Although today M&A practice in deals involving private targets in Europe and the United States has become largely standardised, in respect of the form of the share purchase agreement (SPA), considerable differences exist on some deal terms, including:
- payment arrangements;
- some representations and warranties;
- closing conditions;
- indemnification terms; and
- dispute-resolution provisions.
The extent of standardisation and the underlying differences are borne out not only by individual experience but also by empirical studies on SPAs, including the European M&A Deal Points Study ('EDPS 2015') and a similar study on deals for private targets in the US ('USDPS 2015').1
An illustration of these points, discussed below, can provide a useful framework for practitioners in the US confronted with negotiating deals in Europe (with the help of local counsel), or vice versa.
Beyond serving that practical purpose, review of those differences helps to put in perspective how SPAs function and guidelines for negotiating them. The key functions of the agreement are to make the transaction happen at favourable terms and to reduce risks and costs and/or allocate them acceptably. An attorney participating in the negotiation of a deal should of course be able to identify what technical deal terms, including best practices used in other jurisdictions, will maximise his or her client's position. But the attorney should also keep in mind the overall priorities for the deal, which do not always dictate taking a maximalist position on each technical drafting point.
Of course, deals may vary significantly from one to another, and technical drafting choices can be dominated by economic considerations, including the relative bargaining power of the parties, so the observations set out below should be applied to concrete cases with caution.
Further, review of European M&A practice must take account of the differences in legal systems among European countries, which may be more significant than the differences in the law of individual states in the US. In this connection, three points should be borne in mind:
- When negotiating an SPA the most important rule is the same whatever law is chosen: the parties' rights and obligations will generally be determined by the terms of the SPA, so careful drafting is essential.
- Although by virtue of European Union (EU) law2 and the domestic law of all or virtually all European countries the parties have freedom to choose the law applicable to their SPA,3 it is inevitable that the SPA will have to take account of the law of the countries where the target is incorporated (which is the applicable company law) and where it has operations (whose law will apply to such matters as its relations with its employees). Consequently, unnecessary confusion and complexity can be avoided by choosing the law of one of those countries. Indeed, in 77 per cent of the SPAs in the EDPS 2015 sample, the law applicable to the SPA was the law of the place of principal activity of the target.
- Although most of the key provisions in an SPA will be equally enforceable whether the applicable law is that of the country of the target, the buyer or the seller or some other country, there may be some issues – such as sensitive matters like sandbagging (see below) – on which the law of those countries will differ, and only local counsel can identify and advise on those points.
This article sets out below observations regarding: (1) standardisation, within Europe and with the US; and (2) some salient differences in SPA drafting between Europe and the US.
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Footnotes
1 EDPS 2015 (co-chaired by the author of this article) was prepared under the auspices of the Market Trends Subcommittee of the American Bar Association's (ABA's) Business Law Section Mergers and Acquisitions Committee, which analysed 81 SPAs involving targets located in Europe or having substantial operations there, for a price of at least €15m, signed or closed in 2012 or 2013. It follows similar studies of SPAs in Europe ('EDPS') published in 2008, 2010 and 2013. This article draws on comparisons with similar ABA studies of SPAs for US deals for private targets ('USDPS') published in 2006, 2009, 2011, 2013 and 2015. All of these studies, as well as studies of Canadian deals, are available at http://apps.americanbar.org/dch/committee.cfm?com=CL560003. 2 EU Regulation 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I). It seems quite unlikely that after Brexit there would be any change in this rule in the United Kingdom.
3 An SPA is not among the types of contracts for which there are special rules as to choice of law (contracts relating to carriage of goods or passengers, consumers, employment or insurance, see EU Regulation 593/2008, Arts 3, 5, 6, 7 and 8).
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.
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.
