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April 24, 2024

How Standing Mediators Can Add Value in M&A Deals

Joe Basile

The popular conception of a professional mediator, and by far the species most commonly encountered, is an individual parachuting into the midst of a hot dispute on an ad hoc basis to help the disputants reach a resolution that they view as a better result than they are likely to obtain from further combat. By contrast, a “standing mediator,” a neutral whom parties in a long-term business relationship engage before a dispute arises to assist in solving problems as they may arise, is a rare bird indeed. This article argues that consideration of a standing mediator should be best practice for lawyers representing clients in long-term business relationships, particularly M&A transactions.

Mediators: “Ad Hoc” vs. “Standing”

When parties to a business transaction engage a mediator, the occasion is almost always the outbreak of a dispute that the parties are unable to resolve on their own by direct negotiation. At the time of the engagement, such an “ad hoc mediator” is, by definition, unacquainted with the terms of the deal that has given rise to the dispute and is almost certainly unfamiliar with the parties and their representatives. After an ad hoc mediator completes the assignment, they are unlikely to maintain a relationship with the former disputants.

Unlike an ad hoc mediator, a “standing mediator” is a professional neutral whom parties to a long-term relationship engage on a “clear day,” i.e. before any dispute arises. Upon being hired, the standing mediator works to become familiar with the terms of the parties’ relationship, gets to know the parties’ representatives, and is available to work with the parties for the duration of their relationship both to prevent disputes from arising and to facilitate a resolution if a dispute does arise. Whereas an ad hoc mediator works exclusively on dispute resolution, a standing mediation works primarily on dispute prevention, and on dispute resolution only if necessary.

Unfortunately one encounters standing mediators rarely in practice, and almost never in M&A-based relationships. It would be inaccurate to equate a standing mediator with a unicorn, because standing mediators do exist. However, outside of the construction industry where the practice of appointing standing neutrals has gained traction, it would not be unfair to compare a standing mediator to a rare species encountered more often in literature than in real life.

The Limitations of the Ad Hoc Approach

Although mediation is almost always a more value enhancing way to resolve an M&A-related dispute than is outsourcing resolution to a judge or arbitrator, there are several aspects of an ad hoc approach to mediation that make achievement of an optimal outcome challenging.

First, there is a good chance that the ad hoc mediator never gets engaged at all. This is because once parties to an active dispute have lawyered up, they may be a reluctant to suggest mediation for fear of appearing doubtful of their prospects for success in litigation or arbitration. In the M&A world, this risk is exacerbated by the infrequency with which parties agree to any form of alternative dispute resolution at the outset of their relationship. For example, a recent review of 108 definitive agreements involving private company targets that were executed or completed during 2022 and the first quarter of 2023 revealed that only 6% of the agreements (7 deals) included any form of ADR provision. Of this tiny subset of deals that included an ADR provision, only 14% (1 deal) provided for mediation.

Second, if appointed, an ad hoc mediator will almost certainly begin the engagement with no, or at best limited, familiarity with background information. An ad hoc mediator may have to learn about the transaction and the dispute, the transaction documents, the parties’ relevant personnel, the parties’ interests, the identity of various stakeholders and influencers, and the barriers to achieving a settlement. Although an ad hoc mediator can mitigate this handicap with preparation, the ad hoc mediator’s ability to catch up will be limited, particularly if there is any time sensitivity to arriving at a settlement as is often the case in an ad hoc situation.

Third, because by definition an ad hoc mediator begins their work at a time after which the parties have already begun disputing, it is likely that temperatures on all sides are already elevated and that the parties have already sunk money, time, and energy into the dispute. This may be especially so if litigation or arbitration has been initiated before the ad hoc mediator is engaged. Heightened emotions and commitment to winning conspire to make an ad hoc mediator’s job all the more difficult.

Disputing parties can achieve many benefits by maintaining control over the resolution of their controversies rather than outsourcing determination of the outcome to a judge or arbitrator. There is a clear need for an approach that maximizes the chances for a voluntary, self-determined approach to succeed. Enter the standing mediator.

The Case for a Standing Mediator

As an alternative to awaiting the eruption of a dispute before summoning an ad hoc mediator, parties to a transaction can benefit from engaging a professional neutral to serve as a standing mediator at the inception of their relationship before any dispute has arisen.

Once selected and engaged, a standing mediator would begin working to become thoroughly familiar with the background of the deal, the terms of the transaction documents, the details of each party’s internal organization and reporting structure, the identities and personalities of each party’s decision-makers, influencers and stakeholders in the relationship, and each party’s interests and objectives in entering into the transaction. Thereafter, the standing mediator could periodically meet with each party to monitor their respective perceptions of the progress of their relationship and be available to attend key meetings at which the parties discuss issues. As with conventional ad hoc mediation, the parties and the standing mediator would agree that private communications between a party and the mediator would be kept confidential unless the disclosing party otherwise agrees. The parties would tailor the scope and duration of the engagement to the nature and expected duration of the parties’ relationship. However, as with ad hoc mediation, any party could withdraw from the standing mediation arrangement at any time.

The standing mediator’s work would have two components. First, on an ongoing basis, the standing mediator would be on the lookout for issues that are likely to ignite disagreements and could assist the parties in problem solving before disputes arise. Second, if a dispute does occur, the standing mediator would be available at the

request of the parties to facilitate a resolution of the dispute. If a dispute occurs, the standing mediator acts much in the way that an ad hoc mediator would operate, but with the benefit of having a significantly better understanding of the parties and the background of the dispute.

There are several advantages to appointing a standing mediator rather than waiting for an active dispute as the occasion for hiring an ad hoc mediator. These advantages include the following:

  • Because a standing mediation arrangement by definition is put in place before a dispute has occurred, neither party should be reluctant to propose it for fear of appearing doubtful of that party’s likelihood of success in a then non-existent lawsuit or arbitration.
  • A standing mediator is on the scene and in position to spot brewing disagreements and facilitate problem solving before disagreements ripen into disputes. The parties, assisted by their respective counsel and advisors, can do their part to problem solve by means of their direct interactions, but the professional training, experience, and neutrality of a standing mediator would enhance these efforts.
  • With much more time to gather background information about the parties, their relationship, and the transaction terms, a standing mediator is likely to be better prepared to facilitate resolution than would an ad hoc mediator if a dispute were to arise.
  • By working with the parties on an ongoing basis, a standing mediator is able to build more trust and credibility with the parties over time than could an ad hoc mediator called in on short notice. This trust and credibility will be valuable assets to enhance the likelihood of a standing mediator’s success, both in the context of ongoing problem solving and if called upon to facilitate the resolution of a dispute.
  • For all the above reasons, a standing mediation arrangement is likely to reduce the number of disputes that arise during the course of a long-term relationship and to increase the likelihood that the parties will be able more efficiently to resolve such disputes should any arise.

Recognizing the M&A Deal as a Long-Term Relationship

As is implicit in the foregoing discussion, a standing mediation arrangement is best suited for situations in which parties have agreed to enter into a relationship that they expect to continue over some period of time. For this reason, M&A deal lawyers would serve their clients well by becoming familiar with the standing mediation concept and recommending it in suitable circumstances.

Although one could imagine an M&A deal that consists of only a simultaneous signing of the purchase agreement and closing with no post-closing interactions between the parties, this would be a rarity. Much more typically, the signing of a definitive M&A agreement marks the commencement of a relationship that will extend over some period of time. Rather than being the culmination of negotiations, in most cases the parties’ arrival at an agreement to proceed with an M&A deal initiates a long-term relationship between them during which there will be many occasions for further negotiation. For example:

  • Many M&A deals contemplate a temporal gap between the signing of the definitive agreement and the closing. There are often conditions to closing that the parties must work together to satisfy (for example obtaining shareholder approvals, third party consents, and regulatory clearances) and the parties often undertake various other obligations to each other during this interlude.
  • Most agreements for the acquisition of private companies provide for some type of purchase price adjustment that the parties negotiate and finalize post-closing. This process can extend for a period of months (in some cases longer) after the closing.
  • Many deals for the acquisition of private companies provide for the payment of contingent consideration. The buyer’s obligation to pay this additional amount is dependent on the target’s attainment of financial performance goals or other milestones extending over a period of months or years after the closing.
  • M&A deals involving private company targets typically include indemnification obligations and commitments to do, or refrain from doing, various things that survive the closing, often for years.
  • Carve-out deals (i.e. deals in which the buyer acquires a discrete business from the seller rather than the seller in its entirety) often include transition service agreements requiring ongoing interactions between the parties for a considerable period of time after the closing.
  •  If the deal consideration includes buyer equity, then the transaction is likely to include a multi-year shareholders’ agreement.
  • Some M&A deals entail the creation of a joint venture, the very essence of which is a long-term relationship.

Ideally, the parties will grow to better understand each other as they work together over time. Nonetheless, as can happen in the best of relationships, disagreements can arise, and some disagreements may become disputes. If the parties to a relationship are large organizations (as is often the case in M&A deals), their respective personnel, circumstances, and interests are not likely to remain static over time. As such relationships extend for longer durations, the number of issues and opportunities for disagreement necessarily increases. It follows that most M&A deals are excellent candidates for consideration of the appointment of a standing mediator at the time of the signing of the definitive transaction agreements.

Conclusion

In most M&A deals, the entry into a definitive transaction agreement marks the beginning of an on-going, often long-term, relationship between the parties. The value of an M&A deal for each party is likely to be a function of their ability to preserve and work well within that relationship. Hence, the early addition of a professional standing mediator to the deal team presents an opportunity to create significant value for the parties.

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