asset management

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The choice of arbitration institution can arise at any point in an investment cycle: from finalising initial agreements at fund or portfolio company level, or on an ad hoc basis when a dispute arises.

To help demystify some differences – this article sets out the key features of three commonly used international arbitration regimes that an asset manager should take into account when making such a choice.

In Salladay v. Lev, the Delaware Chancery Court elaborated on how early a corporate board must take protective measures to shield a conflicted transaction from entire fairness review.

Salladay involved a motion to dismiss a challenge to a merger agreement based on alleged director conflicts at the target company. The defendants argued that the transaction was approved by an independent committee of directors and a shareholder vote, warranting deferential business judgment review and, in turn, dismissal. The court held that business judgment review was inappropriate because the independent committee only became involved in negotiations after they had begun—too late to “replicate the value-enhancing structure of an arms-length transaction”—and the shareholder vote was not fully informed. Instead, the much stricter standard of entire fairness applied, rather than the more lenient business judgment rule, and therefore dismissal was inappropriate.

Litigation funders are well aware that half of the potential market is largely untapped. Clients would prefer to focus on their business rather than litigation, and offload some or all of their defense costs to a third-party. Law firms want the fee flexibility that defense-side funding could provide.

So why is defense funding still the exception rather than the rule? To begin with, because the synergies that propel plaintiff-side funding are much more difficult to capture on the defense side.