Mergers & Acquisitions Comparative Guide -

1 Deal structure

1.1 How are private and public M&A transactions typically structured in your jurisdiction?

Private M&A transactions: Most private M&A transactions in England and Wales are structured as share purchase deals, under which the entire issued share capital of the target is acquired by the buyer from the seller for an agreed consideration. The target becomes a wholly owned subsidiary of the buyer. All assets and liabilities of the target remain in that entity and in effect are acquired by the buyer by virtue of the acquisition.

The main agreement governing this type of transaction is the share purchase agreement, which is usually accompanied by a separate tax deed under which the seller indemnifies the buyer for the pre-closing tax liabilities of the target.

Alternatively, private M&A transactions may be structured as business purchase deals, under which certain assets and liabilities of the target – for instance, fixed assets, intellectual property, debtors and goodwill – are acquired by the buyer from the seller and absorbed into the buyer, but with the target itself being retained by the seller.

Public M&A transactions: Public M&A transactions in England and Wales involve the acquisition of the entire share capital of the target.

Public M&A transactions are subject to the UK Takeover Code, as published from time to time by the UK Panel on Takeovers and Mergers. The panel is the supervisory body for code takeovers.

The code applies to takeovers of UK, Channel Islands and Isle of Man incorporated companies listed on a UK, Channel Islands or Isle of Man stock exchange (including the London Stock Exchange (LSE) Main Market and the LSE's AIM market, as well as to unlisted public limited companies registered in any such jurisdiction and which are considered to have their central management and control in that jurisdiction. The code is also applicable to unlisted private limited companies from such jurisdictions in certain circumstances.

However, the code does not govern the sale and purchase of the business and assets of a listed company, the process for which would be akin to private M&A, but taking into account the additional requirements set out in the relevant listing rules (eg, requirements relating to shareholder approval of major transactions).

The code is designed to ensure that:

shareholders in a target are treated fairly and are not denied an opportunity to decide on the merits of a takeover;
shareholders holding shares of the same class in the target are afforded equivalent treatment by a bidder;
there is an orderly framework within which takeovers are conducted; and
the integrity of financial markets is maintained.

At the time of writing, the Takeover Panel is undertaking a substantive review of the code and 2021 may result in significant changes being made to it.

1.2 What are the key differences and potential advantages and disadvantages of the various structures?

Private M&A transactions: The key advantage of a share purchase deal is its relative simplicity, in that the buyer acquires the entire issued share capital of the target, which brings with it all assets and liabilities of the target. However, this usually results in the buyer wishing to ensure via a separate tax deed that it is indemnified for any pre-closing tax liabilities of the target.

As part of the negotiation process, the buyer will seek to agree a price adjustment mechanism – usually either a completion accounts mechanism or a locked-box mechanism – to ensure that the target is being acquired on a ‘cash-free, debt-free' basis.

The key advantage of a business purchase deal is that it enables the buyer to cherry pick which assets and liabilities it wishes to acquire in relation to the target. However, such transactions are often more complex and time consuming to negotiate, can give rise to complex price adjustment provisions and will result in a very different tax treatment for both the buyer and seller. Also, various third-party consents may need to be obtained – for instance, from contractual counterparties and landlords; and a Transfer of Undertakings (Protection of Employment) Regulation consultation process may need to be undertaken with the employees of the target.

Public M&A transactions: If a target is subject to the Takeover Code, the acquisition of its shares must be conducted as a public M&A transaction in accordance with the code.

There are two principal mechanisms to effect a takeover in the United Kingdom under the code:

a contractual offer to all of a target's shareholders to acquire their shares; and
a court-approved scheme of arrangement, which is a statutory mechanism involving a shareholder vote and court approval, under which 100% of the target's share capital is acquired by the bidder.

For a contractual offer to succeed, a bidder must secure acceptances in respect of shares in the target carrying more than 50% of the voting rights in the target; but it may choose a higher threshold before the offer can become can unconditional.

A scheme of arrangement requires the approval of a majority in number, representing 75% in value of each share class, of shareholders attending and voting at the relevant shareholder meeting, together with court approval.

1.3 What factors commonly influence the choice of sale process/transaction structure?

Private M&A transactions: Tax planning will usually be the most significant driver in determining the transaction structure. Whether a transaction is structured as a share purchase or a business purchase will entail each of the buyer and the seller considering how the transaction will be treated for tax purposes, in particular in relation to each of corporation tax, capital gains tax, stamp duty land tax and stamp duty. On the tax analysis only, the buyer and seller may arrive at different conclusions as to the optimal structure for the deal.

In addition to tax planning, other factors that commonly influence the transaction structure will include:

whether any assets or liabilities need to be carved out of the acquisition;
the strategy in relation to the target's employees;
the extent to which the seller group needs to provide transitional services to the target post-closing;
the debt and equity financing for the transaction; and
the approach to confidentiality, announcements and publicity.

The sale process for a private M&A transaction will usually be either an ‘off-market' private deal negotiated between buyer and seller or a seller-driven auction process. Auction processes tend to arise on larger deals and/or where the seller is a private equity sponsor, but can feature on any M&A transaction where the demand for the target is high and the seller and its advisers can generate competitive tension via an auction process.

Public M&A transactions: The advantages of a contractual offer are that:

effective control (with more than 50% acceptances) can be achieved more quickly; and
there is greater flexibility to amend terms in a competitive situation.

Hostile bidders invariably elect to make contractual offers as an acquisition by scheme of arrangement, which usually requires substantial coordination between the bidder and the target.

The advantages of a scheme of arrangement include the fact that all target shareholders will be bound by the scheme if it is approved by the required majority of shareholders and by the court.

Under a contractual offer, it may be necessary to invoke squeeze-out rules to acquire 100% of the target's shares, which require acceptances in respect of 90% of the target's shares to which the offer relates.

The scheme of arrangement has traditionally been the more popular deal structure, particularly for larger-value, recommended bids. Out of the 40 firm offers announced in 2020 for Main Market or AIM companies subject to the Takeover Code, including six offers with a deal value above £1 billion, 29 were structured as a scheme of arrangement (73%) and 11 as contractual offers (27%). The majority (37 firm offers: 93%) were recommended by the target board.

2 Initial steps

2.1 What documents are typically entered into during the initial preparatory stage of an M&A transaction?

Private M&A transactions: In a private M&A deal, the principals will usually enter into:

non-binding heads of terms that will summarise the key commercial terms of the deal; and
a mutual non-disclosure agreement (which may include non-circumvention provisions and restrictive covenants).

The parties will also need to appoint various advisers, each of which will necessitate the negotiation and agreement of an engagement letter with each of those advisers.

Once heads of terms are signed, the parties will embark on the due diligence process. The shape and size of this will vary from deal to deal, but the process will usually entail the buyer's accounting and legal advisers – and potentially other diligence experts – submitting due diligence questionnaires to the seller and its advisers.

In the case of a sell-side auction process, the preliminary documents will be different. In such cases, the sell-side corporate finance adviser will usually issue a process letter to potential bidders inviting them to submit by a certain date a conditional offer letter, and potentially also comments on a sell-side produced draft share purchase agreement. The seller may also have a produced a suite of vendor due diligence reports on the target. At the time of being granted preferred bidder status, the preferred bidder may be granted a period of exclusivity to close the transaction; it may also be required to submit equity and debt commitment letters to evidence certainty of funds for the transaction.

Public M&A transactions: Compared to private M&A transactions, only limited due diligence is undertaken in public M&A transactions, as the code obliges the target to provide equal access to due diligence information to competing bidders. A potential purchaser will review publicly available information, including:

information on the target's website;
public announcements, circulars, prospectuses and interim and audited accounts;
filings with the Registrar of Companies; and
analyst reports.

Because of the fundamental requirement under the Takeover Code to maintain the secrecy of an approach regarding a potential takeover, only a very limited number of persons can be contacted prior to the announcement of an offer or possible offer. Within these restrictions, a bidder may wish to secure the support of key shareholders and directors of the target (in a recommended transaction).

Key shareholders and directors (in their capacity as shareholders) of the target may give ‘hard' undertakings to accept the bidder's offer (falling away only on a rival bid being declared unconditional or becoming effective). Institutional shareholders may give ‘soft' undertakings (falling away where a higher competing offer is made or the target board withdraws its recommendation); more likely, they will only provide non-binding letters of intent to accept an offer.

2.2 Are break fees permitted in your jurisdiction (by a buyer and/or the target)? If so, under what conditions will they generally be payable? What restrictions and other considerations should be addressed in formulating break fees?

Private M&A transactions: Although permissible in private M&A transactions, break fees are typically not seen on such deals.

Public M&A transactions: A target is prohibited from entering into any ‘offer-related arrangements' – which include paying break fees or inducement fees of any size – and other arrangements that have a similar or comparable financial or economic effect in connection with a bid, except in certain limited circumstances. A limited break fee may be payable to a ‘white knight' – that is, a competing offer following a hostile approach – and to a preferred bidder following an auction process for the company governed by the Takeover Code.

There are no restrictions under the code for break fees to be paid by the bidder.

2.3 What are the most commonly used methods of financing transactions in your jurisdiction (debt/equity)?

Private M&A transactions: This very much depends on the size and commercial terms of the transaction, as well as tax considerations. Typically, however, transactions are funded by a combination of:

equity, in the form of actual shares as well as shareholder loans (and other forms of subordinated debt); and
senior secured debt.

On more complex transactions and some private equity buy-outs, the capital structure will be more complex, sometimes comprising mezzanine debt interposed between the equity and the senior debt.

Private M&A transactions will often feature other mechanisms for funding the transaction – in particular:

non-contingent deferred consideration;
performance-linked earn-outs (usually linked to revenues or earnings before interest, tax, depreciation and amortisation of the target for a period following closing); and
vendor financing (sometimes in the form of vendor loan notes).

Public M&A transactions: Public M&A transactions are financed by:

cash (from either available cash resources and/or debt facilities); and/or
the offer of bidder shares or other bidder securities (eg, loan notes), with the bidder often providing alternatives to target shareholders.

It is rare for a takeover to be wholly funded by external debt.

2.4 Which advisers and stakeholders should be involved in the initial preparatory stage of a transaction?

Private M&A transactions: On private M&A deals, the principal parties will comprise:

the seller;
the buyer;
the management of the target; and
outgoing or incoming lenders to the target.

Other stakeholders could include relevant regulatory bodies, such as the Financial Conduct Authority (FCA) or the Pensions Regulator.

The buyer and seller, and any relevant lenders, will each appoint their own legal advisers, and potentially also a corporate finance adviser, reporting accountant and other advisers with specific due diligence expertise.

Ultimately, the length of the contacts list on each deal will vary depending on its size and complexity, and the parties involved.

From a legal perspective, each party will require separate legal advice – not least because in the United Kingdom, it is almost impossible for the same law firm to act for both buyer and seller (other than in very limited specific circumstances).

Public M&A transactions: Similarly, the principal parties on public M&A deals will comprise the bidder, the target, management and any debt providers to the bidder. A small number of major shareholders in the target may be approached for support.

Because of rules on pre-announcement secrecy (the Takeover Panel must be consulted if more than six parties are to be approached about an offer, excluding the bidder, the target and their respective advisers and employee representatives), the initial group of persons involved in planning and negotiating a bid will be small.

The bidder and the target will each appoint corporate finance and legal advisers. External debt providers to the bidder will also retain legal advisers.

The Takeover Panel will be heavily involved in any takeover bid; and given that targets (and potentially bidders themselves) will be listed companies, the FCA or the AIM Team of the London Stock Exchange is also likely to become involved in connection with the administration of relevant listing, disclosure and prospectus rules.

2.5 Can the target in a private M&A transaction pay adviser costs or is this limited by rules against financial assistance or similar?

Until October 2008, legislation in the United Kingdom prohibited financial assistance being given by UK private companies unless a specific ‘whitewash' procedure was followed. That prohibition has now been removed, so a target in a private M&A deal can in theory bear a proportion of the buy-side and sell-side advisers' costs on the deal; but this will be subject to the overriding obligation on the directors of the target to consider whether to pay any such costs for the ‘corporate benefit' of the target.

In practice, particularly on the buy side, the buyer will discuss with each of its advisers whether and to what extent the target and/or its subsidiaries will be able legitimately to bear a proportion of the buyer's advisers' fees, having regard to various issues, including UK value added tax on deal fees.

If the seller is seeking to shift some of the burden of its deal costs to the target, it will need a legitimate reason for doing so (eg, delineating between actual disposal costs which would be for the account of the seller and the costs of a pre-sale restructuring or reorganisation which would be for the account of the target). If some of the seller's costs are shifted to the target company, the principals will need to be mindful of this point when finalising the price adjustment mechanism in the acquisition agreement, and in particular the accounting treatment of deal fees.

3 Due diligence

3.1 Are there any jurisdiction-specific points relating to the following aspects of the target that a buyer should consider when conducting due diligence on the target? (a) Commercial/corporate, (b) Financial, (c) Litigation, (d) Tax, (e) Employment, (f) Intellectual property and IT, (g) Data protection, (h) Cybersecurity and (i) Real estate.

As mentioned in question 2.1, only limited due diligence is undertaken in public M&A transactions. The comments in this section are therefore principally focused on private M&A transactions.

Before legal due diligence is carried out on the target, it is important to ensure that the legal team has a good commercial understanding of the target, how it is structured and its principal counterparties. Often, this can be achieved by a review of the information memorandum prepared in relation to the target.

(a) Commercial/corporate

In ordinary commercial due diligence, a buyer will take steps to understand the target's ‘material' contracts, based on a commercial assessment of the target's business. The buyer should diligence contracts which:

contain any unusual or onerous terms, or are of an abnormal nature;
are not on an arm's-length basis;
are long term (or from which the target cannot easily extricate itself);
cannot readily be performed by the target; or
may result in a financial loss to the target.

As a consequence of Brexit, a buyer should also obtain information on the target's supply chain, to understand:

the extent to which the target is in compliance with the new UK-EU regulatory regime (and the steps that need to be taken if not); and
whether any tariffs may apply to the target in connection with the export or import of any products, goods or services in which it is involved.

Brexit will continue to have a material impact on UK businesses that trade with or sell services to EU-based individuals and businesses, and this will be a major focus of due diligence for the foreseeable future.

(b) Financial

Financial due diligence will usually be conducted by reporting accountants to the buyer, and will typically analyse:

audited accounts;
management accounts;
financial control systems;
accounting policies (including revenue recognition); and
tax (including corporation tax returns and UK value added tax returns).

The reporting accountants will produce a financial and tax due diligence report, which will accompany the legal due diligence report prepared by the buyer's counsel.

(c) Litigation

Legal due diligence will examine any pending, threatened or actual litigation in relation to the target. This could relate to:

disputes with customers or suppliers;
employee disputes or litigation;
regulatory disputes – for instance, with the UK Financial Conduct Authority if the target is a regulated financial services business or the UK Information Commissioner's Office where there has been a breach of data protection legislation; or
tax disputes with Her Majesty's Revenue and Customs (HMRC), the UK tax authority. In recent years, HMRC has taken a more activist approach, and therefore the requirement to diligence past or current tax disputes between a target and HMRC is becoming more prevalent.

(d) Tax

Tax due diligence is normally carried out as part of the financial due diligence on a target. The main focus will be to determine whether the provision for taxation in the target's accounts have been correctly prepared.

For a company within the charge to UK tax, this will cover corporation tax, as well as matters such as the Pay as You Earn System (under which employers must deduct an amount on account of the income tax and national insurance contributions due from employees) and withholding tax obligations on payments of interest and other sums to third parties.

In addition, it will be important to determine whether there are any particular features of the target's tax position that might indicate potential issues in the future. For example, if the target has entered into a transaction that has been subject to disclosure under the Disclosure of Tax Avoidance Schemes Rules, this may be a material consideration to take into account when assessing how likely it is that the target may be involved in litigation with HMRC.

The due diligence process should also seek to ascertain whether there are features of the target's tax profile that depend on specific rulings or concessions that may (or may not) survive a change of ownership. An example of this might be a transfer pricing agreement entered into with one or more tax authorities around the world.

If the target forms part of a broader group, the due diligence exercise may also want to consider the position of other members of the group. While the United Kingdom does not have a general rule of fiscal consolidation, the normal position is that each company is responsible for its own tax position – there are some exceptions to this rule. For VAT purposes, members of a group do have joint and several liability, so that if the target is leaving a VAT group, the position of the other members may need to be taken into account.

(e) Employment

Employment laws and practices change frequently in the United Kingdom, often as a result of updated guidance from the courts, and this is especially likely to be the case in the coming years following Brexit.

At the time of writing, UK-specific employment due diligence employment-related issues include the following:

understanding any issues relating to and the support available to employers under the UK's Coronavirus Job Retention Scheme (or ‘furlough' scheme, as it is commonly referred to);
considering the historic approach to holiday pay and what is included when calculating it (following a series of cases relating to commission, overtime and other variable pay);
clarifying whether any contractual enhanced redundancy pay entitlement exists, which may bind the buyer in the future; and
establishing whether any employee or worker requires permission to work in the United Kingdom and ensuring that copies of relevant documents are held if so.

The Transfer of Undertakings Regulations (TUPE) are likely to apply in private M&A deals structured as business purchases, which can create considerable additional obligations and limitations for the parties. One of the consequences of TUPE applying to a transaction is that an information and (in some cases) consultation process must take place with transferring employees in advance of closing. In transactions involving a significant number of employees, that process can take a number of weeks and should be factored into the deal timetable.

(f) Intellectual property and IT

IP due diligence should ascertain the extent of the registered and unregistered intellectual property that the target either owns or relies upon to carry out its business. The target will often provide the buyer with a schedule of all such intellectual property and the buyer will then take steps, as far as possible, to verify that information. The buyer will also take steps to ascertain that the target is properly licensed to use any third-party intellectual property that it relies upon, and to understand the terms and limitations of such licences (including any required royalty payments).

Following the United Kingdom's exit from the European Union, as from 1 January 2021, there are certain specific rules in relation to the registration status of EU intellectual property in the United Kingdom. On 1 January 2021, the UK Intellectual Property Office created comparable UK IP registrations for all registered community designs, international designs, registered EU trademarks and international trademarks that were protected at the end of the transition period. The new UK rights are treated as if they had been applied for and registered under UK law (with protection from the original priority date). A buyer should ensure that for any applications which were ongoing at 31 December 2020, separate applications have been made to register such rights within the United Kingdom, as comparable rights will not be automatically created if the registration had not completed prior to that date.

As regards IT, a buyer will want to ascertain the extent of any IT relied upon by the target in order to perform the business. This is especially key to understand whether the target is reliant on any IT that it does not own (and again, to understand the terms on which such IT is licensed to the target).

If the target sells services or goods that heavily rely on certain software, then ideally the target will own such software. As such, the buyer should ensure that the target does own the software (and that any rights of creators of the software, who may be employees or consultants of the target, have been properly assigned to the target company). The buyer should also check whether such software is reliant on any open-source software, for which specific licences and rules apply.

(g) Data protection

The buyer should take steps to conduct due diligence on the target's compliance with applicable data protection laws.

The target must keep records of its data processing activities and should also have accurate records of any data breaches. The buyer should be comfortable that it understands the extent of the data processing activities carried out by the target, including:

the data that the target processes;
the subjects of such processing; and
the legal grounds on which the target relies to carry out such processing.

The buyer will want to understand the extent to which the target transfers any personal data internationally. Transfers from the United Kingdom to any country outside of the European Economic Area (EEA), which is not identical to the European Union, will require additional safeguards, as set out in the General Data Protection Regulation (GDPR) and the UK Data Protection Act 2018. For a period of four months (with a possible further extension) following the United Kingdom's withdrawal from the European Union, personal data transfers from the EEA to the United Kingdom can continue without further safeguards, provided that the United Kingdom continues to apply its existing data protection regime without amendment (in brief, that the United Kingdom continues to apply the terms of the EU GDPR legislation).

The buyer should be satisfied as to whether it needs to implement any additional safeguards for any international data transfers and, following the expiry of the interim period mentioned above, may need to make further provision based on whether the United Kingdom has become subject to an adequacy decision by the European Union.

(h) Cybersecurity

Cybersecurity due diligence has assumed greater importance in recent years, particularly in view of the reputational and financial damage caused by attacks/loss of data, including the powers of the relevant authorities to issue fines. For example, the UK Information Commissioner's Office (ICO) recently issued a fine of £18.4 million to Marriott following a data breach affecting Starwood hotels which occurred prior to Marriott's acquisition of Starwood, but which only came to light after the acquisition. The ICO noted in particular that Marriott had failed adequately to diligence Starwood's systems prior to the purchase.

Typically, appropriate due diligence in this area involves both legal and technical reviews of security and data policies and issues relevant to the target's business/sector. Where initial responses raise any red flags, security experts may need to be employed to scrutinise target systems/data.

(i) Real estate

Real estate due diligence should ascertain the extent of owned and leased real estate assets that the target relies upon to carry out its business. Diligence in this regard will obviously depend on whether the target is ‘asset-lite' as opposed to ‘asset-rich'; and clearly, real estate due diligence will be much more involved for the purchase of a physical retail business as opposed to, for instance, a technology business.

The buyer will be provided with a schedule of all such real estate assets and will then take steps, as far as possible, to verify that information. This will include:

reviewing the United Kingdom's Land Registry official copies and title plans, and any leases and ancillary documents (almost all properties in the United Kingdom are registered with the Land Registry other than short-term leases);
undertaking due diligence searches in relation to each of the properties. These searches are comprised of searches from the local municipal authority and various utilities providers, as well as specialist search providers that can supply ‘desktop' environmental and flood searches (the latter being an increasingly important issue given climate change); and
obtaining replies to specific and detailed property pre-contract enquiries (Commercial Property Standard Enquiries) from the seller.

The objective of such due diligence will be to establish:

that the target owns or validly leases the properties;
that there are sufficient rights to access and service the properties;
that there are no covenants or other matters that might affect the use of the properties;
that planning/zoning consent exists for the use of the properties without any unacceptable conditions;
that there are no environmental matters that might affect the use or costs of operating the properties (eg, energy efficiency, flooding or contamination); and
the extent of liabilities and costs relating to each of the properties (eg, rent and service charge, rates).

It is usual for the legal due diligence to be accompanied by surveys of each of the properties by a qualified building surveyor, who will prepare a report to the buyer on the physical condition of the properties and other associated matters. The surveyor will usually want to review the results of the legal property due diligence and buyer's counsel should also see a copy of the surveys to ensure that any matters raised by each are covered by the other.

3.2 What public searches are commonly conducted as part of due diligence in your jurisdiction?

In addition to the real estate searches mentioned above, the following public searches are typically carried out:

filings at the UK Companies House Registry;
the contents of the minute books, registers and other statutory books of the target;
insolvency searches in respect of the target and its subsidiaries;
searches in relation to intellectual property at the UK Intellectual Property Office and the European Patents Office; and
in respect of public M&A, the public announcements made by the target under applicable listing and disclosure rules.

Depending on the deal, there may be other public searches that can be carried out.

3.3 Is pre-sale vendor legal due diligence common in your jurisdiction? If so, do the relevant forms typically give reliance and with what liability cap?

Vendor due diligence reports are typical on auction processes in private deals where a private equity firm is selling one of its portfolio companies.

In those types of deals, reliance is typically given to the buyer and its lenders, with the liability usually capped at the lower of £25 million or the issuing firm's insurance cover, although sometimes that liability limit is negotiated downward.

4 Regulatory framework

4.1 What kinds of (sector-specific and non-sector specific) regulatory approvals must be obtained before a transaction can close in your jurisdiction?

Merger regime: UK merger control is the preserve of the Competition and Markets Authority (CMA). In keeping with the United Kingdom's policy to encourage investment wherever possible, the UK regime is ‘voluntary', meaning that the parties to a transaction which would qualify for assessment by the CMA do not have to seek pre-completion clearance from the CMA. The quid pro quo, however, is that the CMA retains the right to investigate such transactions upon becoming aware and, if it finds competition concerns, impose undertakings on the parties to mitigate those concerns. A ‘qualifying merger' is one where:

the target's UK turnover exceeded £70 million during its last financial year; or
the merger will create or increase a share of supply of 25% or more in the United Kingdom.

If a transaction is large enough to meet the thresholds under the EU Merger Regulation (139/2004) (EUMR) – that is, the merging parties' turnovers are significant enough to meet the EUMR turnover tests – a notification of the transaction must also be made to the European Commission. However, whereas prior to Brexit this would give the European Commission exclusive jurisdiction to consider the competitive effects of the transaction to the exclusion of any national competition authorities, including the CMA, this rule no longer applies. Accordingly, as well as notification to the European Commission, it will also be necessary for the parties to consider separately whether they will need to obtain CMA approval.

A special merger control regime applies to UK transactions involving water and sewerage transactions, under which the CMA and the UK water regulator, Ofwat, will consider whether, after the merger, sufficient numbers of competitors will be in play to enable the regulators to make meaningful comparisons between them.

Sectoral regulators will also input into mergers which qualify for assessment by the CMA, although decision-making authority rests with the CMA.

Financial services: Where the target business owns any licences or is subject to specific regulatory approvals, it will often be necessary to obtain regulatory approval to any ‘change of control' brought about by a transaction, and different regulators will have particular rules in place as to what constitutes a change of control for such purposes.

For example, the UK Financial Conduct Authority (FCA) will have to give its prior approval to any transaction giving rise to a change of control over any regulated entity carrying on financial services.

Pensions: If the target has a ‘defined benefit' pension scheme, it is likely that the UK Pensions Regulator will have to review the transaction and may impose certain conditions in relation to it.

Public interest and national security: Historically, the UK government has imposed a light touch in relation to merger control. This has been limited to transactions which qualify for assessment by the CMA and have ‘public interest' elements. Previously these were limited to those impacting on:

national security;
plurality of the media; or
the stability of the UK financial system.

However, in June 2020 new national security legislation was passed which included a fourth category of public interest merger: those which impact on public health emergencies. And as from July 2020, mergers involving artificial intelligence, cryptographic authentication technology, advanced materials and certain other sectors to be consulted on are treated as a special category of public interest case, meaning that the UK government can intervene to investigate their impacts at much lower thresholds – that is, where:

the target's UK turnover exceeds £1 million; or
the parties' combined share of supply exceeds 25%.

4.2 Which bodies are responsible for supervising M&A activity in your jurisdiction? What powers do they have?

As explained in question 4.1, the CMA is the primary supervisory body for UK merger control. In certain cases, the UK government can intervene and will review the public interest aspects of a merger. And where the target is a regulated entity, it may be that approval is needed from the regulator(s) concerned under relevant change of control provisions (eg, the FCA in relation to UK financial services businesses).

The supervision and regulation of public M&A transactions are carried out by the Takeover Panel, which:

gives rulings on the interpretation, application and effect of the Takeover Code;
conducts investigations; and
monitors dealings in companies that are subject to the code.

The panel will be in regular contact with the participants to a code takeover and will expect to be consulted on any issues arising. The panel is a statutory body and has powers to enforce the code and order remedies, compensation and disciplinary action (to principals and advisers alike) for breaches of the code.

4.3 What transfer taxes apply and who typically bears them?

On the sale of shares in a UK company, UK stamp or UK stamp duty reserve tax will generally arise at the rate of 0.5% of the consideration for the acquisition. Stamp duty and stamp duty reserve tax do not apply to shares quoted on certain growth markets recognised as such by Her Majesty's Revenue and Customs, including:

the AIM Market of the London Stock Exchange;
the High Growth Segment of the LSE Main Market; and
the AQSE Growth Market.

These taxes are typically paid by the purchaser.

On a business purchase as opposed to a share purchase, careful consideration will need to be given as to whether any transfer taxes apply, particularly in relation stamp duty land tax on the transfer of any real estate.

5 Treatment of seller liability

5.1 What are customary representations and warranties? What are the consequences of breaching them?

In a typical private M&A transaction, the seller and/or management of the target will give a comprehensive set of warranties to the buyer comprising:

capacity;
audited and management accounts;
records;
business since the last accounts date;
assets;
debtors;
intellectual property;
confidential information;
computer systems;
contracts;
joint ventures, partnerships and corporate structure;
data protection and privacy;
litigation;
compliance and regulatory matters;
competition;
insurance;
employees;
pensions;
real estate; and
tax.

If any of those warranties is breached, the buyer will be entitled to claim its loss by reference to the position that it would have been in had the warranty been true. This contractual measure of damages under English law is subject to certain limitations, including an obligation on the buyer to mitigate its loss. Unlike in the United States, a claim for breach of warranty is not based on an indemnity measure of damages, unless that basis is specifically provided for in relation to certain specific indemnities to be negotiated between the parties.

The suite of warranties will usually be contained in a separate schedule to the acquisition agreement or, where management of the target is giving the warranties, occasionally in a separate management warranty deed.

The warranties will then be qualified by a disclosure letter containing various general and specific disclosures. If a matter is set out clearly in the disclosure letter, the buyer will then be prevented from suing against it.

5.2 Limitations to liabilities under transaction documents (including for representations, warranties and specific indemnities) which typically apply to M&A transactions in your jurisdiction?

The schedule of limitations for a private M&A deal will usually be heavily negotiated and will typically comprise the following limitations on liability:

matters fairly disclosed to the buyer or within its actual knowledge;
an overall cap on liability, which very much varies across deals;
a de minimis threshold per claim;
an aggregate threshold for all claims;
time limits, usually around two years for non-tax claims and seven years for tax claims; and
a range of other limitations, in relation to, for instance:
- no double claims;
- prior and subsequent recoveries;
- insurance recoveries; and
- conduct of claims.

The limitations on tax claims will often be contained in the tax deed as opposed to the share purchase agreement, which usually necessitates careful analysis to ensure that the two sets of provisions properly dovetail with each other.

5.3 What are the trends observed in respect of buyers seeking to obtain warranty and indemnity insurance in your jurisdiction?

Warranty and indemnity insurance has become much more prevalent in recent years, particularly on private equity and corporate real estate deals, and is now a well-developed market.

As such insurance has become more commonplace, premiums have reduced, but transaction costs have risen, in part because of the tendency for the insurance broker to appoint its own legal counsel on the deal.

Premiums on such policies are now in the region of 1% of the amount insured.

Where such policies are written, the dynamic of the deal changes, in that the acquisition agreement needs to be negotiated on a tripartite basis between buyer, seller and insurance broker.

5.4 What is the usual approach taken in your jurisdiction to ensure that a seller has sufficient substance to meet any claims by a buyer?

This will very much depend from deal to deal, but the following mechanisms may be considered:

warranty and indemnity insurance (discussed above);
escrow of a proportion of the consideration;
set-off against deferred or earn-out consideration; and
parent company guarantees.

5.5 Do sellers in your jurisdiction often give restrictive covenants in sale and purchase agreements? What timeframes are generally thought to be enforceable?

Restrictive covenants are often given on deals where individual sellers are selling their business and exiting. The scope of these covenants is usually comprehensive and they typically apply for a duration of up to three years.

Covenants of this type are more enforceable under a share purchase agreement than an employment agreement, which usually does not have covenants beyond one year.

5.6 Where there is a gap between signing and closing, is it common to have conditions to closing, such as no material adverse change (MAC) and bring-down of warranties?

It is very typical to have conditions to closing, to deal with, for instance:

a Transfer of Undertakings (Protection of Employment) Regulations consultation process with employees;
buy-side and sell-side shareholder approvals; and
regulatory consents (eg, a change of control application to the UK Financial Conduct Authority).

Where there is a gap between exchange and closing, the warranties will usually be repeated on exchange and on closing, and sometimes on each day in between. The seller will usually be required to agree to operate the target in the usual manner in such period; and will be obliged to tell the buyer if there is an impending breach of warranty.

MAC clauses are not typically seen in UK private M&A deals, but do appear from time to time.

For public M&A deals, such MAC clauses are in effect prohibited (see question 6.8).

6 Deal process in a public M&A transaction

6.1 What is the typical timetable for an offer? What are the key milestones in this timetable?

The timetable below assumes the implementation of a takeover by contractual offer under the Takeover Code as in force at the time of writing (as referred to in question 8.2, changes to the offer timetable are likely to be implemented in mid-2021). On a scheme of arrangement, the timetable would be amended to take account of the court process.

Date	Event
Beginning of offer period	Announcement of possible offer by target or bidder, whether voluntarily or required by the Takeover Panel in response to a leak or otherwise. Announcement names bidder and all other potential bidders and automatically triggers 28-day ‘put up or shut up' deadline.
Within 28 days of start of offer period (unless Takeover Panel consents to extension at request of target)	Bidder named in announcement required either to announce a firm intention to make an offer or announce that it does not intend to make an offer.
Impact Day	Bidder makes announcement of firm intention to make an offer.
D Day (Impact Day +28)	Offer document published – must be within 14 and 28 days of Impact Day.
D+14	Last day for target to advise shareholders of its view of the bid.
D+21	Earliest date offer can be closed.
D+39	Last day on which target may announce any material new information (usually not relevant for a recommended deal).
D+42	Accepting shareholders can withdraw acceptances of offer if offer not unconditional as to acceptances.
D+46	Last day on which bidder can revise offer.
D+60	Last date for offer to become unconditional as to acceptances, or offer will lapse. If the bidder has satisfied the compulsory acquisition thresholds, it can start the squeeze-out' process to acquire the minority's shares (see question 6.3).
D+81	If offer declared unconditional as to acceptances on D+60, all other conditions must be fulfilled by this date.
D+95	Last day for settlement of consideration if offer wholly unconditional on D+81.
Around D+100	Bidder can complete compulsory acquisition procedure six weeks after it sent out compulsory acquisition notices (subject to minority objection rights).

6.2 Can a buyer build up a stake in the target before and/or during the transaction process? What disclosure obligations apply in this regard?

A buyer can purchase shares in the target both before the launch of and during the takeover transaction, subject to certain considerations and restrictions, as follows:

Trading must be made in compliance with UK market abuse, insider dealing/trading and disclosure rules, including those set out in the Takeover Code (these rules are complex);
Before the first closing date, the Takeover Code prohibits anyone from acquiring an interest in shares in the target (including irrevocable commitments to accept or approve a bid) that would cause the person (together with persons acting in concert) to hold 30% or more (but less than 50%) of the voting shares or, if more than 30% (but less than 50%) of the voting shares are already held, to increase that interest;
The acquisition of shares has implications for the terms of the bid, as discussed in question 6.7; and
Acquisitions in the market made by a bidder are counted towards the 50% minimum acceptance threshold for an offer, but do not count towards satisfying shareholder voting requirements for approving a scheme of arrangement.

Under the Takeover Code, on the commencement of an offer period, opening position disclosures must be made by:

bidders;
targets;
persons acting in concert with them; and
persons interested in 1% or more of any class of relevant securities of the bidder or target.

Ongoing dealing disclosures are required during an offer period where a person is, or becomes, interested in 1% or more of any such securities.

These Takeover Code disclosure rules are in addition to the general shareholder disclosure regime applicable to UK listed companies, which require disclosure (where the target is a UK incorporated company listed on the London Stock Exchange's (LSE) Main Market or another UK market such as AIM):

of interests in shares of the target in excess of 3%; and
where a subsequent acquisition or disposal causes that person's holding to increase or decrease through a whole percentage.

Different threshold percentages apply if the target is a non-UK issuer.

6.3 Are there provisions for the squeeze-out of any remaining minority shareholders (and the ability for minority shareholders to ‘sell out')? What kind of minority shareholders rights are typical in your jurisdiction?

Yes. In a contractual offer, most bidders will aim to receive acceptances in respect of at least 90% of the target's voting share capital not already owned by the bidder when it issues the offer document. If the bidder reaches this level of acceptances, it will then be entitled to acquire any remaining shares from minority shareholders that have not accepted the offer under the squeeze-out procedure in the Companies Act 2006. Minorities are entitled to receive the same terms under the statutory squeeze-out mechanism as under the offer.

Similarly, statutory minority sell-out rights (on the same terms as the offer) are triggered when the bidder has acquired 90% of the entire voting share capital of the target.

Squeeze-out/sell-out rights are not relevant to takeovers by scheme of arrangement, which provide for the acquisition of 100% of the target share capital if the relevant shareholder and court approvals are obtained.

In relation to minority shareholder rights, there is a mechanism for a minority shareholder to bring a claim for unfair prejudice against it in certain scenarios, but this is usually in the context of private as opposed to public transactions.

6.4 How does a bidder demonstrate that it has committed financing for the transaction?

Under the Takeover Code, a bidder should make an announcement of a firm intention to make an offer only after careful and responsible consideration and when it has every reason to believe that it can and will continue to be able to implement the offer.

In particular, the bidder must have ensured that it will be able to satisfy any offer consideration in cash. This means that the financing for the offer must be fully committed when the announcement of the firm intention to make an offer is made; and the announcement (and subsequent offer document) must contain a statement by the bidder's financial adviser confirming that sufficient resources are available to the bidder to satisfy full acceptance of the cash element of the offer consideration.

Accordingly, the bidder's financial adviser will require certain procedures to be followed and checks to be made (known as a ‘cash confirmation' exercise) before making this statement, as if the bidder proves not have sufficient resources and the financial adviser has not taken all reasonable steps to confirm that resources are available, it will be called upon to provide the necessary funds itself.

6.5 What threshold/level of acceptances is required to delist a company?

For AIM listed companies and Premium listed issuers on the LSE's Main Market, the approval of not less than 75% of votes cast by the company's shareholders in general meeting is required to delist. No such formal approval is required where acceptances in respect of 75% of voting rights are obtained pursuant to the takeover (and in the case of AIM companies, with the consent of the LSE).

6.6 Is ‘bumpitrage' a common feature in public takeovers in your jurisdiction?

Yes, ‘bumpitrage' and other public M&A-related shareholder activism steps aimed at generating value in excess of an original offer price continue to be a feature of some transactions.

6.7 Is there any minimum level of consideration that a buyer must pay on a takeover bid (eg, by reference to shares acquired in the market or to a volume-weighted average over a period of time)?

Yes. Except with the consent of the Takeover Panel, the offer price must match the highest price paid by the bidder, or its concert parties, for an interest in target shares in the three months before the offer period, or between the start of the offer period and the announcement of a firm intention to make an offer. The value of an offer must be increased to the highest price paid for any acquisition of interests in shares by a bidder or its concert parties above the offer price following the announcement of a firm intention to bid.

The bidder must offer cash, or make a cash alternative available alongside the offer of other consideration, if:

during the offer period and within 12 months prior to its commencement, the bidder and its concert parties acquire over 10% of the target's voting share capital for cash; or
the bidder and its concert parties acquire any shares for cash during the offer period.

The cash offer or cash alternative must be not less than the highest price paid by the bidder or its concert parties under either scenario.

Where interests in shares carrying 10% or more of the voting shares in the target have been acquired in exchange for securities during the offer period and in the preceding three months, a ‘securities' (ie, a share) offer is normally required.

Subject to these requirements, a bidder is generally free to offer cash, shares, loan notes or other securities or a combination thereof.

6.8 In public takeovers, to what extent are bidders permitted to invoke MAC conditions (whether target or market-related)?

Once an offer is formally announced, the bidder is committed to proceed. Scope to withdraw by invoking the conditions to the offer is very limited (even if there is, for example, a significant change in the target's financial position or prospects or a major adverse external event). The only exceptions are:

the failure to satisfy conditions as to merger clearance;
the acceptance condition (or to obtain the approval of target shareholders in the case of a scheme);
court approvals; and
the admission of shares to trading.

This is borne out by the recent case of Brigadier Acquisition Company Limited, which made an offer for Moss Bros Group PLC in March/April 2020. The Takeover Panel rejected Brigadier's attempt to invoke MAC conditions in light of the onset of the COVID-19 pandemic and the related UK government's measures, which has significantly impacted Moss Bros' business. This is consistent with the panel's ruling on WPP Group's offer for Tempus Group in late 2001; the effects of the events of 9/11 were not deemed sufficient to invoke MAC conditions.

6.9 Are shareholder irrevocable undertakings (to accept the takeover offer) customary in your jurisdiction?

Yes. As referred to in question 2.1, key shareholders and target directors (in their capacity as shareholders) may give ‘hard' undertakings to accept the bidder's offer, while institutional shareholders may give ‘soft' undertakings or only provide non-binding letters of intent to accept an offer.

The Takeover Code requires that negotiations or discussions relating to a possible offer must be restricted to a very limited number of people, which limits a bidder's ability to obtain irrevocable commitments before announcing an offer.

7 Hostile bids

7.1 Are hostile bids permitted in your jurisdiction in public M&A transactions? If so, how are they typically implemented?

Yes. Hostile bids are typically implemented by way of a contractual offer, as a scheme of arrangement requires the cooperation of the target board.

7.2 Must hostile bids be publicised?

Yes. As for any takeover, an offer document must be published and the usual timetable for a takeover observed.

7.3 What defences are available to a target board against a hostile bid?

During the course of an offer, or prior thereto from the time when it has reason to believe that a bona fide offer may be imminent (irrespective of whether that offer is welcomed by the target company or not), the target board may not take any action (without the approval of target shareholders) which could result in that offer being frustrated or in shareholders being denied the opportunity to decide on its merits.

This rule does not apply where the action:

is pursuant to a pre-existing contract (ie, one which was entered into at a time when the target board did not have any reason to believe that a genuine offer was imminent);
has already commenced; or
is in the ordinary course of business.

In each case, the Takeover Panel must be consulted.

Frustrating action could include:

the issue of shares or convertibles;
a share buy-back;
the issue or grant of options;
an agreement to sell, dispose of or acquire material assets; or
the conclusion of contracts otherwise than in the ordinary course of business.

This prohibition on frustrating action does not stop the target board from encouraging shareholders not to accept the offer if it believes that the offer should be on more favourable terms.

8 Trends and predictions

8.1 How would you describe the current M&A landscape and prevailing trends in your jurisdiction? What significant deals took place in the last 12 months?

Public M&A transactions: The public M&A market in the first half of 2020 was significantly affected by the COVID-19 pandemic. Only 12 firm offers were announced for Takeover Code companies on the London Stock Exchange Main Market or AIM in that period, compared to 33 firm offers announced in the same period in 2019. Additionally, deal sizes were significantly reduced in H1 2020, with only one bid being valued at over £1 billion (compared to seven such bids announced in H1 2019). Among the volatility in the capital markets, bidders struggled with valuations and securing acquisition finance.

Strengthening stock markets in the second half of 2020, particularly in Q4, led to a substantial increase in public M&A activity, as regards both the number and size of firm offers announced, with 28 firm offers announced in the second half of the year, giving a total of 40 firm offers announced in 2020 for Main Market or AIM companies that were subject to the Takeover Code (23 for Main Market companies and 17 for AIM companies). Nine bids with a value of £1 billion or above were announced in H2 2020 (making a total of 10 such higher-value bids in 2020). Overall, however, deal volume for the full year 2020 was significantly down from the levels seen in 2019 (when there were 66 firm offers for Main Market or AIM companies that were subject to the code (35 for Main Market companies and 31 for AIM companies) and 13 bids with a value of £1 billion or above).

Notable deals include:

Caesars Entertainment's £2.9 billion recommended cash offer for William Hill plc;
Nova Resources' £3 billion recommended cash offer for KAZ Minerals plc;
Intact Financial Corporation and Tryg's £7.2 billion recommended cash offer for RSA Insurance Group plc;
Allied Universal Topco's £3.8 billion recommended cash offer for G4S plc; and
Toscafund and Penta Capital's £1.11 billion recommended cash offer for Talk Talk Telecom Group plc.

The public M&A market has continued strongly into 2021 with the announcement on 11 January 2021 of Global Infrastructure Partners' £3.36 billion recommended cash offer for Signature Aviation plc.

Private M&A transactions: The private M&A market has followed a similar pattern, with a dip in transactional activities following the onset of the COVID-19 pandemic, with a recovery since Summer 2020. In particular, the private equity markets have been very busy, with funds having a significant amount of dry powder to deploy.

We have recently published our M&A trend tracker, which analyses trends in UK private M&A deals. The publication can be found at www.fladgate.com/2021/01/fladgate-launches-inaugural-ma-trend-tracker/

8.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms? In particular, are you anticipating greater levels of foreign direct investment scrutiny?

On 15 January 2021, the Takeover Panel closed a public consultation on certain proposed changes to the Takeover Code. The changes to the code are largely procedural and include changes to simplify the contractual offer timetable and to apply the same treatment to UK and EU antitrust conditions as is currently applied to other regulatory clearances. The panel expects to publish the final changes to the code in Spring 2021, with the changes taking effect three months thereafter.

The new national security legislation discussed in question 4.1 in theory will result in a higher level of foreign direct investment scrutiny. The proposed National Security and Investment (NSI) Bill, which was introduced to Parliament in November 2020 and is currently in a consultation period, together with the new legislation referred to above, is likely to mean that government intervention will become a feature of UK public M&A. Future M&A transactions may have an ‘NSI' condition included and M&A counterparties may be advised to make precautionary filings. There is some concern that the current drafting of the NSI Bill allows for transactions to be retrospectively unwound or declared void.

More generally, over time, Brexit will generate legislative, tax, accounting and regulatory changes that are sure to impact on M&A markets in ways that at the time of writing are impossible to predict.

9 Tips and traps

9.1 What are your top tips for smooth closing of M&A transactions and what potential sticking points would you highlight?

Private M&A transactions: In relation to private M&A deals, our tips for a smooth process would be as follows:

Ensure that comprehensive heads of terms are agreed between the parties at the outset of the deal, which deal with legal as well as commercial matters;
Appoint all requisite advisers as soon as possible;
Ensure that the diligence teams understand the target and its business before embarking on a review of the data room;
Analyse the regulatory environment in which the target operates, to determine what third-party and other consents may be required;
If the deal is cross-border, think about what implications that could have for the transaction, both legally and practically; and
Decide early on whether there is to be warranty and indemnity insurance on the deal.

Public M&A transactions: As regards public M&A in the United Kingdom, careful consideration should be given to:

the strict requirements under the Takeover Code for a bidder's certainty of implementation and ‘cash confirmation' before announcing a firm intention to offer;
the restrictions on communicating a potential offer beyond a very restricted group prior to announcement;
the relatively short ‘put up or shut up' period between the announcement of a possible offer and the requirement to announce a firm intention to offer; and
the inability to rely on MAC conditions to withdraw from a transaction, meaning that effective bid planning prior to approaching a target's board is essential to the success of a takeover.

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.

UK: Mergers & Acquisitions Comparative Guide