M&A Section April 2014 Presentation

Report
PORTER HEDGES LLP
Prepared for:
HBA M&A Section Meeting
Drafting Effective Arbitration Clauses and
Understanding their Long-Term Impact
Thursday, April 17, 2014
Presented By:
Jeffrey R. Elkin
Allison J. Snyder
COMPARISON OF ARBITRATION AND LITIGATION
Some factors to consider:
FACTORS
Decision by Panel with Expertise
Final Decision or Appeals
ARBITRATION
COURT
Yes
No
Final Unless Parties Adopt
Appeals
Appellate Arbitration Procedure
Time to Resolution
Cost
90 days to 12 months
Expensive
Attorneys’ Fees
Possibly Less
More
Arbitrator(s)' Fees
Daily
None
Administration Cost
Monthly
None
Fee to File
Based on Amount in
Dispute
Small Fixed Fee
Discovery
Confidential Proceedings
2
2-3 Years
More Expensive
Limited
Yes
Expanded
No
TOPICS WE WILL COVER:
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3
Scope of Arbitration Provision
Named Provider or Ad Hoc
Number of Arbitrators and Method of Selection
Location / Venue of Hearing
Discovery Limitations
Award
Recovery of Fees and Costs
Pre-Arbitration Negotiations or Mediation
Confidentiality
Limitations on Damages / Arbitrator’s Authority
Schedule
SCOPE OF ARBITRATION PROVISION

The AAA has proposed the following basic pre-dispute arbitration clause:
“Any controversy or claim arising out of or relating to this contract, or the breach
thereof, shall be settled by arbitration administered by the American Arbitration
Association under its Commercial [or other] Arbitration rules [including the Emergency
Interim Relief Procedures], and judgment on the award rendered by the arbitrators may
be entered in any court having jurisdiction thereof.”
The CPR has proposed the following basic pre-dispute arbitration clause:
“Any controversy or claim arising out of or relating to this contract, or the breach,
termination or validity thereof shall be settled by arbitration in accordance with the CPR
Rules for Non-Administered Arbitration, by (a sole arbitrator) (three arbitrators, of whom
each party shall appoint one) (three arbitrators, none of whom shall be appointed by
either party). The arbitration shall be governed by the Federal Arbitration Act, 9
U.S.C.§1-16, and judgment upon the award rendered by the Arbitrator(s) may be
entered by any court having jurisdiction thereof. The place of the arbitration shall be
(City, State).”

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“… any claim or dispute arising out of or related to this Agreement, or the interpretation,
making, performance, breach, or termination thereof, shall (except as specifically set forth
in this Agreement) be finally settled by binding arbitration …”
SCOPE OF ARBITRATION PROVISION (CONTINUED)
5

“Any and all disputes among the Parties to this Agreement (defined for the purpose of this
provision to include their principals, agents and/or Affiliates) arising out of or in connection with the
negotiation, execution, interpretation, performance or nonperformance of this Agreement and the
transactions contemplated herein shall be solely and finally settled by arbitration…. The Parties
hereby renounce all recourse to litigation and agree that the award of the arbitrator shall be final
and subject to no judicial review.”

“… any dispute arising out of this Agreement or any related document delivered by a party
hereunder shall be settled by … binding arbitration …. The Parties agree that this is an essential
term and parties have entered into this Agreement provided that all disputes are resolved through
arbitration under this …. EACH PARTY, BY SIGNING THIS AGREEMENT … VOLUNTARILY,
KNOWINGLY, AND INTELLIGENTLY WAIVES ANY RIGHTS SUCH PARTY MAY OTHERWISE
HAVE TO SEEK REMEDIES IN COURT OR OTHER FORUMS, INCLUDING THE RIGHT TO
JURY TRIAL.”

“… any dispute, claim or controversy arising out of or relating to this Agreement … or the breach,
termination, enforcement, interpretation or validity hereof or thereof, including any request for
specific performance, claim based on contract, tort, statute or constitution or the determination of
the scope or applicability of this agreement to arbitrate, will be determined by arbitration …. Each
Party agrees that this Agreement does not preclude any Party from (1) seeking provisional
remedies in aid of arbitration, including specific performance or other equitable remedies, from
any court of competent jurisdiction or (2) seeking judicial remedies for any matter not required to
be resolved by arbitration hereunder in (x) the trial courts located in Santa Clara County, California
or (y) the United States District Court for the Northern District of California….”
NAMED PROVIDER OR AD HOC
 AAA, CPR, JAMS most common in domestic cases.
 “… in accordance with the then current Commercial Arbitration Rules of the
American Arbitration Association ….”
 “The arbitration will be conducted in accordance with the JAMS Comprehensive
Arbitration Rules and Procedures, as modified in this Section …. The arbitration
shall be administered by JAMS in accordance with those rules.”
 “The arbitrators shall decide all substantive and procedural issues by a majority
of votes. As soon as possible, the arbitrators shall establish arbitration
procedures as warranted by the facts and issues of the particular case. Except
as provided specifically in this Article, the arbitrators shall have the power to
determine all procedural rules of the arbitration, including, but not limited to
inspection of documents, examination of witnesses, and any other matter
related to the conduct of the arbitration…. The arbitrator shall not be obligated
to follow judicial formalities or the rules of evidence except to the extent required
by Applicable Law. To the extent permitted by Applicable Law, the panel shall
have the authority to issue subpoenas (including subpoenas to third party
witnesses) and other orders to enforce their decisions.
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NUMBER OF ARBITRATORS AND METHOD OF SELECTION
 “Such arbitration shall be conducted by a single arbitrator chosen by mutual
agreement of the Parent and the Stockholders. Alternatively, at the request
of either party before commencement of arbitration, the arbitration shall be
conducted by three independent arbitrators, none of whom shall have any
competitive interests with, ownership interests in, or other conflicts of
interest concerning Parent or the Stockholders.”
 “The arbitration shall be before three arbitrators, one chosen by each of
Buyers and Sellers and the third independent arbitrator chosen jointly by the
two arbitrators…. The arbitrators shall each be a lawyer neutral as to each
Party who is experienced in commercial business affairs.”
 “… [the arbitration] shall be conducted … by a single arbitrator selected by
the Parties. The arbitrator shall be a lawyer familiar with business
transactions of the type contemplated in this Agreement who shall not have
been previously employed or affiliated with any of the Parties.”
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NUMBER OF ARBITRATORS AND METHOD OF SELECTION
(CONTINUED)
 “… each of Buyer and Seller will … summarize its position with regard to
[any] such disputed adjustment(s) that have not been resolved by Seller and
Buyer … in a written document (an “Arbitration Notice”) and submit such
summaries to the Houston, Texas office of Ernst & Young LLP (or if Ernst &
Young LLP is unable or unwilling to serve as arbitrator within 20 days after
receipt of a written request from the Parties to serve and absent agreement
by the Parties as to a replacement for such arbitrator within 10 Business
Days after notification that Ernst & Young LLP is unable or unwilling to
serve, the arbitrator will be a nationally recognized accounting firm not
materially affiliated with Seller or Buyer selected by the Houston, Texas
office of the AAA) (the “Accounting Arbitrator”) ….”
 “Arbitrations under this Agreement shall be conducted before a panel of
three (3) arbitrators, one selected and paid for by Buyer, one selected and
paid for by the Sellers’ Representative, and one selected by mutual
agreement of the arbitrators selected and paid for by both Buyer and the
Sellers’ Representative.”
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LOCATION / VENUE OF HEARING
 “The arbitration shall be conducted in Los Angeles, California,
and shall be governed by the laws of the State of California.”
 “The location of all proceedings shall be determined by the
arbitrators.”
 “Any arbitration shall take place in New York, New York.”
 “The arbitrator will have the power to order hearings and
meetings to be held in such place or places as he or she
deems in the interests of reducing the total cost to the parties
of the arbitration.”
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DISCOVERY LIMITATIONS
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
“… each party shall be limited to calling a total of three witnesses both for purposes of deposition and
the arbitration hearing. . . . [T]he arbitrator or arbitrators . . . shall set a limited time period and
establish procedures designed to reduce the cost and time for discovery while allowing the parties an
opportunity . . . to discover relevant information from the opposing parties about the subject matter of
the dispute. The arbitrator, or a majority of the three arbitrators . . . . shall have the authority to
impose sanctions for discovery abuses, including attorneys’ fees and costs, to the same extent as a
competent court of law or equity, should the arbitrators or a majority of the three arbitrators . . .
determine that discovery was sought without substantial justification or that discovery was refused or
objected to without substantial justification.”

“Each party to the arbitration will be entitled to the timely production by the other parties to the
arbitration of relevant, non-privileged documents or copies thereof. If the parties are unable to agree
on the scope and/or timing of such document production, the arbitrator will have the power, upon
application of any party to the arbitration, to make all appropriate orders for the production of
documents by any party to the arbitration or to authorize a party to the arbitration to seek the
discovery of documents from Persons that are not parties to the arbitration…. [E]ach party to the
arbitration will be entitled to conduct depositions to provide non-privileged testimony that is relevant to
the controversies, claims, or disputes at issue. If the parties to the arbitration are unable to agree on
the propriety, scope, number, or timing of the deposition or depositions, the arbitrator . . . may make
all appropriate orders in connection with the proposed deposition or depositions.”
DISCOVERY LIMITATIONS (CONTINUED)
 Discovery. Discovery will be strictly limited: (1) each party will promptly
produce to the other all relevant and non-privileged documents and
electronic data for inspection and copying; and (2) each Party will promptly
submit written reports of its testifying expert witnesses to the other party,
and permit the other parties reasonable opportunity to depose such expert
witnesses. The parties shall not conduct any further discovery unless
permitted by the arbitrator(s) for good cause shown. The arbitrator(s) shall
not conduct any independent discovery, procure experts, or subpoena
witnesses without the prior written consent of the parties.
 Each party shall be limited to written requests for production (no more than
50) and no more than 43 hours of fact witness depositions, per party. The
time restriction on fact witness depositions applies to depositions noticed by
either party.
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AWARD
 “The decision of the arbitrator or a majority of the three arbitrators, as the case may
be, as to the validity and amount of any claim hereunder shall be final, binding, and
conclusive upon Parent, on the one hand, and the Stockholders, on the other hand.
Such decision shall be written and shall be supported by written findings of fact and
conclusions of law which shall set forth the award, judgment, decree, or order
awarded by the arbitrator(s)….”
 “The arbitrator shall, within thirty (30) days of the conclusion of the hearing, unless
such time is extended by mutual agreement, notify the parties in writing of his/her
decision, stating the reasons for such decision and separately listing the findings of
fact and conclusions of law.”
 “The arbitrator shall promptly hear and determine (after giving the Parties due notice
and a reasonable opportunity to be heard) the issues submitted and shall render a
reasoned award in writing within a reasonable period after the appointment of the
arbitrator.”
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AWARD (CONTINUED)
 “The Parties will instruct the Accounting Arbitrator that, within 20 Business
Days after receiving the Parties’ respective submissions, the Accounting
Arbitrator will render a decision choosing either Seller’s position [as]
presented by Seller or Buyer’s position … whichever is most accurate
based on the terms of the Agreement and the [submitted] materials
described above…. The Accounting Arbitrator will be authorized to resolve
only the specific disputed aspects of the Final Settlement Statement
submitted by the Parties as provided above and may not award damages,
interest (other than with respect to Section 3.3) or penalties to any Party
with respect to any matter, notwithstanding any AAA Rules to the contrary.”
 The arbitrators shall issue a standard award.
 “Decision/Appeal. Upon reaching a final decision, the arbitrator(s) must
render findings of fact and conclusions of law upon which the decision is
based.
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RECOVERY OF FEES AND COSTS
 “The parties agree that each party shall pay its own costs and expenses
(including counsel fees) of any such arbitration, and each party waives its
right to seek an order compelling the other party to pay its portion of its
costs and expenses (including counsel fees) for any arbitration. Any fees of
the arbitrator(s) shall be borne in accordance with the Commercial
Arbitration Rules of the American Arbitration Association governing the
arbitration.”
 “The arbitrator shall divide all costs (other than fees and expenses of
counsel) incurred in conducting the arbitration in the final award in
accordance with what the arbitrator deems just and equitable under the
circumstances….”
 “The expenses of any arbitration pursuant to this section shall be borne by
the losing party.”
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PRE-ARBITRATION NEGOTIATIONS OR MEDIATION
 “The Parties shall promptly attempt to resolve any Dispute by negotiations between
Buyers and Sellers (or their Affiliates). Either Buyers or Sellers may give the other
party written notice of any Dispute not resolved in the normal course of business.
Representatives of Buyers (who may include the CEO or the CFO of Company) and
Sellers (who may include the CEO or COO of Equity Owner) shall meet at a mutually
acceptable time and place within 30 calendar days after delivery of such notice, and
thereafter as often as they reasonably deem necessary, to exchange relevant
information and to attempt to resolve the Dispute. If a negotiator intends to be
accompanied at a meeting by legal counsel, the other negotiator shall be given at
least three Business Days prior notice of such intention and may also be
accompanied by legal counsel. If the Dispute has not been resolved by these
Persons within 60 calendar days of the disputing party's notice, or if the parties fail to
meet within such 30 calendar days, either Buyers or Sellers may initiate binding
arbitration as provided below.”
 “… the parties shall first attempt to mediate the matter. If the matter(s) has not been
satisfactorily resolved (or waived), within thirty (30) days after written notice by either
party to the other requesting mediation, then the matter shall be referred to arbitration
for resolution ….”
15
PRE-ARBITRATION NEGOTIATIONS OR MEDIATION
(CONTINUED)
 Exclusive Process. The dispute resolution process described below shall be
the sole and exclusive process for the resolution of disputes between the
Parties with respect to this Joint Venture and interpretation of this
Agreement.
Step 1 – Senior Executives: Any disagreement which cannot be resolved
by the Management Committee established by this Agreement shall be
presented for resolution by either Party to a senior executive designated by
each Party. The appointed senior executives for each Party are, as follows:
Party:
Senior Executive
Senior Executives shall attempt to resolve the disagreement within
ten (10) days following presentation of the dispute, or within such
longer period mutually agreed in writing.
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PRE-ARBITRATION NEGOTIATIONS OR MEDIATION
(CONTINUED)
Step 2 – Mediation: If Senior Executives are unable to resolve the
disagreement, the dispute may be referred to mediation if either Party files a
Request for Mediation within thirty (30) days thereafter following expiration
of the time stated above (or mutually agreed to) for resolving the
disagreement among Senior Executives. Mediation, if instituted, shall be in
accordance with the Construction Industry Mediation Procedures of the
American Arbitration Association in effect as of the date of this Participatory
Subcontract. Mediation, if requested, shall be concluded within ninety (90)
days following the filing of a Request for Mediation.
[Step 3 – Arbitration:]
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PRE-ARBITRATION NEGOTIATIONS OR MEDIATION
(CONTINUED)
 Dispute Resolution through non-binding negotiation. As a condition precedent
to filing litigation, the parties shall attempt in good faith to resolve through
negotiation any dispute, claim or controversy arising out of or relating to the
Prime Contract, according to the following mandatory procedures:
– Exchange of Correspondence. Either party may initiate negotiations by
providing written notice to the other party, setting forth the subject of the
dispute and the relief requested. The recipient of such notice shall respond
within ten (10) days of receipt of notice with a written statement of its
position on a recommended solution of the dispute.
– Meeting of Project Level Representatives. If the dispute is not resolved by
the exchange of correspondence under (a), then project level
representatives of each party with their respective level of settlement
authority will meet at a mutually agreeable time and place within ten (10)
days of receipt of the written statement outlined in (a) in order to exchange
relevant information and positions and to make good faith efforts to resolve
the dispute.
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PRE-ARBITRATION NEGOTIATIONS OR MEDIATION
(CONTINUED)
– Meeting of Senior Home Office Representatives. If the dispute is not
resolved by negotiations between project level representatives within
ten (10) days after the initial meeting under (b), then senior home office
representatives of each party with their respective level of settlement
authority will meet at a mutually agreeable time and place within twenty
(20) days after the final project level meeting outlined in (b) to attempt to
resolve the dispute.
– Meeting of Chief Executive Officers. If the dispute is not resolved by
negotiations between senior home office representatives within ten (10)
days after their initial meeting under (c) then the Chief Executive Officer
of each party will meet at a mutually agreeable time and place within
twenty (20) days of the date of the final senior home office
representatives meeting to attempt to resolve the dispute.
– Extensions of Time Constraints. Time constraints indicated herein for
completing negotiations outlined herein may be changed by mutual
agreement of the parties.
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PRE-ARBITRATION NEGOTIATIONS OR MEDIATION
(CONTINUED)
20

As a condition precedent to the commencement of arbitration, the parties shall in good faith first attempt
to resolve any dispute or disagreement using mediation. Upon the written request of either party, the
other party shall endeavor in good faith to agree upon a mutually acceptable mediator. In the event that
the parties are not able to agree upon a mutually acceptable mediator within twenty-one (21) calendar
days of the date of the party’s request to the other party, either party may commence the mediation
process by filing a request for appointment of a mediator and administration of the mediation proceeding
with the American Arbitration Association (“AA”) pursuant to its Construction Industry Arbitration Rules
and Mediation procedures, in effect at the time of the request for mediation (“AAA Rules”) provided
however, that the mediator appointed must possess at least ten (10 years of full or part=time experience
as a commercial mediator with significant construction industry experience. The mediation shall be held
in ______________ (City and State).

Upon the appointment of the mediator, the mediator and the parties shall determine the date, time and
length of the mediation conference. The parties and the AAA (if used) are not limited to any geographical
area or mediator fee range with respect to the source of a neutral mediator. Unless otherwise mutually
agreed upon by the parties, the mediation conference shall be held within ninety (90) days of the date of
appointment of the mediator. In the event that the mediation conference is not commenced within this
ninety (90) days period, any party is free to commence arbitration in accordance with the terms of this
Agreement. No mediator shall be selected whose schedule precludes him or her from holding the
mediation conference within ninety (90) days of his/her appointment.

The fees, costs and expenses of the mediator and the AAA’s administration of the mediation process (if
AAA administration is used) shall be borne equally by the parties. Each party shall be responsible for
paying its own attorneys’ fees, costs and expenses incurred in the mediation process, provided that if an
arbitration is required, the arbitrator(s) shall assess the cost of mediation to the non-prevailing party in
the arbitration proceeding.
CONFIDENTIALITY
 “Except as required by Law, no Party may disclose the
existence, contents or results of an arbitration brought in
accordance with this Agreement, or the documents
presented and evidence produced by its opposing
Parties, or any analyses or summaries derived from such
evidence. To the extent permitted by Law, the arbitration
shall be considered and treated by the Parties as a
confidential proceeding.”
21
LIMITATIONS ON DAMAGES / ARBITRATOR’S AUTHORITY
 The arbitrators will have no authority to award punitive damages,
exemplary damages, consequential damages, multiple damages, or
any other damages not measured by the prevailing Party’s actual
damages, and may not, in any event, make any ruling, finding or
award that does not conform to the terms and conditions of the
Agreement.
 The arbitrator(s) shall not grant any punitive damages nor any relief
prohibited by or inconsistent with the terms of this Agreement. This
Agreement is subject to the Federal Arbitration Act, 9 U.S.C.§§1-16,
except as modified herein. All decisions shall be final and binding on
the parties, and may be entered in any court of competent
jurisdiction, except that appeals based on errors of law, lack of
evidence, sufficiency of evidence, or any other grounds provided by
statute, may be made to the federal district court nearest the site of
the arbitration.
22
LIMITATIONS
ON
DAMAGES / ARBITRATOR’S AUTHORITY
(CONTINUED)
 “The arbitrator shall have no authority to award punitive or speculative
damages or any damages inconsistent with this Agreement. In addition
to monetary award, the arbitrator shall be empowered to award
equitable relief, including an injunction and specific performance of any
obligation under this Agreement.
 “Buyer and the Sellers’ Representative further agree that the arbitrators
in any such arbitration shall have full authority to order specific
performance or other equitable relief and other damages; provided,
however, that the arbitrators shall not be authorized to award any
punitive damages in connection with any controversy or claim settled by
arbitration hereunder.”
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SCHEDULE
 The parties shall have twenty-one (21) calendar days from the end of the mediation
process (as determined by the mediator’s conclusion that impasse has occurred) to
mutually agree upon and select the arbitrator(s). If after twenty-one (21) calendar
days, the parties have not selection all of the arbitrators; either Party may commence
the arbitration process by filing a Demand for Arbitration with the AAA. In such case,
the arbitration proceeding (including the selection and appointment of the arbitrators),
shall be administered by the AAA. The arbitration proceeding shall be held in ______
(City and State). No arbitrator shall be selected whose schedule precludes him or her
from holding the arbitration hearing within two-hundred and seventy (270) days of
his/her appointment.
 The arbitration hearing shall be concluded within two hundred and seventy (270) days
of the date on which the arbitrator(s) is appointed, unless the parties mutually
otherwise agree in writing. During the entire arbitration process, the arbitrator shall
manage the proceeding and engage in all reasonable efforts to minimize any wasteful
or unnecessary delays, costs and expenses, including limiting discovery to only that
which is reasonably required to allow the parties and their counsel to expeditiously
prepare to present evidence of the claims and defenses at issue.
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