This article is an extract from GTDT Practice Guide Nordic M&A 2022. Click here for the full guide
Litigation versus arbitration
In Denmark, arbitration is the most favoured means of dispute resolution in connection with M&A disputes owing to several internationally common factors.
In arbitration, the parties are offered the opportunity to appoint a tribunal consisting of technically competent and specialised arbitrators, who can apply specialist knowledge to often technically complex and industry-specific disputes. It is possible for the parties to agree to appoint arbitrators without official legal qualifications if the dispute is more technical than legal in nature. Such access does not exist for litigation to the same degree.
The flexibility of arbitration proceedings and the parties’ ability to tailor the procedure, choice of law and venue to suit their needs are features that are often attractive to parties to M&A disputes, including and especially in cross-jurisdictional disputes.
One of the most coveted features of arbitration as opposed to litigation in Denmark is the fact that the parties can agree to full confidentiality of the proceedings as well as the final award. However, full confidentiality in arbitration is not a general rule in Denmark and must be specifically agreed upon by the parties.
The flexibility of the proceedings is not limited to strictly procedural matters. The parties also control the taking of evidence, choosing what evidence to submit and what evidence to request from their opposing parties.
The arbitral tribunal may participate ex officio in the taking of evidence, and it is also often used to cooperate with the national courts in taking evidence, especially where such documentation requires enforcement of interim measures.
The predictability and effectiveness of arbitral proceedings also make arbitration a more attractive venue for commercial parties in M&A disputes. Whether in institutional or ad hoc arbitration, the arbitral tribunal is quick to set out submission deadlines and hearing dates early in the arbitral proceedings – usually immediately following the appointment of the tribunal. This lends a higher degree of predictability for the longevity of disputes to the parties and allows parties to consider expected periods requiring increased expenditure of time.
In almost all cases, arbitration also remains the more time-effective alternative since the parties can customise their submission deadlines to fit their timing requirements. The arbitral tribunal, whether appointed institutionally or ad hoc, is also quick to schedule early court hearing dates, as opposed to the Danish national courts, which must navigate a complex scheduling of court hearings across a multitude of ongoing cases. The covid-19 pandemic has had a particularly significant impact on the Danish national courts’ listing times, leading to some court hearings being scheduled one-and-a-half to two years after initiation in certain local Danish jurisdictions. For reference, the Danish Institute of Arbitration aims to conclude arbitration cases within six months.
The finality of arbitral awards, of course, also adds to the effectiveness of these cases since appealing national courts’ decisions can add several more years to a case that has already been brought before the district courts.
When it comes to enforcing arbitral awards in Denmark, Denmark has unconditionally ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958 (the New York Convention). Arbitral awards rendered in Denmark are enforced pursuant to section 38 of the Danish Arbitration Act. This procedure requires submission of an approved copy of the arbitral award, the arbitration agreement and, if necessary, an authorised translation of these documents.
Enforcing international awards originating from nations that are parties to the New York Convention follows the same procedure as domestic awards. Generally, the Danish national courts are not reluctant when enforcing arbitral awards originating from New York Convention nations, unless these are unenforceable as a matter of public policy.
Arbitration in Denmark is generally seen as more expensive compared with litigation. Generally, the cost-effectiveness of arbitration over litigation will depend on whether the proceedings are institutional or ad hoc, and whether the parties appoint one or three arbitrators. It is possible to conduct cost-effective arbitral proceedings regarding limited specific legal disputes, when the parties have a shared intention of reducing courts, for example, by appointing a sole arbitrator, conducting a minimal exchange of pleadings and choosing a local venue. However, as a rule, arbitration in Denmark is more expensive than litigation.
The Danish Arbitration Act is based on the UNCITRAL Model Law of 1985. The Arbitration Act applies to arbitral proceedings taking place in Denmark, regardless of the nationalities of the parties and the choice of law. The Arbitration Act is based on the principles that a valid arbitration agreement relieves the Danish courts of jurisdiction, and a rendered arbitral award is legally binding between the parties and is recognised and enforced by Danish courts.
The Danish Arbitration Act does not contain formal requirements regarding arbitration agreements or clauses. Under Danish law it is not a requirement that an arbitration clause be in writing, although it is advisable.
Generally, the Danish courts take a pro-arbitration approach and accept arbitration agreements on the conditions outlined in the Model Law. They accept the principle of competence–competence, the ability of the arbitral tribunal to rule on its own jurisdiction and competence.
The doctrine of severability also exists in Danish law, meaning that an arbitration agreement is not, for instance, affected by the invalidity of the main contract establishing the legal relationship between the parties.
Institutional and ad hoc arbitration
Institutional arbitration is readily available to parties in Denmark. Parties may choose between several permanent arbitration institutions with their own set of established arbitral rules, reminiscent of other internationally recognised arbitration institutions.
Two commonly used institutions are the Danish Institute of Arbitration and the Danish Building and Construction Arbitration Board, specialising in construction law disputes.
Institutional arbitration is generally considered to be a more time-efficient choice compared with ad hoc arbitration and leads to fewer procedural disputes, since the procedural rules are thoroughly laid out in the institute’s rules. Conversely, this also means that the preparation of institutional arbitration disputes is less flexible than their ad hoc counterparts.
Ad hoc arbitration entails that the parties to a dispute have all but complete control of the constitution and organisation of the arbitral proceedings, including deciding how the costs of the case are determined and distributed between the parties. The procedural framework is completely flexible to be controlled by the parties, subject only to matters of public policy.
The Danish Arbitration Act only applies to the procedure of an arbitral dispute where the parties have not agreed otherwise. The arbitral tribunal must consist of three arbitrators, unless otherwise agreed.
The parties each have 30 days to appoint an arbitrator. The two appointed arbitrators have 30 days to appoint a third arbitrator, being the chair of the arbitral tribunal. If this process gives rise to issues resulting in the inability of the parties to appoint a tribunal, each of the parties can refer to the Danish courts and request that they appoint the remaining arbitrators.
A person who has been chosen to become an arbitrator in a dispute must immediately inform the parties of any factors that may compromise his or her impartiality and independence during the treatment of the dispute. The parties can object to a choice of arbitrator only where there is a reasonable suspicion regarding his or her impartiality or independence or if the arbitrator does not possess the qualifications that the parties agreed would be required.
If a party objects to the appointment of a specific arbitrator, the objecting party must submit a written letter of objection to the arbitral tribunal within 15 days after the party became aware of the relevant facts. If the objection is dismissed, the objecting party can appeal the dismissal to the Danish courts within 30 days after the dismissal.
Handling of the appeal by the Danish courts does not stay the arbitral proceedings.
As mentioned, an arbitral tribunal can determine the validity of the arbitration agreement, including the jurisdiction of the tribunal. An arbitration clause included in a contract is regarded as a separate agreement, independent of the rest of the contract. This means that an arbitration clause contained in an invalid contract can still be determined to be valid. An objection pertaining to the legal competency of the arbitral tribunal must, at the latest, be made in the defendant’s first address to the tribunal regarding the merits of the case. If the arbitral tribunal chooses to determine its legal competency as an interim ruling, the ruling issued by the tribunal can be appealed to the Danish courts within 30 days. The appeal also does not stay the arbitral proceedings.
Domestic or foreign arbitral awards have a binding effect in Denmark and can be enforced according to the Danish Administration of Justice Act’s rules regarding enforcement of judgments. The party invoking the arbitral award or requesting the enforcement of said award must present a legalised copy of the arbitral award and the arbitration agreement. The arbitration award is recognised or enforced, unless the party against whom the award is being invoked requests that the award be set aside and proves that the conditions listed above apply.
The Danish judicial system is characterised by a considerable degree of transparency and trust, owing primarily to the fact that most commercial cases in Denmark are open to the public. Furthermore, all commercial cases are made available to the public, with some being published in the Danish Legal Gazette.
This transparency often conflicts with the confidential nature of commercial disputes, especially M&A disputes, which is why arbitration remains the favoured venue for such disputes.
The Danish court system consists of various courts in a three-tier hierarchy. At the top of the hierarchy is the Supreme Court. In the middle are the two High Courts: Eastern and Western High Court. The lowest courts are the 24 District Courts, located throughout the various regions of Denmark. Parallel to the District Courts are the two special courts: the Maritime and Commercial Court and the Land and Registration Court.
A trial will generally start at a District Court. A judgment rendered by a District Court can be appealed to the High Courts and, if permission is granted by the Appeals Commission Board, the judgment rendered by the High court can be appealed to the Supreme Court.
The Maritime and Commercial Court deals only with cases relating to trademarks, international cases, marketing law and commercial maritime matters. Some of these types of cases must be brought before the Maritime and Commercial Court unless otherwise agreed by the parties (see below). Cases regarding insolvency and bankruptcy arising in the Greater Copenhagen judicial district must be brought before the Maritime and Commercial Court.
The Maritime and Commercial Court is especially relevant in relation to transnational litigation, as it can be, and often is, chosen by the parties to hear cases regarding international commercial matters in the first instance instead of the District Courts. This is especially the case in relation to disputes between corporations based in different countries, or in cases where both corporations are domiciled in Denmark, but the activities performed by the parties are international in nature. The crucial element is that the subject matter of the case be of an international nature. The Maritime and Commercial Court is in Copenhagen.
The High Courts of Denmark consist of the Eastern and Western High Courts. The Western High Court treats cases originating from the Jutland Peninsula, while the Eastern High Court treats cases originating from elsewhere in Denmark. The Western High Court is in Viborg in Jutland, while the Eastern High Court is in Copenhagen.
The Supreme Court is the highest and final instance in the Danish court system and is in Copenhagen. The Supreme Court consists of 18 Supreme Court judges, one of whom is the Supreme Court President.
The Danish legal system is based on the two-tier principle, meaning that a case generally can be tried before two courts. Thus the main rule is that litigants are entitled to appeal as a matter of right.
Judgments made by the High Courts (when the High Court acts as a court of first instance) may be appealed to the Supreme Court, without exception. Judgments passed by the High Courts as a court of second instance cannot be appealed to the Supreme Court. However, the Appeals Permission Board can permit the appeal of a High Court judgment to the Supreme Court. Permission is granted when a case is of general public importance.
Judgments made by the Maritime and Commercial Court can be appealed to the High Court, without exception. Judgments made by the Maritime and Commercial Court also can be appealed to the Supreme Court, if the case is of general public importance, is precedent-setting or if there are other reasons to allow the appeal directly to the Supreme Court.
Judgments rendered in the EU or EFTA are recognised by Danish courts under article 36 of the Brussels I Regulation. Danish courts can refuse recognition of judgments rendered in the EU or EFTA if any of the limited exceptions in article 45 applies.
Refusal of recognition of judgments is possible if the judgment is manifestly contrary to public policy in Denmark, the judgment was rendered in default of appearance because of a lack of service of the statement of claim upon the defendant, the judgment is incompatible with a judgment given between the same parties in Denmark, or the judgment is incompatible with an earlier judgment given in another member state or in a third state involving the same cause of action and between the same parties, provided that the earlier judgment fulfils the conditions necessary for its recognition in Denmark, according to the Brussels I Regulation.
In theory, article 223a of the Administration of Justice Act allows for the Danish courts to recognise foreign civil or commercial judgments rendered outside the EU or EFTA. However, article 223a has never been exercised, and judgments made outside the Brussels I Regulation or the Lugano Convention’s scope of application in general cannot be recognised or enforced in Denmark.
However, in a judgment by the Eastern High Court in 2001, the High Court ruled that a group of creditors were allowed to lodge their claims in an estate in liquidation by referring to previous Argentinian civil judgments. The Argentinian judgments were thus recognised by the Danish High Court. In the grounds of the judgment, the High Court emphasised that the Argentinian judgments were rendered in a country that was the proper venue for the trial, well founded and compliant with the general principles of Danish law, and not subject to errata and omissions.
Alternative dispute resolution
Mediation is finding increasing use in Denmark and is offered and actively suggested by the national courts as well as the Danish Institute of Arbitration.
The Danish Institute of Arbitration adopted a set of mediation procedural rules in 2015, the Rules of Arbitration Procedure (the Rules). The mediation starts when the Danish Institute of Arbitration receives a Request for Mediation (see article 3 of the Rules), accompanied of a fee of €1,300. If the dispute is settled, the parties can request that the settlement be confirmed in the form of a final arbitral award on agreed terms; it means that the settlement may be enforceable at the ordinary courts to the same extent as any other arbitral award. If the mediation ends without reaching a settlement, the parties can agree that the dispute be solved by arbitration administrated by the Danish Institute of Arbitration and in accordance with the Rules.
M&A disputes in Denmark
Overview of common M&A disputes in Denmark
M&A disputes can arise at all stages of an M&A transaction – pre-signing, between the time of signing and closing and post-closing. Post-closing M&A disputes are the most common in M&A transactions.
Under Danish law pre-signing disputes are not seen very often. Parties are free to negotiate and end negotiations at their sole discretion. Under Danish law parties are obliged to a duty of loyalty, also in the pre-contractual phase. Liability for a party in this phase will therefore require that the party has acted negligently or in bad faith, perhaps entering the negotiations in bad faith. It is, however, very difficult to prove that a party has acted negligently or in bad faith in connection with the negotiations or ceasing negotiations in the pre-contractual phase. In the rare occasions where liability of a party for bad faith may be established, it is most likely to result in liability for damages for costs related to the contract negotiations.
The parties may agree pre-contractual documents such as letters of intent, term sheets or similar types of pre-contractual documents. Under Danish law such pre-contractual documents used in M&A processes are non-binding, unless otherwise indicated. This is relevant, for example, in terms of confidentiality undertakings, exclusivity clauses and regulation on governing law.
Pre-signing disputes can arise in relation to such confidentiality undertakings, exclusivity clauses or similar where the parties prior to signing have undertaken certain obligations in these pre-contractual documents. A party’s breach of confidentiality undertakings can be difficult to prove. Under Danish law unauthorised disclosure of trade secrets, such as know-how, business-critical information and technological know-how, where an actual interest in secrecy can be proven, is prohibited. Furthermore, a loss can also be difficult to prove, but if a breach of a confidentiality undertaking is documented the court or arbitral tribunal may lower the demands for documenting the actual loss and can be inclined to fix damages at its discretion if the likelihood for a loss has been established.
Breach of exclusivity clauses is most likely to result in liability for damages for costs related to the contract negotiations.
Disputes between signing and closing
Disputes between signing and closing are not often seen and will often relate to fulfilment of the agreement’s conditions precedent.
In most cases the parties will do their best to meet the conditions precedent as the agreement has been signed and the parties have a clear and mutual interest in closing the agreement. Sometimes material adverse consequences clauses or hardship clauses are seen in agreements, allowing a party to cancel the transaction in the event of material adverse consequences. Disputes regarding what a material adverse consequence may therefore arise, but are rarely seen in Denmark.
In the event a party fails to fulfil the agreed conditions precedent for closing or fails to comply with the agreed closing conditions, the party in breach can be liable for damages.
The most common type of M&A disputes in Denmark are those following the completion of a transaction – post-closing disputes. These disputes comprise a wide range of different disputes. The most common areas where post-closing disputes can arise are as follows.
Representations and warranties
Post-closing disputes often concern the seller’s representations and warranties when they are not fulfilled or complied with following the buyer’s takeover of the target company. Such disputes will often include contract interpretation as to the representations and warranties and in accordance with Danish law, the intent of the parties is decisive if such intent can be documented.
It will often be necessary to look closely into the negotiation history, the due diligence process and any other disclosures to be able to make the wording of the agreement clear. It is recommended to keep all such records available and to the extent possible as part of the agreement. It is also relevant to examine what the buyer knew or ought to have known based on the due diligence process and the data room material disclosed to the buyer and the buyer’s advisers.
For tax reasons, damages paid owing to breach of representations and warranties is agreed to be a reduction in the purchase price in the transaction agreement.
Disputes concerning adjustment of the purchase price are a common post-closing dispute. Often these types of disputes arise owing to unclear description of the basis for the price adjustment. Price adjustment disputes are often referred to experts as a preliminary step. Even if an expert decision is agreed upon to decide a matter concerning a price adjustment dispute, the parties’ dispute may end in arbitration as other legal issues or facts are also likely to be disputed.
It is advisable to define the adjustment mechanism as clearly as possible to avoid misunderstandings or room for interpretation at a later stage where the transaction has been completed and the parties’ interest mutual interest in the deal has been replaced by more opposite interests (eg, it is advisable to be more detailed in defining the calculation method). If possible, a calculation example of the price adjustment mechanism could reduce the risks of disputes post-closing. References to accounting principles or generally recognised accounting principles are, for instance, broad definitions that leave room for interpretation.
Accounting principles are necessary in the most common price adjustment regulation to define items such as enterprise value, locked-box method (which includes an enterprise value calculation at a fixed date prior to closing), equity regulation and earn-outs (see below). As such it may often be relevant to be very clear what accounting principles mean in the agreement to avoid misunderstandings at a later stage.
In terms of price adjustment regulation, the locked-box mechanism may reduce disputes on price adjustments, but this is a consideration of the pros and cons that must be made by the parties and their respective advisers in the M&A transaction.
Disputes concerning earn-outs are probably the most common type of post-closing dispute between parties, and a type of price adjustment, as referred to above. The reason is the nature of the earn-out, where the opposite interests of the buyer and the seller following closing will increase in terms of the parameters included in the calculation of the earn-out. Following closing of the deal the seller will not have influence on the target company and underperformance by the company will be subject to arguments about the buyer’s poor management, business decisions or similar arguments and, on the other hand, the buyer may argue that it is the result of a development in the market post-closing or even owing to the seller’s poor management decisions prior to closing. There are many variations in the arguments seen in disputes.
Earn-out is often used where the parties during the negotiation phase are too far apart in terms of valuation of the target company and therefore agree that the purchase price must be paid subject to specific conditions, and maybe even in more than one instalment during the period after closing the transaction.
A few notes on damages
In M&A transactions in Denmark it is a standard term in the agreement that the buyer is unable to terminate the agreement or to claim a proportionate refusal in the event of material breach. The buyer is consequently entitled to claim damages only. Under Danish law damages are calculated as the actual loss and the non-breaching party bears the burden of proof of such loss.
In Danish transaction documents some definition of calculating the loss is typically agreed to ensure that the loss is no higher than the actual loss and that the loss is not calculated using a multiple such as the multiple used in calculating the purchase price where relevant.
Minimum threshold, basket and liability cap regulation are normally used in Danish transaction as well as modifications thereto in the form of specific indemnities. As such the parties seek to define liability and damages in as detailed a way as possible to avoid the Danish regulation by law that includes liability for the full loss documented.
Under Danish law agreed limitations of liability are likely to be disregarded by Danish courts or arbitration tribunals, based on Danish case law, in the event of gross negligence or wilful misconduct performed by the party in breach. However, such definition is commonly included in the transaction agreement.
Arbitration is the most used method of dispute resolution in M&A disputes. The parties are recommended to discuss the preferred choice of dispute resolution in the same manner and at the same time as discussing other parts of the transaction documents.
Danish arbitration regulation offers the parties a high degree of flexibility and time efficiency compared with ordinary courts as well as the opportunity to appoint specialist arbitrators to the tribunal with specific competencies within the specific matter at hand in the dispute.
It is advisable to be very specific in defining the issues where disputes are most likely to arise, such as pricing mechanisms, earn-outs and representations and warranties. The more detailed and clear the definition, the less risk of a dispute’s arising at a later stage; however, the risk cannot be eliminated.
Clear records of due diligence, questions and answers, correspondence and historic negotiations should be kept for documentation purposes and for the purpose of avoiding disputes at a later stage or in the event of a dispute, to enable the parties to have comprehensive documentation of the steps in the transaction.