Authors Sergio Garrido Vallespí and Natalia Gracia Gómez wrote an article titled “International Transactions and Post-M&A Disputes in the Sustainability Era” (“the Article”). The Article has been divided into a series of two blog posts to be published on the blog of the Georgetown Journal of International Law (“GJIL”). This post is the second in the series. The first posts is accessible on the Georgetown Journal of International Law Blog website. 

Post-M&A ESG Disputes

Dispute Resolution Clauses

Most M&A agreements include a dispute resolution clause outlining how the parties will deal with the disputes that may arise out of their agreement. This dispute resolution clause usually directs the parties to a specific litigation forum or binds them to resolve their disputes through arbitration. Often, arbitration is preferred because of its international character, favoring enforcement and confidentiality of the disputes.

Frequently, these dispute resolution clauses establish prerequisites to the adjudicatory process (litigation or arbitration). The prerequisites, through multi-tier dispute resolution clauses, can take the form of negotiation or mediation provisions. While this may seem to promote a faster and more consensual resolution of the disputes, it may be counterproductive if the parties fail to agree on a final decision. Some practitioners recommend including these alternative endeavors while allowing the parties to ignore them altogether or drafting the clauses in a manner that the negotiation or mediation can be finalized, permitting a transition to litigation or arbitration whenever one of the parties considers that a consensual solution will be impossible to reach.

A different alternative is an expert determination multi-tier dispute resolution clause. Expert determination is the process by which the parties appoint an independent expert who will provide a final determination for certain issues. This is often used for valuation disputes or other equally highly technical aspects where the input of an expert on the field is desired. These decisions are contractually binding between the parties, but they lack res judicata effect and enforceability. Furthermore, the parties could agree on granting power to courts or an arbitral tribunal to review the expert’s decision. However, the expert’s decision may also be subject to subsequent legal proceedings, where the parties may contest the decision’s validity, raising issues such as the scope of the expert determination clause and whether the expert produced an extra petita decision.

If the parties choose arbitration as their preferred method for dispute resolution in their M&A transaction, they can tailor the arbitration clause to address some particularities of the process considering the specificities of their agreement. While forum selection clauses also allow for some customization of the adjudicatory proceeding (i.e., a choice of law provision), the possibilities are more limited, and their validity and enforceability will be subject to the procedural and substantive laws of the chosen jurisdiction.

In turn, arbitration grants the parties greater freedom to draft the dispute resolution clause in accordance with their needs. In a complex transaction such as an M&A agreement, this may be especially beneficial. For instance, consolidation (joint resolution of arbitrations between the same parties that started separately) and joinder (addition of third parties to the arbitration in a later stage) provisions may be advisable for transactions that attain company groups or refer to different actors.

The institution rules may already address this issue, especially if the chosen institution is an internationally recognized one, such as the Rules of the International Chamber of Commerce (ICC) (Articles 7 and 10), the Singapore International Arbitration Centre (SIAC) (Rules 16 and 18), or the International Centre for Dispute Resolution (ICDR) (Articles 8 and 9). Nonetheless, it would be advisable to address the question specifically on the arbitration clause, in order to avoid questions regarding the scope or time limits of the consolidation or joinder provision. For example, the parties may wish to limit the time in which parties can seek to consolidate disputes to the time limits for which an indemnification has been agreed.

Furthermore, the arbitration clause may also address the ESG concerns that were considered in the transaction. The parties could agree to hold virtual hearings in order to avoid travel expenses and the associated environmental costs, in line with the Guiding Principles of the Campaign for Greener Arbitrations. The Covid-19 pandemic forced the popularization of online hearings, and the flexibility of arbitration proceedings has facilitated the expansion of the practice. Multiple arbitral institutions have amended their rules from year to year to include provisions that help the parties and arbitrators conduct virtual conferences and evidentiary hearings. As society moves towards remote work, it remains to be seen whether adjudicatory proceedings will follow the same trend, or they will resist change, but arbitration is developing the tools to make it possible.

The parties may go a step further and subject the arbitration to international standards specifically associated with ESG goals, such as the Hague Rules on Business and Human Rights Arbitration. The Hague Rules, published in 2019, follow the lines of the UNCITRAL Arbitration Rules, adapting its provisions to the protection of human rights in a business environment. In line with the United Nations Guiding Principles on Business and Human Rights, the Rules’ Introductory Note does not define these terms, providing flexibility to different situations. For example, Article 11 establishes that the arbitrators appointed under the Rules ought to have knowledge and experience in business and human rights law. Similarly, the Permanent Court of Arbitration (PCA) introduced the Optional Rules for Arbitration of Disputes Relating to Natural Resources and/or the Environment in 2001. They also follow the basic structure of the UNCITRAL Arbitration Rules and, although they have not been yet broadly used, they are an adequate framework to deal with “environmental disputes with commercial dimensions.” These instruments can provide an adequate framework to procedurally deal with post-M&A ESG disputes, ensuring the expertise of the decision maker and the necessary flexibility.

Types of Disputes

Post-M&A ESG disputes can arise from findings of contractual breaches of the M&A agreement. The buyer may identify that some of the contractual clauses (i.e., representations, warranties) were false and decide to bring an action against the seller for breach of contract, seeking damages or the rescission of the agreement.

Courts have awarded damages for breaches of ESG warranties in M&A contracts. An example can be found in MDW Holdings v. Norvill. MDW acquired all shares of GDE through an SPA. After the acquisition, MDW realized that GDE had breached environmental laws and avoided costs from environmental compliance, producing an artificial increase in its profits that had affected the price paid by MDW in the transaction (¶ 12). MDW brought a suit against the three original shareholders of GDE for breach of warranties under the SPA and for pre-contractual misrepresentations under the UK Misrepresentations Act (1967).

The judge of the High Court found that the GDE shareholders had breached some of the warranties under the SPA that referred to compliance with laws and regulations in their (mis)management of wastes and residues (¶¶ 212-214, 216-221). The judge found evidence of discharges of leachate, disposals of hard solids, and false statements, and awarded damages to MDW (¶ 294). The breached ESG warranties from Schedule 5 referred to compliance with laws and regulations, and to maintaining the specific permits necessary for operation (EHS Permits). These would have been revoked if the true state and practices of the company had been disclosed.

The Court of Appeal (Norvill v. MDW Holdings) dismissed the shareholders’ appeal, but allowed the cross-appeal by MDW, remitting the case back to the judge to assess whether MDW was entitled to additional damages for deceit (¶¶ 86-88). It agreed with the High Court judge in the conclusion that, had MDW been aware of the true legal and financial situation, it would not have paid such a high price for the Norvills’ shares (¶¶ 55-57).

Similarly, in the Veolia v. Valores Ecológicos arbitration, the Tribunal awarded damages for breach of warranties under the SPA and for environmental non-compliance. Besides traditional M&A representations referring to compliance with laws and regulations, the SPA for the acquisition of shares in a hazardous waste landfill operator (RIMSA) that originated the arbitration included specific warranties about compliance with environmental laws and permits.

Specifically, the Respondents had warranted (¶ 117) that RIMSA: “complied with all applicable laws and legal regulations, permits and orders;” “possesses all Environmental Permits necessary to operate its business;” “is in compliance with all terms and conditions of such Environmental Permits and with the Environmental or Safety Laws, except with respect to matters that will not have an adverse effect on the operations, assets or business of … the Company;” and “no person has generated, collected, manufactured, refined, produced, processed, treated, stored, handled, transported, disposed of, discharged, emitted, poured, emptied, leached, leaked, spilled, injected, dumped, accumulated, buried, transported, released or used any hazardous material at any site or facility operated by [RIMSA] … in violation of, or in a manner that would give rise to liabilities under any Environmental or Safety Laws.”

Upon analysis of the factual evidence, the Tribunal concluded that Respondents had violated such environmental compliance warranties—among other warranties of the contract—and awarded them more than $2 million dollars.^[1]

In addition to these post-M&A contractual disputes between the parties to the transaction, the buyer also faces the risk of ESG-related claims from third parties, that may affect its investment. Authorities, regulators, or other stakeholders may raise the subject and sue the target/acquired company for an ESG breach. This situation can lead the buyer to seek redress from the seller under traditional remedies, even if there were no specific ESG clauses in the transaction documents.

The legitimacy of these actors derives from multiple sources: the protection of their investment (i.e., minority shareholders), their contractual rights with the company (i.e., consumers and customers), the protection of a common good (i.e., NGOs), or the protection of industry standards and market competition (i.e., industry competitors may raise ESG breaches conferring unfair advantages to the target/acquired company).

This constitutes a threat for buyers on M&A transactions, who can face unexpected litigation from third parties after the transaction has been finalized. ESG-related risk on this front arises from the popularization of climate change-related claims against private law companies. The fight against climate change used to be focused on governments and their agencies, but some actors are moving to claim accountability from private law enterprises. This risk should be contemplated in the design of the transaction documents, pondering the buyer’s interest in not being found liable for the actions of past management, and the seller’s interest in not remaining perpetually tied to a business they let go of.

The most notorious example of this new strategic litigation is the Shell case under the Dutch courts. In a class action, the NGO Milieudefensie (Friends of the Earth, Netherlands) sued the top holding company of the Shell group, Royal Dutch Shell (RDS), for its inaction in relation to climate change protection (¶ 3.1).

The Hague District Court noticed the climate standards and recommendations of multiple international agencies, treaties, and agreements, such as the UN Climate Convention (1992), the Intergovernmental Panel on Climate Change (1988), the United Nations Environment Programme (UNEP), the Paris Agreement (2016), and the International Energy Agency (IEA). Although these were international commitments and bodies by governments, they were considered as having become part of a social standard.

The District Court sided with Milieudefensie and found that RDS, as the top holding company of the group, established the general policy of the Shell group (¶ 2.5.1). This led the court to conclude that RDS had an obligation of result, and that it was “obliged to reduce the CO2 emissions of the Shell group’s activities by net 45% at end 2030 relative to 2019 through the Shell group’s corporate policy” (¶ 4.1.4). The parent’s obligation derived from an unwritten standard of care in the Dutch Civil Code, according to which “acting in conflict with what is generally accepted according to unwritten law is unlawful” (¶ 4.4.1). This derived from the social standard created by the public law instruments to which the Netherlands (and other governments where Shell conducted its business) had adopted.

However, on November 12, 2024, the Hague Court of Appeals overturned the District Court decision. It argued that there was not a clearly established sectorial standard regarding the percentage of emission reductions that were required from oil and gas companies such as Shell (¶ 7.91). Alluding to the precautionary principle, it found that the District Court lacked the authority to impose a reduction of 45% of total emissions, as it would establish an extremely high burden on a private party by the establishment of a non-consensual standard (¶¶ 7.95-7.96, 7.111).

Despite quashing the judgment, the Court of Appeals established that environmental and human rights treaties, despite being directed to governments, could affect “private law relationships by giving substance to open standards, such as the standard of care” (¶ 7.24). Thus, it reaffirmed Shell’s obligation to limit CO2 emissions, even if there was not an explicit public law obligation in the country under whose laws it operated (¶ 7.27).

The importance of this case and precedent for parties interested in pursuing M&A transactions lies in the noticeably increasing risk of ESG-related actions by private third parties. Regulatory risk does not only come from governmental action now, but also from other stakeholders. Thus, adequate due care against ESG breaches ought to be exercised with regard to private parties, too.

Furthermore, although the Shell case does not relate specifically to a specific transaction, but to the overall group structure, it shows a risk for parent companies in becoming the subject of litigation based on the activities of their subsidiaries under alter ego theories. Accordingly, this aspect is relevant for buyers and sellers in M&A transactions, both when the target is incorporated into the portfolio of a holding company—since the buyer/parent may be liable for the newly acquired subsidiary’s actions—and for the seller’s liability as the former parent, even if the target was later acquired.

Conclusion

The evolving landscape of ESG indicates that sustainability standards will increasingly affect various aspects of business transactions, and consequently, their integration into international business processes will persist. The existing gaps across different regulations are likely to close, imposing elevated canons that will become globalized. This homogenization is particularly significant given the growing concerns regarding the entire supply chain process. In a shifting landscape, actors in international business transactions must pay special attention to ESG factors to protect their investments, enhance value, and shield themselves from liability. A scenario of regulatory change and rising social awareness (i.e., the soft power of ESG) is likely to lead to an increase in ESG disputes. As ESG due diligence and ESG clauses in M&A agreements try to protect the parties from ESG risks, dispute resolution clauses must also evolve and tailor any future dispute processes to the specific ESG circumstances.

^[1] The damages awarded also refer to the remaining breached warranties.

______________________________________________________

Natalia Gracia Gómez is a Spanish lawyer currently pursuing an LL.M. at Georgetown University Law Center. She holds an LL.M. in International Business Law from ESADE Law School and completed a semester at Columbia Law School as part of her LL.B. and B.A. in Global Governance studies. Her practice focuses on international arbitration. She is an extern with the International Dispute Resolution group at Squire Patton Boggs in Washington, DC, and she previously worked in the Litigation and International Arbitration department at Cuatrecasas in Barcelona, Spain.

 

Sergio Garrido Vallespí is a Spanish lawyer currently working at a big law firm in New York City and completing his PhD at ESADE. He holds an LL.M. from Georgetown University Law Center, where he graduated cum laude in 2024. He also holds an LL.M. in International Business Law from ESADE and also completed a semester at Freie Universität Berlin as part of his Masters. He also holds a double Bachelor in Law and Global Governance from ESADE. His practice focuses on M&A, finance, and capital markets.