UK M&A deal practice – an introduction for US-based buyers
22 April 2021
We continue to see a lot of mid-market M&A activity in the UK driven by US-based buyers, including both corporate buyers and financial investors. Unsurprisingly, that activity is largely focused on sectors which have remained buoyant throughout the COVID-19 pandemic, such as technology, creative and high-value manufacturing businesses.
These sectors are also less likely to be affected by any Brexit-related changes to supply chains, or (as in the case of high-value manufacturing) are less sensitive to any marginal cost increases. Coupled with the traditional cultural and linguistic comfort factors felt by US buyers when doing business in the UK, we see little sign of any reduction in the appetite for UK assets from US buyers looking for a bridge into Europe.
Whilst the M&A process and deal practice in the US and UK have many similarities, there are some important differences which a US-based buyer should take into account at an early stage in any transaction. We sometimes see US-based clients fighting an uphill battle in relation to deal terms on UK deals when they have omitted to negotiate this in the letter of intent on the assumption that what is usual in the US is also standard in the UK.
Every deal will clearly have its own dynamics, and in particular will depend on whether the transaction follows a formal auction process which will typically result in more seller-friendly terms. Nonetheless, it’s possible to draw out some common differences in deal practice.
- Split signing and completion:UK practice heavily favours simultaneous signing and closing.A UK seller is unlikely to agree to a split deal structure unless an interval is necessary for regulatory reasons such competition law/anti-trust approvals or other regulatory consents, or perhaps if there is a very significant customer whose consent is required.A UK seller will expect any buyer to have financing in place at signing.
- Conditions to completion:the conditions to completion are likely to be more limited in a UK SPA than in a typical US SPA where there’s a split structure, giving less room for a buyer to get out of the deal after signing.For example, if the interval between signing and completion is at the buyer’s insistence or results from circumstances relating to the buyer, the seller may not be prepared to repeat or “bring down” the full set of commercial warranties as a condition to completion.Business risk between signing and completion may therefore fall on the buyer to a greater extent than may be usual in the US.Similarly, covenants restricting the seller’s conduct of the business during that period may be looser in the UK than in the US, whilst UK MAC clauses are usually more tightly drafted so as to limit any get-out for a buyer.
- Completion accounts versus locked box:although completion accounts remain very common on UK deals, locked box mechanisms are more common in the UK than in the US especially where the transaction results from an auction process.The perceived wisdom is that completion accounts are more seller-favourable than locked box deals, although that may of course depend on whether the business has made substantial profits between the date on which the price was agreed and the date of completion.Locked box deals are likely to require more exhaustive financial and tax due diligence because of the absence of a post-completion true-up.
- Basis of warranties:the warranties are typically given in US deal practice on an indemnity basis, with the extent of the loss which is recoverable governed by detailed provisions in the SPA.UK deal practice is invariably for the warranties to be given on a common law contractual basis, with the amount of any loss which the buyer may recover being based on the diminution in value of the shares or assets purchased as a result of the breach of warranty.That will typically result in a more seller-friendly position, both in terms of the quantum the buyer may recover and also in greater difficulty for a buyer in quantifying loss in any settlement negotiations.The exceptions to this general rule in the UK are tax matters and also any specific indemnities in respect of issues identified in due diligence, which are closer to the US approach to indemnification.
- Caps on liability:the other side of the coin here is that overall caps on claims may well be more generous to buyers in the UK.It’s usual for the overall cap on claims in mid-market deals to be somewhere between 50% and 100% of deal value, and therefore higher than the cap in similarly-sized US deals.A reduced cap can be a valuable bargaining chip for US buyers to offer UK sellers in return for concessions on other deal points.De minimis and deductible/tipping baskets are broadly similar in UK and US deals.
- Escrow accounts:escrow accounts are fairly common on UK deals, but not to the same extent as on US deals and therefore should be agreed in the letter of intent to avoid difficult discussions later in the process.There is no direct linkage in UK practice between caps on claims and the amount held in escrow.It’s worth remembering that UK law firms are no longer permitted to hold escrow accounts, so any escrow funds will have to be held by third-party agents who will charge for their services.
- Disclosure:the concept of disclosure being made to qualify the warranties, and therefore protect sellers, is very similar in the UK and the US.UK practice, especially on auction deals, is more likely to permit general disclosure of data rooms and vendor due diligence reports.
- Buyer’s knowledge:whether a buyer may bring a warranty claim despite being aware of the underlying issue (a “pro-sandbagging clause” in US terminology) depends from state to state in the US.Under English law, there is considerable uncertainty regarding the efficacy of a pro-sandbagging clause as the caselaw is not settled.However, even if an English court would uphold a pro-sandbagging clause in principle it seems likely that any damages a buyer would recover would be significantly reduced (perhaps even down to a nominal amount) to reflect the fact that there has been no real loss of bargain.
Lewis Silkin regularly works with US financial and corporate buyers on M&A deals across a wide range of sectors on UK domestic and cross-border transactions. We’d be delighted to discuss any questions you may have regarding UK deal practice at an early stage in any discussions you may be having in relation to possible UK acquisitions.
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