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Print articleAn acquired taste
The two countries enjoy cultural, linguistic and political affiliations that stretch back many years. When US businesses expand overseas, most US businesses consider the UK to be one of the leading target markets.
There are many similarities between executing a US or a UK acquisition. Due diligence and risk-reduction strategies are similar, as are most post-acquisition integration issues. The legal systems are very similar too, having grown from the same roots of English common law.
However, there are some real differences when a US business evaluates, structures, prices and executes a UK acquisition. Here are five differences:
1. No Mergers
While the term “M&A” (mergers and acquisitions) is also used in the UK, the concept of “mergers” does not currently exist under English law. If a US company wishes to “merge” with an English company this would be effected by acquisition, either of the shares (company purchase) or the assets of the English company. There is no equivalent to the US concept where two independent corporations merge into a single successor entity.
2. Due diligence
As in the US, it is important that the buyer carries out a thorough “due diligence” investigation on the company and its assets. This process will help uncover issues or problems that need to be discussed before the purchase is completed and dealt with in the sale and purchase agreement.
The buyer’s enquiries of the seller will cover areas such as the company’s capital structure, finances and tax, assets and real estate, contracts, employees, IT and IP, litigation and insurance. The seller sometimes finds it easier to set up a physical data room containing all documentation which is made available for review by the buyer and its lawyers, accountants and tax advisers. The rules of use of the data room enable the seller to retain control of the documents, which may be commercially sensitive and may not be copied, and control persons admitted as well as, therefore, times of access.
Especially on transatlantic deals, a virtual data room is an efficient alternative, where authorised persons at the buyer and its advisers are given log-in and password details and can download the due diligence documents from the secure website set up by the seller’s lawyers. On some deals, commercially-sensitive documents may only be posted onto the website in the later stages of the transaction.
Specialist experts may also be engaged by the buyer, such as environmental consultants and property surveyors, if sites are to be inspected and assessed, or pensions actuaries if there are concerns about the employer’s adequate funding of the company pension scheme. Environmental and pensions liabilities are often the largest actual or contingent liabilities of UK targets.
So, the due diligence process is very similar in the UK and the US. However, note that in the UK (and Europe generally) there are mandatory areas of law that apply whatever the parties agree to in the purchase agreement. These include anti-trust, environmental, labor, pensions, corporate and tax law. These areas will therefore usually be reviewed in detail by US acquirers to ensure that they understand and can quantify the risks involved. In asset purchases, particular attention should be given to the Transfer of Undertakings (Protection of Employment) Regulations 2006 which operate automatically to transfer the employment of all employees of the transferring business on the same terms and conditions to the buyer, who will take on the employer’s rights and obligations. This comes as a surprise to most US acquirers.
3. Purchase agreement
The next stage is the purchase agreement. There are some fundamental provisions which are important for the buyer to reduce the potential risks it is taking on. Warranties, covenants, undertakings and indemnities are used to reduce risk and to gather more information on the target and the seller. Warranties differ from indemnities. Warranties under English law require the buyer to prove and quantify its loss arising on a breach of warranty in order for the seller to be liable to pay damages. This can make it difficult for a buyer to recover 100% claimed under a warranty. These are subtle but real differences in the apportionment of risk.
Another way in which the seller may try to limit its liability exposure is in its disclosure letter to the buyer. The disclosure letter will also be negotiated and sets out matters which at completion would constitute a breach of warranty. The buyer should only accept disclosures made in sufficient detail so it can quantify the risks it is taking on.
The UK disclosure exercise is therefore similar to that in the US, but again subtle but important differences arise. For US buyers this sometimes means that they believe that they can make a warranty claim when in fact they cannot.
4. Financing
The buyer must consider how it will finance a share purchase. It is unlawful for an English target company to provide “financial assistance”, such as by way of loan or grant of security, to assist others in acquiring its shares. There is no equivalent restriction in the US. This prohibition will be lifted for private limited companies in the next year under the new UK Companies Act, but in the meantime deal-makers may currently follow a cumbersome “whitewash” procedure (aimed to protect the interests of shareholders and creditors) in order to circumvent the prohibition.
5. Tax
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The tax treatment of share purchases and asset purchases differs, and the buyer and the seller’s company structure and tax position must be analyzed to determine which type of purchase would be more advantageous. Stamp duty payable to HM Revenue and Customs is only 0.5% of the purchase price in a share purchase. Stamp duty land tax of up to 4% may be payable in an asset purchase on the price of real estate being transferred, so the apportionment of the price over the assets should be considered. Value added tax may be payable on an asset purchase if the business is not transferred as a “going concern”. The buyer will also need to consider how it will pay the price to the seller, whether this should for instance be in cash, shares and/or loan notes as there will be further tax considerations for the parties.
Summary
M&A deals in the UK and US are remarkably similar. However, slight legal differences can mean substantial re-allocation of risk. However, this is easy to manage. Many law firms in London specializing in UK-US transactions deal daily with American acquirers and are able to help those acquirers understand and so manage those risks.
Neil Foster is a partner and Sabina Coles is an assistant solicitor in the corporate department of Field Fisher Waterhouse LLP, specializing in acquisitions and disposals and private equity. Neil Foster may be contacted at neil.foster@ffw.com
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