court cast serious doubts about the very purpose of promises to contract. Acknowledging the criticisms raised by scholars38, the Court stated the following alternative: either an agreement contains all essentialiae and therefore is a final contract, not a mere promise to contract, or there is no agreement on all essentialiae and, therefore, the parties cannot be bound to execute a contract the main content of which is not sufficiently clear. Even though the Court was cautious not to rule on such an alternative, this jurisprudence can probably be regarded as voiding the promise to contract of any practical substance39.

Accordingly, if a letter of intent contains a commitment to conclude the final contract, then the following distinction should be made: either the letter of intent contains all the essentialia negotii and might, therefore, qualify as a binding agreement, or it does not and is not a contract and thus is not binding.

3.3. Is the Letter of Intent an Offer?

Conceivably, the letter of intent may express the intent only of its author. This happens when one party (usually the potential buyer) is invited by the seller to express the conditions at which it would be ready to acquire the target. This may occur at any point in time, usually in the initial phase of the process, often in a bidding context40.

35 ATF 31 II 640 (1905). 36 See supra footnote 30. 37 ATF 103 III 97 (1977), Blum v. Bancofin, at 106 and 107. See also infra footnote 68. 38 See WALTER STOFFEL, La promesse de contracter en droit suisse, in Pouvoir exécutif et pouvoir législatif, Recueil des travaux présentés aux deuxièmes journées juridiques yougoslavo-suisses, Zurich 1986, p. 131 et seq., especially p. 145 to 148; EUGEN BUCHER/PETER SALADIN, Die Verschiedenen Bedeutungsstufen des Vorvertrages, in Berner Festgabe zum schweizerischen Juristentag 1979, Bern/Stuttgart 1979, p. 169 et seq., especially p. 183 to 187. 39 See RALF SCHLOSSER, p. 350 and note 23; THEO GUHL / ALFRED KOLLER / ANTON K. SCHNYDER / JEAN

NICOLAS DRUEY, Das schweizerische Obligationenrecht, 9th ed., Zürich 2000, p. 108, N. 16; PIERRE CAVIN, Lavente, l'échange, la donation, TDPS VII/1, Fribourg 1978, p. 146; PIERRE ENGEL, Traité des obligations en droit suisse, Bern 1997, p. 181 and 182. Following ERNST A. KRAMER, Berner Kommentar, VI/1/2/1a, Bern 1990, ad art. 22 CO, N. 98, the promise to contract now only makes sense where it expresses the commitment of one of the parties to the other to conclude a contract with a third party.40 See herein HENRY PETER, M&A transactions: process and possible disputes, § 2.1.1.

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For a contract to be concluded, an offer has to be accepted (art. 1 §1 CO). If the offer contains a deadline for its acceptance, the author is bound until the expiry thereof (art. 3 §1 CO). Absent such a time limit, the offeror will be bound until he can, according to business usages, reasonably expect a reply (art. 5 §1 CO). Tacit acceptance is only exceptionally admitted (art. 6 CO); it will however be excluded if it is customary, in the relevant business, to expect a written answer41, which is typically the case in the field of M&A.

Consequently, provided that all other conditions are met, a unilateral letter of intent may qualify as an offer. If the offer is accepted, and it contains all essential points (art. 2 §1 CO) and is not subject to other discretionary conditions, the letter of intent may give rise to a contract42. If there is no timely acceptance or if the offer is refused, there will be no contract.

4. Legal Effects

A letter of intent can have legal effects irrespective of the fact that it can be qualified, in part or as a whole, as a contract.

4.1. Pre-Contractual Duties

First of all, obligations derive from the rules of good faith (art. 2 and 3 CC) on the basis of the principles elaborated by the doctrine and case law with respect to the culpa in contrahendo.

As soon as they start to negotiate, the parties must observe pre-contractual duties, i.e. each party must take utmost care to behave like a fair partner and to avoid any undue damage to the other party. This is sometimes expressly indicated in clauses of the letters of intent stating that the parties shall "negotiate in good faith" or "endeavour their best efforts" to achieve the envisaged transaction43. It could therefore be said that such provisions of letters of intent are nothing else than a codification of the duties already expressed in the preliminary part of the Swiss civil code. Seen from this perspective, these provisions of the letter of intent would be redundant.

However, we suggest going further and considering that the letters of intent should be interpreted as a reinforced commitment of the parties to act and, in particular, to negotiate in good faith44. By signing a letter of intent, the parties create qualified expectations. This implies the need for qualified good faith in M&A cases.

There are two situations in which pre-contractual duties may arise: (i) during the negotiation of the letter of intent itself and (ii) during the negotiation of the finalagreement following the execution of a letter of intent. If, however, the duty to negotiate

41 ATF 100 II 18 (1974) = JdT 1974 I 354. 42 RALF SCHLOSSER, p. 356 and 357 and note 50; MARKUS LUTTER, p. 19 to 23; P. SIEBOURG, p. 155 to 158. 43 So-called "best endeavours" or "best efforts" clauses. See RALF SCHLOSSER, p. 360; RALPH LAKE / UGO

DRAETTA, p. 206; HARVEY L. TEMKIN, When Does the "Fat Lady" Sing? An Analysis of "Agreements in Principle" in Corporate Acquisitions, 55 Fordham Law Review (1986), p. 130; SIEBOURG, p. 225. 44 See RUDOLF TSCHÄNI, p. 17, N. 4.

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in good faith is provided for by the letter of intent, it could also be treated as a contractual obligation, not as a pre-contractual duty45.

Pre-contractual obligations include:

- a duty to act honestly46: the parties should not negotiate without the genuine intent to conclude a final contract47.

- a prohibition to deceive: a party may not deceive the other party. A culpa in contrahendo would exist in the event a party alleges – or implies – that it is concluding parallel negotiations whereas this is untrue. This behaviour sometimes occurs in an attempt to create a fake auction process in order to increase (or decrease) the price.

- a duty to inform: each party must inform the other of facts that the latter does not know48 which may recognisably have an impact on its decision to enter into the deal or on the terms thereof49. Also, each party has a duty to inform the other whenever it has decided not to conclude the agreement. In the case of mergers and acquisitions, the reinforced requirement of good faith noted above would imply that the range of such information covers anything which significantly contributes to the decision making of the parties, unless the other party can be expected to obtain such information on its own50.

Issues concerning the duty to inform in connection with a letter of intent frequently arise in the case of parallel negotiations51. The doctrine however diverges as to whether conducting parallel negotiations is admissible at all52 and, if so, as to whether there is a duty to inform the other party and to what extent53.

The Swiss Federal Court has ruled that a subsidiary that negotiates for months without informing its counterpart that the final decision lies with a third party (incasu its mother company) is liable in the event such a decision is ultimately

45 Provided that the letter of intent, at least in that respect, qualifies as a contract.46 ATF 105 II 80 (1979) = JdT 1980 I 71. 47 ATF 46 II 373 (1920) = JdT 1921 I 42. 48 ATF 102 II 80, 84 (1976). 49 ATF 105 II 80 (1979). 50 RUDOLF TSCHÄNI / ANDREAS VON PLANTA / MATTHIAS OERTLE, p. 83, N. 397. For a detailed assessment of the information the seller has a duty to disclose or the buyer has to find out by himself, see MARKUS VISCHER,Due Diligence bei Unternehmenskäufen, SJZ 96 (2000) No 10 p. 229. VISCHER focuses on due diligence, but the principles he identifies apply mutatis mutandis to the letter of intent. 51 See RUDOLF TSCHÄNi, p. 17, N. 4 to 6. 52 Pro: RALF SCHLOSSER, p. 361 and note 74-5; E. ALLAN FARNSWORTH, Precontractual Liability and Preliminary Agreements: Fair Dealings and Failed Negotiations, 87 Columbia Law Review (1987) 247, p. 279; E. ALLAN FARNSWORTH, Negotiations of Contracts and Precontractual Liability: General Report, in Conflits et harmonisation, Mélanges en l'honneur d'Alfred E. von Overbeck, Fribourg 1990, p. 657, especially, p. 672 et seq.; MARKUS LUTTER, p. 42; RUDOLF TSCHÄNI / ANDREAS VON PLANTA / MATTHIAS OERTLE ,p. 83, N. 397; RUDOLF TSCHÄNI, p. 19, N. 12. Contra: RALF SCHLOSSER, p. 361 and note 74; MARCEL FONTAINE,Les lettres d'intention dans la négociation des contrats internationaux, Droit et pratique du commerce international 1977, p. 99 et seq., especially p. 108 et seq. 53 RALF SCHLOSSER (p. 361), for instance, believes that the parties to a letter of intent have a reinforced duty to inform their counterpart in case of parallel negotiations, i.e. not only of their existence, but even of the content of any offer.

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negative and thereby causes prejudice to the other party54. On the contrary, the Court rejected a claim from the seller on the grounds that the buyer had not informed the seller of its intention to re-sell the company immediately after the (initial) acquisition55.

- a duty to advise: particular knowledge held by one party must benefit the other. The duty to advise may be seen as a particular form of the duty to inform56.

4.2. Contractual Interpretation and Completion

Once the contractual nature of the letter of intent has been determined, the letter of intent will be interpreted whenever the parties are in disagreement as to the scope of their rights and obligations. The rules governing contractual interpretation and completion are a typical expression of the general principle of good faith.

When the parties’ intent is expressed but is unclear, the parties and, as the case may be, the judge, will assess it. When such intent is not expressed and cannot be construed, and provided all essentialia negotii are agreed on57, the judge will complete (in French, "compléter"; in German, "ergänzen") the contract58.

Pursuant to art. 18 §1 CO, the judge will seek the real and common intention of the parties. The judge will consider the overall circumstances surrounding the contract, its conclusion and performance. If the intent of the parties is neither expressed nor implied, the judge will have to decide the hypothetical intent of the parties, considering the nature of the deal (art. 2 §2 CO) and relying on the rules of good faith (art. 2 §1 CC). In doing so, he will consider what is customary in the field of M&A in general, taking into account the relevant transaction in particular59.

4.3. Remedies and Liabilities

The legal consequences of the non-performance of a letter of intent will mostly depend on its nature. Two types of liability may arise: contractual liability and pre-contractual liability.

4.3.1. Contractual Remedies and Liability

To the extent that a letter of intent can be considered a contract, with binding effects, therefore, art. 97 et seq. CO shall apply.

54 ATF 105 II 75 (1979), 80. 55 SJZ 1976, p. 360. 56 ATF 68 II 302 (1942). See also PIERRE TERCIER, Le droit des obligations, Zürich 2004, p. 124, N. 577 et seq.57 For instance, sometimes the parties state that "customary representations and warranties" shall apply. We have suggested (see above 3.1) that, in M&A transactions, "Reps and warranties" are essentialia negotii.Thus, if the provision is not sufficiently clear, we believe that it will be difficult to deem that there is a contract.58 ATF 110 II 287, JT 1985 I 146; ATF 11 II 260, JT 1986 I 94; ATF 115 II 484, JT 1990 I 210; PIERRE

TERCIER, p. 176, N. 860 et seq. 59 PIERRE TERCIER, p. 176, N. 866 et seq.

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If performance does not occur, art. 107 §2 CO provides for a variety of consequences. Indeed, the creditor may (i) demand that the obligation be carried out (specific performance); he will still be entitled to claim damages for late performance ("first option"); (ii) provided he declares so immediately, the creditor may waive his right to require performance and either (a) claim damages for non-performance, i.e., positiveinterest ("second option"), or (b) depart from the contract, i.e. waive his right to claim performance and demand so-called negative interest ("third option")60. In Swiss law, positive interest is defined as the interest that the claimant had in the implementation of the contract; negative interest being, simply said, that which the claimant had in not concluding the contract61.

Occasionally, the parties may expressly provide for liability in the event of breach and for the consequences thereof, for example in the form of conventional penalties or liquidated damages or, on the contrary, for exclusion thereof62. Where they have not, the practical consequences of contractual liability might vary considerably and will therefore be assessed on a case by case basis, which might prove to be extremely difficult.

4.3.1.1. Specific Performance

To the extent all or part of a letter of intent qualifies as a contract, specific performance can, as a matter of principle, be claimed. A non-controversial example lies in a clause which provides a duty to hand over certain documents obtained during the due diligence. Apart from these clearcut instances, ordering specific performance of M&A deals based on plain letters of intent should only be admitted restrictively in view of the nature of this type of transaction63.

Whenever a letter of intent qualifies as a promise to contract, not only will those provisions relating to the negotiation of the final contract be enforceable, but, in some cases, so will also be the conclusion of the final contract itself. As seen above, in normal cases the Swiss Federal Court is reluctant to order a possible enforcement of the conclusion of a final contract based on a plain promise to contract; considering the peculiarities of M&A transactions, this is therefore a fortiori be a controversial issue in M&A.

It is true that, in 1971, the Swiss Federal Court ruled that, in principle, the promise to contract entitled the claimant (buyer) not only to an indemnity but also to the specific performance (Realerfüllung) of the prospected contract. In the case in question, the final contract however consisted in the sale of land, whereby specific performance enabled the claimant (buyer) to obtain registration of the land in its name64. The enforcement of

60 See also art. 109 CO. 61 On positive and negative damages, see PIERRE TERCIER, p. 220, N. 1103 and 1104. On contractual liability generally, see PIERRE TERCIER, p. 230 et seq., N. 1163 to 1225. 62 Conventional liability may namely provide for the right to depart from the negotiation anytime free of any liability for damages. 63 See herein, HENRY PETER, M&A transactions: process and possible disputes, § 3.1.4. 64 ATF 97 II 48 (1971), Odier v. Delavy.

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the promise to contract was therefore relatively straightforward. Whether the Court would have issued the same ruling in a case concerning an M&A deal is questionable.

In 1976, the Swiss Federal Court admitted, in its entirety, the claim of the potential sellers for payment of the penalties provided for in the draft of an M&A agreement. In this case, the parties had signed a promise to contract and drafted the final sale contract but had abstained from signing it. The deal sought to merge two stock companies into a holding. The Court ruled that the promise to contract entitled the parties to require performance of the draft agreement. Since the claimants (sellers) did not request specific performance, the Court, regrettably, did not have the chance to rule on the implementation of the merger itself65.

As noted above66, in 1977 the Federal Court stated that since the relevant promise to a contract contained all essentialiae, it amounted to an enforceable final contract. The dispute concerned the registration of a sale in the real estate property register, which was possible on the basis of the promise to contract67. This position has been confirmed several times since68.

The impact of this case law on a letter of intent qualifying as a promise to contract appears to be that, if circumstances allow, it can bind the parties to both the conclusion and the performance of the final contract. It should not, however, be overlooked that M&A transactions are sometimes highly complex and require much more than the plain assignment of shares or assets. Accordingly, ordering specific performance in this field can prove inappropriate or even totally unrealistic. It could probably be sustained that, in most cases, in view of the very nature of the deal, the right to claim specific performance based on a letter of intent has been implicitly waived.

Where - or to the extent that - the letter of intent is only concerned with the negotiations,one can hardly identify a provision capable, in practice, of being enforced against the will of the other party69.

4.3.1.2 Positive Interest

Further issues arise in the context of the second option of art. 107 §2 CO where the relevant party waives its right to obtain specific performance but claims damages for non-performance.

Beyond damnum emergens however, it will often be difficult to assess the lucrumcessans. In this respect, suffice it to think of the difficulties in estimating the earning capacity of an individual in the event of permanent injuries or death, to convince oneself that a similar estimate in the case of an unsuccessful, complex merger or acquisition

65 ATF 102 II 420 (1976) = JT 1978 I 230, Bucher v. Frey.66 See supra § 3.2. 67 ATF 103 III 97 (1977), Blum v. Bancofin, at 106-7. 68 ATF 118 II 32 (1992) = JdT 1993 I 387. See also ATF 127 III 248 (2002) (essentialia missing; no contract); and ATF 129 III 264 (2003) (promise to sell an immovable amounting to a conditional sale, whereas the condition was ultimately not met). 69 See RALF SCHLOSSER, p. 352; ERNST A. KRAMER, ad art. 22 CO, N. 57.

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15

would necessarily be speculative. However, this does not mean that positive interest should not be granted. Art. 42 § 2 CO will often be the key provision in such cases.

In any event, these difficulties appear to militate strongly in favour of conventional penalties70.

4.3.1.3. Negative Interest

In the context of the third option, the creditor will claim the damage it would not have incurred if the negotiations had never taken place. In practice, he will claim not only the financial and other costs resulting from non-performance, but also all other costs connected to the negotiation from its inception, namely all legal and advisors’ fees, as well as the time and costs incurred by the relevant party's own structure, etc. Whilst damages relating to the promise to contract or an actual contract do not fundamentally differ from those relating to negotiation only, they can be expected to be higher, since the commitment to conclude possibly involved more extensive expenses.

Beyond these costs, it is worth mentioning that the seller might have a claim against the potential buyer because the latter induced the former to irremediably decline the offer of another potential buyer71 or, generally, because he has lost other opportunities. However, proof of this kind of prejudice will generally be difficult to adduce.

4.3.1.4. Partnership

Should it be considered that a letter of intent gives rise to a partnership, as has been suggested72 it is not art. 97ss CO which apply but rather art. 530ss CO. In several respects answers to the same issues might then be different. There shall, for instance, be a duty of loyalty (art 536 CO). There shall also be a right to terminate (i.e. not to implement the transaction) if good reasons to do so arise (art. 545 § 2 CO). Finally, rather than the traditional issue of damages which arises in case of synallagmatic agreements, the main issue in case of partnership is to know how the relationship between the parties will be "liquidated" should the partnership be dissolved. Should, for instance, the parties have started to set up a contractual joint venture without being able to complete it, irrespective of any breach, both parties will have a claim in respect of the surplus (profit) generated by the joint project, if any (art. 549 § 1 CO). This line of thinking might be insidious; however, knowing that, in case losses result from the common project, which might easily occur in the initial phase, these, as well, shall be borne by both parties, pursuant to art. 549 § 2 CO, unless a different solution has been expressly or implicitly provided for.

70 See herein GEORG VON SEGESSER, Arbitrating pre-closing disputes in merger and acquisition transaction, §6.3.5; HENRY PETER, M&A transactions: process and possible disputes, § 3.2.3; PETER FORTSMOSER,Schweizerisches Aktienrecht, Zürich 1981, § 9, N. 19; ATF 102 II 420 = JT 1978 I 230, § 4. 71 RALPH MALACRIDA/NEDIM PETER VOGT / ROLF WATTER, Swiss Mergers & Acquisitions Practice, Basel 2001, p. 54; RUDOLF TSCHÄNI / ANDREAS VON PLANTA / MATTHIAS OERTLE, p. 83, N. 397. 72 See supra § 3.1.

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4.3.2. Culpa in Contrahendo

Parties to a letter of intent are also liable if they breach their pre-contractual obligations. Unlike contractual liability, culpa in contrahendo entitles the parties to negative interestonly73.

4.3.3. Statute of Limitations

Claims based on contractual liability are subject to the ordinary ten-year statute of limitations pursuant to art. 127 CO.

Pre-contractual liability is of a mixed nature, i.e. partly contractual and partly extra-contractual74. The Swiss Federal Court has ruled, however, that as far as the statute of limitations is concerned, art. 60 CO shall apply75, the timelimit being therefore one year.

5. Conclusion

Hence the nature of the letter of intent is, in many ways, ambiguous. This derives from the fact that (i) it almost always combines binding and non-binding clauses and (ii) it in any event triggers at least behavioural obligations. As such, it therefore does not enter into any particular category, as any determination of its nature is extensively fact driven. It often lies somewhere between legally inexistent and legally binding instruments. Moreover, as put by Fontaine, anarchy in terminology still seems to be prevalent in this field76.

Among the remedies theoretically available in case of non-performance, specific performance can be envisaged only in exceptional circumstances77. Whenever a letter of intent produces binding effects, positive damages might be claimed. In all other cases, in view of the pre-contractual nature of its effects, only negative interests may be sought.

73 ATF 105 II 75 (1979), 81 = JdT 1980 I 67. 74 See RUDOLF TSCHÄNI, p. 18, N. 7. 75 Ibidem.76 MARCEL FONTAINE, p. 99. 77 See herein, HENRY PETER, M &A transactions: process and possible disputes, § 3.1.4.

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ASA_Inhalt 283 21.07.2005, 8:09:24 Uhr

284

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ASA_Inhalt 284 21.07.2005, 8:09:25 Uhr

285

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ASA_Inhalt 285 21.07.2005, 8:09:27 Uhr

286

ASA_Inhalt 286 21.07.2005, 8:09:28 Uhr

287

SWISS ARBITRATION ASSOCIATION

Executive Committee:

President: Professor Dr. Gabrielle Kaufmann-Kohler (Schellenberg Wittmer), Geneva

Vice Presidents: Professor Dr. François Knoepfler, Neuchâtel Dr. Markus H. Wirth (Hombuger Rechtsanwälte), Zurich

Secretary General: Dr. Rainer Füeg, Basel

Honorary Presidents: Professor Dr. Pierre Lalive (Lalive & Partners), Geneva Dr. Marc Blessing (Bär & Karrer), Zurich Dr. Pierre A. Karrer (Pestalozzi Lachenal Patry), Zurich

Honorary Vice-Presidents: Professor Dr. Claude Reymond (Maire Freymond & Associés), Lausanne Professor Jean-François Poudret, Lausanne

Members: Dr. Rocco Bonzanigo (Bolla & Bonzanigo), Lugano Dr. Robert Briner (Lenz & Staehelin), Geneva President ICC Court of Arbitration, Paris Me J.P. Chapuis, Pully Professor François Dessemontet, Lausanne Dr. Dieter Gränicher (Wenger Plattner), Basel Me Dominique Hahn (Bettems & Hahn), Lausanne Dr. Philipp Habegger (Walder Wyss & Partner), Zurich Me Claudia Kälin-Nauer (Froriep Renggli), Zurich Prof. Dr. Franz Kellerhals (Kellerhals & Partners), Bern Dr. Anne-Marie Menzer-Lüthy, Winterthur (Konzernstab Recht, Sulzer Management AG) Dr. Paolo Patocchi (Lenz & Staehelin), Geneva Dr. Wolfgang Peter (Python Schifferli Peter), Geneva Me Thomas Pletscher (economie suisse), Zurich Me Michael E. Schneider (Lalive & Partners), Geneva Me Pierre-Yves Tschanz (Tavernier), Geneva Dr. Daniel Wehrli (Gloor & Sieger), Zurich

ASA Secretariat: att. Dr. Rainer Füeg Aeschenvorstadt 67, P.O. Box, CH-4010 Basel,

SwitzerlandTel: +41 (0)61 270 60 15, Fax: +41 (0)61 270 60 05 E-mail: [email protected] Website: www.arbitration-ch.org

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Why International Arbitration in Switzerland

Switzerland is one of the preferred countries for international arbitration. A number of reasons may account for this success: Political neutrality, a well-developed legal system, geographically convenient location, excellent infrastructure, but above all, openness of mind to the different values, cultures and perceptions of foreign parties coming to arbitrate in Switzerland.

Switzerland is arbitration-friendly.

Switzerland has a modern international Arbitration Law in Chapter 12 of the Swiss Federal Private International Law Statute, in force since January 1, 1989.

On a liberal and flexible basis, essential provisions assure a proper constitution and functioning of the arbitral tribunal, and give the parties (and the arbitrators) all the flexibility so as to conduct the arbitral proceedings in accordance with their own fair and reasonable expectations.

Any dispute involving a business interest is per se arbitrable in Switzerland, no matter what other laws say.

If the International Arbitral Tribunal having its seat in Switzerland was set up by an arbitral institution (such as the ICC, or one of the Chambers of Commerce), any decision by the institution about a challenge of an arbitrator is not reviewable as such by a state court. The arbitration will follow the agreement of the parties also with respect to multi-party arbitration.

The will of the parties prevails. Agreements to arbitrate, agreements to the applicable procedure, and choice of law agreements are all considered separable agreements. An arbitral tribunal has jurisdiction to decide on its own jurisdiction.

The procedure before the arbitral tribunal may be freely determined. There is no presumption that any local state court procedure applies. Many arbitrations follow modern “hybrid” arbitral procedure, as described in the IBA Rules of Evidence.

Arbitral tribunals have the primary power to order provisional and conservatory measures. The state courts in Switzerland must provide assistance to arbitral tribunals upon their request, i.e. by issuing orders or letters rogatory. Arbitral tribunals may issue partial or preliminary awards, e.g., on their jurisdiction.

Arbitral tribunals must apply to the merits the rules of law chosen by the parties, but where none were chosen, will apply the rules of law having the closest connection with the matter in dispute.

Grounds for setting aside an award are strictly limited and comparable to those in the New York Convention, 1958, and in the UNCITRAL Model Law. Such setting aside procedures go straight to the Swiss Federal Supreme Court whose decision is final. The parties may even exclude any setting aside in advance.

Swiss International Arbitration Law deserves the trust of the parties.

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ASA SPECIAL SERIES

ASA’s main publication is its quarterly ASA Bulletin. It is edited since its inception in 1983, by Professor Pierre Lalive (assisted by an editorial board). Since 2002 it is published by Kluwer International.As the occasion arises, ASA has been publishing (and may publish in future) special brochures which are now incorporated in the ASA Special Series:

No. 1 Le nouveau droit suisse de l'arbitrage international (published in 1989)

No. 2 The New Swiss Law on International Arbitration (published in 1990)

No. 3 Verträge und Schiedsverfahren im Europäischen Umbruch

(published as a special issue of the ASA Bulletin in December 1990)

No. 4 Dispute Resolution on International Markets∗∗∗∗

(published in February 1993)

No. 5 Investing in Eastern-European Countries – and Arbitration

(published in March 1993)

No. 6 Objective Arbitrability – Antitrust Disputes - Intellectual Property

Disputes

(published in March 1994)

No. 8 The Arbitration Agreement – Its Multifold Critical Aspects

(published in December 1994)

No. 9 The New York Convention of 1958 (published in July 1996)

No.10 Profiles of ASA Members 1998-2000 (published in April 1998) - free∗∗∗∗

No. 11 Arbitration of Sports-Related Disputes L'Arbitrage des litiges liés au

sport (published in November 1998)

No. 12 International Arbitration “Do’s and Don’ts” (second edition 1998) - free∗∗∗∗

No. 13 The Claims Resolution Process on Dormant Accounts in Switzerland

(published in January 2000)

No. 14 Supplement 2000 to Profiles of ASA Members 1998-2000 - free∗∗∗∗

No. 15 Arbitral Tribunals or State Courts Who Must Defer to Whom? ∗∗∗∗

No. 16 Glossary of Arbitration and ADR Terms of Abbreviations – free

No. 17 International Arbitration ‘Do's and Don'ts’ (Third edition) – free∗∗∗∗

No. 18 Conflicts of Interests in International Commercial Arbitration

(published in July 2001)

No. 19 Investment Treaties and Arbitration (published in August 2002)

No. 20 Arbitration in Banking and Financial Matters (August 2003)

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No. 21 International “Do’s and Don’ts” (Fourth edition) - free∗∗∗∗

No. 22 The Swiss Rules of International Arbitration (published in May 2004)

No. 23 Profiles of ASA members (published in May 2005)

Brochures are sold on a non-profit basis, currently at CHF 20.-.(plus postage and packaging)

For further enquiries please address yourself directly to:

ASA Secretariat: Dr. Rainer Füeg, Aeschenvorstadt 67, P.O. Box, CH-4010 Basel, Switzerland, Tel: +41 (0)61 270 60 15, Fax: +41 (0)61 270 60 05 E-mail: [email protected], Webiste: www.arbitration-ch.org

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If you wish to know more about ASAand international arbitration in Switzerland

Just complete this form (or a photocopy), and send it to: ASA Secretariat

Aeschenvorstadt 67, CH – 4010 Basel Tel: +41 (0)61 270 60 15; Fax: +41 (0)61 270 60 05

E-mail: [email protected]

I would like to become a member of ASA – the Swiss Arbitration Association.

The annual membership fee is at present CHF 250.- p.a. for individual members; This membership fee includes the subscription to the Quarterly ASA Bulletin.

I also wish to be listed in the Profiles on ASA’s website. Listing in electronic profiles costs an extra CHF 200.-

I would like to obtain more material regarding arbitration in Switzerland.

Method of payment:

Bank transfer to the UBS, Aeschenvorstadt 1, CH – 4001 Basel, account no. 292-10560.120.0, in favour of ASA, quoting your name and Membership Fee, rsp. “electronic Profiles”.

Note: For international payment use swift code: UBSWCHZH40A

Payments from within Switzerland may also be made by using a postal payment slip for the ASA-account PC 40-28802-1

Please debit my Visa Card No.

Please debit my Eurocard/Mastercard No.

Expiry date:……………………../…………………./……………………

Signature: …………………………………………………………………

Name: First name:

Profession:

Firm name:

Full address:

Country: Telephone:

Telefax: E-mail:

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