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Freshfields Risk & Compliance

| 7 minutes read
Reposted from A Fresh Take

The Curious Case of Crossover Witnesses in Post-M&A Arbitration


A crucial aspect of any M&A deal is the transfer of employees along with the Target company. This is key to maintain business continuity and ensure that the essential knowledge remains within the Target, post-acquisition. But often those same individuals – whether senior executives of the Target or knowledgeable employees of the Seller – may have been key players at the deal stage, responsible for preparing relevant technical and financial documents constituting the basis of the Purchaser’s due diligence and final decision. In certain cases, these individuals may even have been actively engaged in face-to-face negotiations on behalf of the Seller.

It is therefore no surprise that these employees’ knowledge of the Target and the transaction becomes critical to resolving any subsequent disputes. The employees, however, may find themselves in a difficult situation if – as is common in post M&A disputes – the Purchaser brings arbitration proceedings against the Seller for breaching representations and warranties and providing inaccurate information during the diligence phase. Given their role in preparing documents reviewed by the Purchaser, the Seller may want to present them as fact witnesses in arbitration proceedings. However, since they are now employed by the Purchaser, a crucial question arises: can they testify on behalf of their former employer, and if so, are they willing to offer testimony that may be detrimental to their current employer? Or, on the other hand, the Purchaser may want to submit testimony from such an employee, but confidentiality obligations owed by the employee to their former employer (i.e. the Seller) may prevent the Purchaser from discussing the dispute with their employee.

In our experience, this situation arises not infrequently, but its practical impact on post M&A disputes is rarely discussed. There is no uniform approach to resolve these issues – indeed and as usual – the “perfect” solution will turn heavily on the facts and circumstances of the case and the parties’ strategic interests. This blog post nonetheless seeks to present a few ways to minimise risks and present some examples of approaches taken by parties and tribunals on the question of organising access to such “crossover witnesses”, focusing on the potential risks and risk mitigation strategies from the Seller's standpoint.

Key risks 

Fact witnesses play an important role in arbitration. Not only do they bridge gaps in the factual narrative when documents are unavailable especially in cases of unrecorded personal interactions, but they also provide vital insights on commercial and technical considerations based on first-hand experience. When key personnel who were involved in negotiating the deal leave the company, it remains, in principle, possible to request them to provide factual testimony. However, complications arise when these individuals are now employed by the opposing party in the same proceedings. 

Moreover, the witness’ loyalties no longer lie with the Seller. Even if the Seller manages to engage with the witness, there is no guarantee that the witness will cooperate or agree to testify against their new employer. While they may refrain from formally providing witness testimony against the Seller, the witness may disclose potentially damaging information to their new employer in informal conversations – conversations beyond the Seller’s influence or control.  

Risk mitigation strategies during the deal

There are different mechanisms for transfer of employees – employees of the Target may automatically transfer along with the Target company, while employees of the Seller may be hired subsequently by the Purchaser. Developing strategies for presentation of witness testimony in a potential post M&A arbitration is naturally not the primary focus for lawyers when finalising a transaction. However, where a transfer of employees is imminent, it is useful to incorporate some thinking on these aspects already at the deal stage. This proactive approach could prove to be crucial for a full presentation of the party’s factual and legal case in a subsequent dispute and to preclude disruptive procedural conflicts over access to witnesses. 

1. Deal set-up

At the outset, the Seller should consider addressing risks in the way the deal is set up. Instead of assigning the responsibility for gathering relevant information and preparing crucial due diligence documents solely to Target employees, the Seller’s M&A team could seek a more involved role by actively engaging with these employees and being part of the team preparing the necessary documents. Moreover, to the extent possible, the Seller should ensure that the key face-to-face negotiations are not led by individuals who are likely to transition to the Purchaser’s side post-Closing – or at least minimise the risk by having two co-leads for crucial workstreams and meetings.   

2. Appropriate provisions in deal documents 

Where it is either part of the deal terms that key personnel will transfer to the Purchaser companies, or it is foreseeable that such transfers might take place in the future, it would be sensible to incorporate appropriate provisions in the deal documents regarding access to transferred employees in case of a dispute. For example, a provision could state that in the event of a dispute, the Seller will not be prevented from having conversations with former employees and potentially presenting them as a witness. Or if the parties cannot agree on the inclusion of such explicit language, a more neutral formulation could be used, such as: “The parties shall endeavour to negotiate a mutually acceptable solution that neither denies the Seller access to such an employee for purposes of discussing the dispute, nor restricts the Purchaser from carrying on its day-to-day activities with the employee”.

3. Preservation of documents 

While record-keeping is important in all cases, it gains particular significance in cases involving potential employee transfers. Care should be taken to ensure that documents (or copies thereof) remain with the Seller and are not transferred in their entirety along with the Target. Best practices must be implemented to prepare meeting minutes and handover protocols. All documents in the transferring employee’s possession and control must be archived properly particularly ensuring that relevant transaction documents stored in personal folders or storage devices are handed over to the former employer.

4. Non-disclosure agreements at the time of employee’s transfer  

Equally important for the Seller is to enter into a non-disclosure agreement imposing appropriate confidentiality obligations on the employee. The aim should be to prohibit the employee from discussing or sharing confidential information in relation to any future disputes arising out of the transaction. If the employee transfers after the dispute has arisen, it would be advisable to set out the scope of the confidentiality obligations in more detail. 

Plainly, this solution is not bulletproof:  the Seller has no means to police the conversations the employee is having with its new employer. For reasons discussed above, one cannot exclude the possibility that the employee may intentionally or unintentionally share information with the Purchaser.

Dealing with crossover witnesses in arbitration 

We have acted in multiple arbitrations where access to “crossover witnesses” was an issue. As with most procedural questions in arbitration, there is a range of ways in which access to such witnesses may be handled. This depends to a large extent on the facts of the case and the arbitration “culture” the tribunal and the parties belong to (civil vs common law) which gives the parties enough room to strategise and work towards a solution that is most suitable for them. 

Occasionally, resolution of access to crossover witnesses is driven by party agreement rather than tribunal intervention. To avoid increased costs and delays stemming from lengthy procedural battles, the parties may agree from the outset that the Seller will have access to the witness(es) it needs to present under mutually agreed conditions. In practical terms this means that the crossover witness is allowed to submit a witness statement on behalf of their former employer. Independent legal counsel (typically funded by both parties) ensure minimal influence from the witness’ current employer. In cases where the testimony is likely to be especially contentious, the parties may decide that the witness will submit two witness statements– one on behalf of the Seller and the other on behalf of the Purchaser. This would then lead to the witness being cross examined by both parties at the hearing.

Significantly more common (and controversial) are cases where there is no party agreement and the Purchaser prevents the Seller from speaking to its employee, or where the Purchaser is prevented from discussing the dispute with its own employee because of confidentiality obligations owed to the Seller. In the latter case, it is not uncommon for the Purchaser to apply to the tribunal for a waiver of such obligations. In our experience, however, tribunals are typically reluctant to comment on or waive confidentiality obligations. A more interventionist tribunal in such cases may prohibit both parties from discussing the subject matter of the dispute with the crossover witness and from submitting witness statements. Instead, the tribunal would prefer to take the reins at the hearing, asking questions to the witness on an agreed list of topics whilst giving both parties the opportunity to ask follow-up questions. Other tribunals (particularly common law tribunals) may allow access to the witness and the submission of a witness statement under certain conditions including independent legal representation for the witness, presence of the other party’s representative during discussions with the witness and/or specifying the topics which may be discussed with the witness.

There is unfortunately no standardised “one-size-fits-all” solution to navigate this complex issue. Yet, adopting mitigative measures during the deal phase and striving to reach an agreement with the other party early in the proceedings can be instrumental in avoiding unnecessary costs and delays – and providing more clarity to employees who might inadvertently find themselves in an unpleasant situation.