Growing arbitrability in mergers & acquisitions: The need for minimal judicial involvement

Mergers and acquisitions in India have shown tremendous progress since private equity investment was valued at $33 billion in 2025. However, there is an inherent uncertainty regarding how the growth will proceed with regards to dispute resolution.

Sophisticated parties contracting for complex transactions expect both predictability and efficiency in their dispute resolution process. It is, therefore, incumbent upon Indian courts to live up to this expectation and make arbitration the default position in disputes involving mergers and acquisitions.

Disputes arising out of contemporary M&A deals usually require sophisticated commercial evaluation. As a result of implementing earn-out provisions in M&A contracts, companies face the difficulty of interpreting the meaning of the performance milestones for valuation disputes. When representations and warranty breaches occur post closing, companies also face the same problem. Material adverse change (MAC) clauses provide grounds for disputes when parties disagree on whether a change in market conditions affected the transaction. Furthermore, disputes regarding drag along and tag along rights create problems for shareholders when they wish to exit the company but have different timelines for their exit.

These types of disputes all have some common characteristics - including that the disputes arise out of contractual commitments made between the parties, include commercial judgment regarding public interest and demand that the dispute be resolved by experts familiar with the deal blueprint. It is arbitration that meets the needs of the parties involved. The confidentiality of proceedings, protection of sensitive business information by party-appointed arbitrators, their level of expertise on the transaction and preservation of commercial relationships are all factors that make arbitration the more viable option.

Additionally, the streamlined procedures provided by arbitration result in quicker resolutions than can be obtained in congested court systems. The New York Convention provides a means of enforcing arbitral awards across borders that domestic court judgments frequently cannot. When the parties choose arbitration to settle the dispute and when they exercise party autonomy, then courts are required to accept the parties’ decision on what process should be used to resolve the dispute.

In its landmark decision in Vidya Drolia and Ors v. Durga Trading Corporation (2021), the Supreme Court established a four-pronged test that is essential for determining what kinds of disputes are non-arbitrable. The test establishes that disputes are non-arbitrable if:

(i) the cause of action and subject-matter of the dispute relate to actions in rem which are unrelated to subordinate rights in personam that arise from rights in rem;

(ii) the cause of action and subject-matter of the dispute relate to the rights of third parties; have an erga omnes (towards all) effect; require centralised adjudication, and mutual adjudication would be inappropriate and/or unenforceable;

(iii) the cause of action and subject-matter of the dispute relate to sovereign and public interest functions of the State;

(iv) the subject-matter of the dispute is either explicitly or implicitly non-arbitrable as per mandatory statute(s).

Although rights in personam that emanate from rights in rem can be resolved through arbitration, the distinction is dispositive for M&A disputes. Although company shares may represent rights in rem with respect to the corporate entity, the contractual rights and obligations of shareholders among themselves constitute subordinate rights in personam.

Accordingly, the Vidya Drolia framework concludes that these disputes are suitable for arbitration. The disputes do not concern erga omnes rights, nor do they raise public interests of the State. The parties can establish their own agreement terms and there are no statutes that specifically preclude them from doing so.

Anupam Mittal v. Westbridge Ventures II Investment Holdings [2023] provides insight into the protection of party autonomy in cross-border M&A disputes through the lens of the arbitration agreement. In this case, there was a shareholders' agreement governed by Indian law and provided for arbitration seated in Singapore. The arbitration process was stalled as both parties could not determine if the exit rights and allegations of oppression were arbitrable.

In the Westbridge case, the court found that although oppression claims may be non-arbitrable under Indian law, the parties' election of Singapore as the seat where such disputes are arbitrable, warranted enforcement of the arbitration agreement.

The Westbridge case serves as an example of why businesses should take steps to preserve party autonomy when making decisions about international business operations. Indian courts should follow the same principles used by the Singaporean courts to protect arbitration agreements entered into by sophisticated parties that have chosen arbitration seats with pro-arbitration characteristics.

Courts should presume that parties with equal bargaining power in M&A agreements wish all contractual disputes (including earn-outs, valuations and warranties etc) to be arbitrated when they agree upon arbitration clauses. A rebuttal of this presumption should only be made based on clear evidence that the specific disputes fall under the non-arbitrable categories outlined in Vidya Drolia.

India's ability to attract foreign investment capital will be directly related to the clarity of its dispute resolution laws. PE funds along with strategic acquirers conduct thorough due diligence of legal systems prior to making investment decisions. When there is uncertainty surrounding the enforceability of arbitration clauses for commercial disputes arising out of their investments, risk premiums will rise and deal values will decrease.

For example, a private equity fund negotiating an acquisition of a minority stake that includes performance-based earn-out provisions that depend on achieving EBITDA levels, has exposure to:

1. Protracted legal disputes;

2. Public disclosure of confidential evaluations;

3. Conflicting court judgments.

These risks will result in increased required returns and decreased deal values.

Conversely, the certainty of invoking arbitration for a breach of a contractual obligation provides funds with the ability to more accurately price deals and provide capital with credibility.

India is promoting itself as a center for international commercial arbitration - evidenced by institutions such as the Mumbai Centre for International Arbitration and also has made significant changes through the Arbitration and Conciliation Act reforms. However, India’s judicial approach to arbitrability sends mixed messages to the world. Courts that typically enforce arbitration agreements will help reinforce India’s status as a hub for international commercial arbitration, while courts that frequently declare disputes non-arbitrable will undermine India's reputation.

Courts must develop procedures for evaluating cases.

1. Assumption of arbitrability of:

• Earn-out calculations and payment obligations;

• Breach of representations and warranties;

• Disputes over valuation using agreed-upon methodologies;

• Drag-along and tag-along rights;

• Non-compete and non-solicitation provisions;

• Price adjustment mechanisms;

• Claims for indemnification.

2. Prima facie review at referral stage:

When the court conducts the prima facie review in the event a Section 8 or 11 arbitrability challenge occurs, it should consider the arbitration of all contractual disputes that arise from shareholder agreements and purchase agreements. Any additional arbitrability analysis should occur after the tribunal has been appointed under the competence-competence principle, with the courts intervening only in those instances where non-arbitrability is "manifestly and ex facie" evident.

3. Scope of NCLT jurisdiction:

The National Company Law Tribunal's jurisdiction under Sections 241 – 242 of the Companies Act, 2013 should be construed narrowly so as to avoid duplication of arbitrable contractual disputes.

Legislative intent supports the above described approach. Parliament has clearly indicated that it wishes to limit judicial interference in arbitration and support party autonomy, in both the 2015 and 2019 amendments to the Arbitration Act. In addition, the introduction of Section 11 (6A) limits the scope of inquiry by courts under Section 11 as to whether or not there is an arbitration agreement. Furthermore, the specific remedies available to the National Company Law Tribunal for oppression and mismanagement of companies suggest that disputes that do not trigger these provisions will continue to be resolved pursuant to general contract law principles.

Sophisticated parties who negotiate M&A transactions with arbitration clauses make deliberate choices about dispute resolution. These choices stem from business decisions that prioritise the need for confidentiality, specialised expertise and enforceability of agreements. The Indian court system needs to recognise these calls, because they establish that all contractual disputes need to go through arbitration.

The Vidya Drolia framework provides the doctrinal basis: most M&A disputes involve bilateral rights in personam with no erga omnes effect or sovereign implications. Applying Vidya Drolia’s principles faithfully leads inexorably to a pro-arbitrability conclusion.

Global competition for investment between India and other nations makes judicial M&A arbitrability decisions crucial for establishing India as an arbitration-friendly business destination. The Indian court system should support party autonomy by restricting its ability to intervene in cases which do not fall outside arbitration jurisdiction. The expansion of non-arbitrability categories creates a risk that capital will leave India while working against the established arbitration goals of the nation.

A cogent approach for courts is to assume arbitrability, respect party autonomy and position India as a pro-arbitration seat. This serves not only the parties before the court, but also the broader goal of making India a premier destination for M&A activity and an international commercial arbitration hub.

Rishang Singh is an Advocate practicing before the High Court of Allahabad.