A number of questions frequently come up when considering international mergers and acquisitions. Below are the answers to some of the more common questions but please get in touch to discuss your specific international M&A queries.
What are the main characteristics of a share sale and purchase?
The most basic requirements for a transfer of shares in a UK company are for a stock transfer form to be executed, for stamp duty to be paid (see below) and for the buyer to be registered as the new holder in the statutory books. In addition to a stock transfer form, the parties will enter into a more detailed share purchase agreement (an SPA) setting out detailed terms relating to the transaction and the parties respective rights/liabilities.
Following a transfer of shares, the target company will continue to exist as a separate legal entity as English law does not provide for two UK companies to ‘merge’ (i.e. where one company continues as the owner of the combined assets and liabilities of both companies and the other ceases to exist).
What are the main characteristics of a business (asset) sale and purchase?
Similar to a share transfer, the buyer and seller will enter into a business (or asset) purchase agreement (referred to as an APA or BPA) to confirm the detailed terms relating to the transaction. In the context of a business, it is the company carrying on that business that will be the ‘seller’ and where a business is operated across a ‘group’ there may be multiple sellers. The APA/BPA will need to identify each of the assets and liabilities which constitute that business and set out any specific documentation and/or registration for the transfer of certain assets to be effective.
What pre-transaction investigations are typically undertaken?
It is common (and prudent) for a buyer to undertake pre-transaction due diligence.
In addition to financial and commercial due diligence, which may be undertaken by the buyer and/or their accountants, typical legal due diligence investigations would include: (i) ownership of the shares/assets, (ii) contracts, (iii) employment and pensions, (iv) real estate, (v) environmental, (vi) litigation (vii) compliance and regulatory matters and (viii) tax.
In an auction process where there may initially be more than one potential bidder, the seller may prepare a seller due diligence report for the purpose of obtaining indicative bids without the need to disclose the full information to all bidders.
What approvals or registrations may be required?
Acquisitions that meet certain criteria may be subject to review by the UK Competition & Markets Authority (the CMA) to determine whether it would result in a substantial lessening of competition (an SLC). Where a transaction would result in an SLC, the CMA has wide powers to block the transaction or make it subject to further conditions (such as part disposal). Notification of a transaction to the CMA by a buyer and seller is voluntary but notification may also be made by third party (once the acquisition is public knowledge) or otherwise commenced by the CMA on their own initiative.
The nature of certain companies/businesses may also require certain approvals to be obtained, i.e. regulatory licences will often require the regulator’s prior approval on a ‘change of control’ of the licence holder (i.e. on a share transfer) or for a change of licensee (i.e. on a business transfer).
Are term sheets/letters of intent commonly used?
It is customary for a potential buyer and seller to record the key terms of their agreement before committing time and resources to due diligence and the negotiation of a more detailed purchase agreement. This document may be referred to as a term sheet, heads of terms, a letter of intent, a memorandum of understanding or similar. Such documents are normally not legally binding with the exception of terms that may govern exclusivity, confidentiality, costs and governing law.
Is there an obligation to negotiate in good faith?
Under English law, there is no implied duty to negotiate potential acquisitions in good faith. Unless a term sheet states otherwise, it will not oblige either party to proceed with any transactions contemplated by its terms.
How may the purchase price be structured?
The purchase price is typically determined on a ‘cash-free/debt-free’ basis and on the basis of a normalised level of working capital; the purchase price will therefore be subject to a post-closing adjustment once completion accounts have been prepared and agreed between the parties. As an alternative to a completion accounts, a locked-box mechanism may be used.
While the consideration may be paid in full on closing, it is not uncommon for an element of the consideration to be paid on a deferred basis which may also be subject to certain performance criteria being met (referred to as an ‘earn-out’).
It is common for a certain proportion of the consideration to be held in an escrow account as security for warranty and other claims that may arise post-closing.
What representations/warranties are usually given?
It is common for a seller to give warranties to the buyer at closing and these are likely to cover the areas of investigation undertaken by the buyer in due diligence (see above).
The warranties will be given by the seller subject to any disclosures delivered to the buyer in a separate document (referred to as a ‘disclosure letter’) at the time as the warranties are given. Where a transaction has a split signing and closing, it is common for warranties to be given on signing and repeated at closing.
It is customary for a seller to indemnify the buyer in respect of pre-closing tax liabilities pursuant to the terms of a tax covenant/tax deed.
Are the parties liabilities usually subject to any caps/limitations?
Warranty claims are typically subject to a di minimis (a minimum amount below which any claim may not be made) and a tipping basket (requiring all qualifying claims to reach an aggregate value before any of them may be made). As a guide, these amounts are typically 0.1% (de minimis) and 1% (tipping basket) of the total consideration amount. It is not uncommon for the overall cap on liability to be less than the amount of the purchase price, although fundamental warranty claims, indemnity claims and tax claims are typically subject to a higher cap or no cap at all.
In the event of a claim, how is compensation/damages calculated?
In UK transactions, warranties are not normally given on an indemnity basis. In the event of a breach of warranty, the buyer must be able to prove that is has suffered a loss and the amount of damages will typically be calculated as the difference between the price paid by the buyer and the actual value of the shares/business taking into account the matter giving rise to the breach of warranty. It is common for a purchase agreement to exclude recovery for certain types of loss, such as indirect/consequential loss.
What effect does a share/asset sale have on employees?
An acquisition of shares will not result in a change in employer for the target company’s employees; there will simply be a change in the ownership of the employer and all rights and liabilities between the target company (as employer) and its employees shall remain.
On an acquisition of a business, English law (the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE)) provides that the employees engaged in that business shall automatically transfer from the seller to the buyer on the existing terms of their employment and with all of their existing rights and liabilities, whether those rights and liabilities relate to the period before or after closing. A transfer pursuant to TUPE is automatic and the parties may not ‘contract-out’ of its requirements.
Are restrictive covenants (non-competes) typical/enforceable?
Restrictive covenants are very common on both share and business acquisitions and will include non-compete as well as non-solicitation/poaching provisions. To be enforceable by the English court, a restrictive covenant must be no more onerous than is strictly necessary to protect the relevant party’s legitimate interests. The scope of the restriction, including the geographical area it applies to and the duration must all be carefully considered. As a general rule, the restrictive period should be no longer than 2-3 years from the date of closing.
What dispute resolution procedures are customary in M&A transactions?
Agreements may include an alternative dispute resolution mechanism such as an informal escalation of disputes to more senior managers or a formalised mediation. Litigation in the English court is the most common dispute mechanism but a buyer and seller may opt to refer disputes to arbitration, particularly where confidentiality is important.
What is stamp duty and when is it payable?
Stamp duty is a tax payable by the Buyer on a sale of shares, at a rate of 0.5% of the total consideration (rounded up to the nearest £5.00). The buyer must submit the original stock transfer form(s) to HM Revenue & Customs, together with payment for the amount of duty owing, within 30 days of closing; HMRC will ‘stamp’ the stock transfer form(s) with the amount of duty paid and return them to the buyer.
How long do transactions typically take to close?
As a general guide, a sale of a ‘distressed business’ may be completed in a matter of days or weeks. A trade sale may be completed in 6 weeks to 4 months but may be significantly longer where the transaction has a split signing/closing and/or there is a need to obtain regulatory approval or CMA clearance as a condition to closing.