UK: What To Expect From A US Buyer: 10 Flashpoints

Last Updated: 12 February 2018
Article by Andrew Mills, Emmanuel Amos and Ryan Brown

For the purpose of this article, MJ Hudson has assumed that 100% of the share capital of a UK private limited company is proposed to be sold under a sale and purchase agreement ("SPA") governed by English law.

1. Locked Box or completion accounts?

In UK M&A, the purchase price of a target company is typically determined based on completion accounts or the locked box approach.

Completion accounts allow for a post-completion price adjustment if the target's financial position (usually based on working capital, net debt and cash) is different to that at completion. Completion accounts are often seen as the ultimate protection for a buyer given the ability to adjust the purchase price after completion, and they are almost always used in US M&A (and are referred to as a "working capital adjustment").

Under the locked box approach, the purchase price is fixed based on the target's equity value as derived from a historical (pre-signing) balance sheet with no opportunity for adjustment. The buyer bears all trading risk in, and all profits of, the target from the date of the historical balance sheet date until completion, supported by an indemnity from the seller for any "leakage" of value (e.g. dividends and other agreed payments) that occurs between from the date of the locked box accounts until completion.

The locked box approach is commonly used by UK private equity sellers and in UK auction sales, but is rare in US M&A. Given the relative lack of familiarity of US buyers with the locked box approach, the seller of a UK business may wish to consider using completion accounts to generate interest from US buyers in the target business.

2. Deal (un)certainty

Antitrust and/or regulatory clearances are often required for an M&A transaction to complete, which can mean a split signing and completion under an SPA. In this instance, a US buyer may be more likely than a UK buyer to require additional non-regulatory conditions to be included in the SPA to cover this "risk period" between signing and completion.

These conditions often include:

(a) the accuracy (i.e. repetition) or "bring down" of all or substantially all of the seller's warranties at completion, often measured against a materiality standard;

(b) no material breach of pre-completion covenants (these specify how the target business should be operated between signing and completion to preserve its condition); and

(c) a material adverse change (MAC) clause (as discussed below).

The inclusion of additional conditions erodes the seller's deal certainty, as they give the buyer a termination right.

3. Material Adverse Change

A MAC clause permits a buyer to elect not to complete a transaction if the financial position of the target business (or, sometimes, its prospects as a result of macro events) has materially and adversely deteriorated in the period between signing (or the date of a set of historical audited accounts) and completion.

MAC clauses are far more usual in US M&A than in UK M&A and are generally more broadly defined, and therefore more buyer friendly, than MAC clauses in UK deals. However, MAC clauses are difficult to enforce in both the UK and the US and are often requested by a buyer as a potential means to renegotiate the purchase price before completion if it can find a reason to do so. As indicated above, a MAC clause is best avoided by a seller. In UK and US M&A, if a seller agrees to a MAC clause it will usually seek to exclude from the definition of MAC adverse changes resulting from macro events, changes in law or accounting rules, and any change caused by the seller's compliance with the terms of the SPA or the announcement of the transaction.

4. Escrow account

A third party escrow account which holds part of the purchase price to satisfy a buyer's potential claims (including, if agreed, any post-completion purchase price adjustment) is very common in US M&A, particularly with US private equity sellers. An escrow account is less common in UK M&A, and often fiercely resisted by private equity sellers.

In US deals a buyer's sole recourse for all claims is sometimes limited to the escrow account to ring-fence the seller's potential liability. This is often the case where the target company has a large shareholder base or where the seller is a private equity fund. In UK M&A, it is unusual for a buyer to have recourse solely against the escrow account, instead it is used to provide security for part payment of potential claims against the seller.

5.Disclosure of the data room

An online data room is now common place in M&A transactions (it is rare not to see one). In UK M&A, it is extremely common for the entire data room to be disclosed against the seller's warranties, subject to a standard of, at least, "fair" disclosure under English law.

General disclosure of the data room is not market practice in the US. Rather, disclosure is usually only specific against the relevant warranties as set out in the disclosure letter. However a US buyer should be able to accept full disclosure of a data room if it is well-organised and of a manageable size.

6. Indemnification for breach of warranty

US buyers will typically require a seller to indemnify them for all losses arising from breaches of warranties, subject to express limitations. In contrast, in the UK a breach of warranty is usually calculated with reference to contractual damages, being the decrease in the value of the target's shares due to the warranty breach, rather than on a more generous indemnity basis. Although the technical differences between recovery on an indemnity vs. contractual basis can largely be removed with legal drafting, this is another request that a UK seller should strongly resist.

7. Warranty claims – the de minimis

In the UK, the financial limitations that apply to warranty claims focus on three metrics – an aggregate cap, a 'de minimis' amount (i.e. minimum size of claim; only claims in excess of this value can be actioned), and a threshold amount (i.e. the total value of all actionable claims must exceed this amount before a claim can be brought). The purpose of the 'de minimis' concept is to weed out immaterial or nuisance claims, and it is a standard feature of UK M&A deals. By contrast, US M&A practice is mixed, so a US buyer may, initially, be surprised if a seller proposes a 'de minimis' for warranty claims. Practice also differs in respect of the type of threshold, discussed below.

8. Tipping the basket

In UK M&A, the whole amount of all aggregated warranty claims is usually recoverable once the threshold (referred to as a hurdle or tipping basket) is reached. This is a buyer-friendly position and a principle that is rarely negotiated in UK deals. In US M&A, once the claims threshold is reached the buyer is often only entitled to the excess amount over that threshold (referred to as the excess or deductible), which favours the seller. This is a key difference and a well advised US buyer is likely to insist on adopting the UK approach of a hurdle/tipping basket. A seller in a UK deal should mitigate this by arguing for a higher threshold amount than might be ordinarily seen in US M&A (which is often a lower proportion of the purchase price given it may work as a deductible).

9. Pro-Sandbagging

A US buyer may seek to expressly preserve their right to bring a warranty claim against a seller even if they have actual knowledge of a potential claim (e.g. through the seller's disclosure process or the buyer's own due diligence). This is often referred to as a "pro sandbagging clause". In the UK, it is highly questionable whether this clause would be enforceable at law; the general view is that if a buyer has actual knowledge of a matter that leads to a successful warranty claim, it may only be awarded nominal damages by an English court. A pro sandbagging clause is rare in UK M&A and although it arguably poses less risk to a UK seller (due to enforceability doubts), it should still be avoided if proposed.

10. Warranty and indemnity insurance

A UK seller may seek a clean break from SPA claims by requiring a buyer to take out warranty and indemnity (W&I) insurance. W&I insurance is also commonly proposed by UK buyers. However, W&I insurance is not as commonly used in US deals, so the suggestion may be received with scepticism. This is even more likely to be the case if the buyer is a US corporate, rather than a private equity or other institutional investor.

With special thanks to Jonathan Silverblatt, a partner at Reitler Kailas & Rosenblatt LLC, who provided input on New York law and US M&A market practice for this article.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions