Here is the translation of the text into a natural and professional business English style (Corporate Finance / M&A / Transactional Law):
What is the underlying rationale for this somewhat unique clause? What are its primary structural arrangements and consequences for the parties involved?
The conduct of claims clause is more commonly known in insurance law. It refers to "the insurer taking decisions regarding legal proceedings brought by or against the insured" (*).
Thus, an insurer concerned about potential liability decides to take control of the lawsuit by selecting legal counsel, defining defence strategies, and so forth. The insured is effectively sidelined, leaving the insurer to make decisions on their behalf. To be enforceable, the conduct of claims clause must be explicitly included in the insurance contract. Frequently, such contracts do not provide for a total surrender of control by the insured, as that would mean the insurer waives any recourse against its client. Consequently, the contract typically provides that the case will be handled "in collaboration" between the parties.
This ambiguity sometimes leads to disputes between the insurer and its insured, where the court must determine whether the insurer genuinely took charge of the proceedings. If so, the insurer will have waived its right of recourse against the insured and must bear the full financial consequences of the dispute.
Application in Business Transfers
In M&A and business transfer transactions, the conduct of claims clause operates within the framework of enforcing Representations and Warranties (R&W)—or indemnification provisions. As a reminder, the purpose of R&W is for the seller to guarantee to the buyer that the target company is in good standing across all operational areas: no undisclosed tax, labor, or commercial liabilities, no pending litigation, and so forth. Referring to the target company's balance sheet assets and liabilities ensures that all risks are reflected on the balance sheet—potentially as provisions—leaving no unwelcome surprises post-closing.
Representations and warranties consist of a comprehensive list of representations by the seller, along with a procedural mechanism for claim enforcement. This includes specifying how and within what timeframe the buyer must notify the seller, on pain of forfeiting indemnification rights. When an indemnity claim is raised, the seller may contest it and is often best positioned to address it, given that the underlying cause dates back to their period of operational management. It is therefore logical to allow a seller whose liability is triggered under the R&W agreement to select their own legal counsel and defense strategy.
This principle applies to court litigation as well as to tax or regulatory matters, such as tax or labor audits. The clause may grant full control of proceedings to the seller, which works to their advantage. However, as in insurance law, hybrid arrangements are common in purchase agreements: the parties may agree to "collaborate" on the defense, the seller may be granted the right to "present arguments and participate in proceedings," or the seller may be granted control of the proceedings provided they "cannot admit liability or settle on behalf of the target company without the buyer's prior written consent." The buyer will typically insist on retaining a measure of control to prevent the dispute from inflicting broader commercial or reputational harm on the business.
The Principle of Responsibility: He Who Pays, Decides
In all scenarios, defense costs are borne—quite logically—by the party conducting the proceedings. The conduct of claims clause thus enshrines the principle of responsibility: he who pays, decides. In practice, however, there are numerous subtleties that prove critical when invoked. Because party autonomy prevails in this domain, the wording of this clause, like so many other elements of the purchase agreement, remains fully negotiable.
The relative bargaining power and mutual commitment to close the transaction are pivotal factors. It is essential to dedicate sufficient time and effort to this closing phase, which can sometimes feel tedious. Above all, securing expert guidance is crucial: while indemnity claims accompanied by litigation are relatively rare, their occurrence underscores the vital importance of a meticulously drafted agreement. As the saying goes, it is far better to seek counsel before rather than after the fact.
* Source: Blog of Jérôme Blanchetière, Attorney-at-Law, Paris.
Article originally published in La Libre Économique by Tanguy della Faille, Partner at Fondaris, on 30/09/2017. Published/updated version on the Fondaris website with the author’s permission.
