8 July 2024

Private M&A Comparative Guide

Holland & Knight


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Private M&A Comparative Guide for the jurisdiction of United States, check out our comparative guides section to compare across multiple countries
United States Corporate/Commercial Law
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1 Deal structure

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

Private M&A transactions are typically structured as:

  • an acquisition of the target's equity interests, in which the buyer acquires the target's equity interests directly from the selling equity owner(s);
  • an acquisition of the target's assets, in which the buyer acquires some or all of the assets – and often the associated liabilities – from the target as seller; or
  • a merger with the target, whereby the target and the buyer or a subsidiary of the buyer combine into one legal entity.

Private transactions are normally conducted in one of two ways:

  • a proprietary (confidential) process between the seller and a specific buyer; or
  • a competitive process (a private auction). In competitive processes, investment banks or other deal intermediaries are hired by the seller(s) or target to market the transaction to multiple prospective buyers. Please see question 1.4 for more information on auction processes.

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

Most parties typically view the primary differences between an equity acquisition (including by way of merger) and an asset acquisition as relating to:

  • the allocation of liabilities for pre-closing activities of the target business; and
  • the tax consequences of the transaction for both the buyer and the seller(s).

The buyer in an asset acquisition can generally:

  • avoid successor liability for the business (other than liabilities expressly assumed under the definitive agreements); and
  • obtain a favourable tax basis (known as a ‘step-up' basis) in the acquired assets.

For these reasons, asset acquisitions are often considered pro buyer, as the buyer typically acquires only the limited liabilities of the target business associated with the specific assets being acquired, often as expressly listed in the asset purchase agreement. While this often means that the buyer in an asset acquisition has a lower risk of assuming unknown or undisclosed liabilities, it also means that a seller in an asset acquisition will retain those liabilities, which is likely undesirable – particularly in the case of a sale of all or substantially all assets of a target. For these reasons, private acquisitions are often structured as an asset acquisition only if:

  • they are a ‘carve-out' transaction (ie, the sale of only a portion of the assets of the target, such as one of a number of different lines of business or a single division of the target); or
  • there are substantive reasons for the buyer to be concerned about:
    • unknown or undisclosed liabilities (often related to the prior management of the business); or
    • significant successor liability (often specific to the industry of the target business).

Additional potential disadvantages for a buyer in an asset acquisition include:

  • the inadvertent failure to purchase important assets in a carve-out; and
  • the imposition of successor liability by courts in certain situations, even for liabilities not expressly assumed by the buyer under the definitive agreements – for example:
    • if the transaction is deemed a de facto merger under state law;
    • if the transfer was fraudulent or intended to defraud creditor; or
    • with respect to specific types of statutory claims such as product liability or environmental claims.

Asset acquisitions may also trigger certain state bulk sales laws or third-party consents under the target's commercial agreements.

Equity acquisitions, on the other hand, are often considered pro seller, as the seller(s):

  • typically are not left with any contingent liabilities outside of the negotiated post-closing indemnities; and
  • typically receive better tax treatment for their sale proceeds when selling equity interests as opposed to assets.

Equity acquisitions also frequently allow the parties to transact without requiring third-party consents to assign valuable commercial agreements (other than those containing express change-in-control triggers) and have fewer statutory requirements than mergers.

Although private mergers are occasionally used, most acquisitions of private companies are structured as equity acquisitions, as most private companies have a small number of equity holders, making equity acquisitions a simpler alternative absent a specific need to utilise a merger.

1.3 What factors commonly influence the choice of transaction structure?

The factors which commonly influence the choice of structure are:

  • commercial issues (ie, successor liability);
  • tax issues; and
  • consents/legal requirements.

With regard to key commercial and tax issues, buyers and sellers typically have competing interests. Sellers often prefer to sell their equity interests to avoid being left with contingent liabilities and to receive more favourable capital gains tax treatment for the sale proceeds. On the other hand, buyers often prefer asset acquisitions, as they acquire specific assets and limited liabilities of the target business and receive a ‘step-up' in basis in the assets for tax purposes.

In some cases, an asset purchase may be the only viable option for acquiring a target business, such as when the target business is a division or business unit of a corporate seller's larger enterprise and is not operated by a separate subsidiary. Alternatively, in some cases, an equity acquisition is the only viable option in order to avoid unnecessary difficulties triggered by transferring individual assets, such as:

  • obtaining customer consents to the assignment of valuable contracts;
  • transferring employees and related benefits; or
  • transferring/obtaining required permits or governmental approvals.

1.4 What specific considerations should be borne in mind where the sale is structured as an auction process?

Sellers or targets looking to initiate an auction process would be best served by engaging an investment bank or other deal intermediary with appropriate industry expertise and contacts within the applicable market in order to identify and connect with the greatest number of high-value potential buyers. From a legal perspective, it is important for the sell side to conduct appropriate due diligence to resolve or prepare a mitigation plan for any potential issues that a buyer may identify. Once a pool of potential buyers has been identified, each should enter into a confidentiality agreement with the target, which may contain additional prohibitions such as:

  • non-solicitation clauses to protect valuable human capital;
  • restrictions on contact with employees, customers or vendors of the target in order to reduce knowledge of the potential transaction; and
  • restrictions on co-bidding or locking up potential debt financing sources in order to preserve the maximum number of available bids.

Potential buyers that participate in numerous auction processes and/or private equity funds with investments in multiple companies within the same industry should:

  • endeavour to keep the terms of any confidentiality agreements consistent for ease of compliance; and
  • avoid binding affiliates which are not participating in the auction process to the restrictions contained in the confidentiality agreement.

Following receipt of preliminary information about the target, potential buyers which have signed a confidentiality agreement will submit an indication of interest stating the valuation range at which they would be interested in pursuing the transaction. Sellers will typically want to move forward with more than one bidder in order to maximise negotiation leverage and procure the best possible terms; while buyers will often push to obtain a period of exclusivity prior to being willing to expend the time and money necessary to complete their due diligence and negotiate definitive acquisition agreements. The law with regard to any implied duty to negotiate a transaction in good faith varies from state to state and in some jurisdictions remains unclear. As such, it is generally advisable to include clear language in any preliminary agreements between the parties that entry into such agreement does not create any obligation of either party to negotiate or ultimately consummate a transaction unless or until a definitive agreement has been signed between the parties.

2 Initial steps

2.1 What agreements are typically entered into during the initial preparatory stage of a private M&A transaction?

  • Engagement letters with legal, financial and tax advisers: Each party will want to enter into engagement letters with its respective advisers which set forth the scope of work and payment obligations (including any tail-period, success fee calculation and expense reimbursement provisions). Many advisers will also have standard terms and conditions with respect to:
    • indemnification;
    • conflicts of interest; and
    • non-reliance by third parties on work product produced by the adviser.
  • Confidentiality agreement between the parties to the transaction: In addition to the considerations noted in question 1.4, parties should consider whether the confidentiality agreement should be unilateral (most common) or mutual (generally only in the case of a transaction involving equity consideration, where the seller(s) would therefore desire to receive certain confidential information of the buyer in order to evaluation the value of such consideration).
  • Letter of intent/term sheet: Parties will often desire to reach agreement on the key terms of the acquisition prior to undertaking the time and expense of performing due diligence and negotiating definitive agreements. Term sheets in the United States are typically non-binding, other than with respect to specific provisions regarding confidentiality, exclusivity and expenses, in the absence of separate agreements covering those topics.
  • Exclusivity: Especially in a proprietary process, the buyer will want to obtain an exclusive period of negotiation prior to engaging in due diligence and negotiation of definitive agreements. The terms of exclusivity may be memorialised in a binding provision of a term sheet or set forth in a separate agreement.

2.2 Which advisers and stakeholders are typically involved in the initial preparatory stage of a private M&A transaction?

Key advisers include:

  • legal;
  • tax;
  • accounting; and
  • if applicable, investment banks or other deal intermediaries.

Key stakeholders on the sell side typically include:

  • one or more members of senior management of the target business; and
  • representatives of any significant equity holders, who may or may not also be board members or members of the management team.

Key stakeholders on the buy side may be a ‘deal team' comprised of several professionals from a private equity fund of varying levels of seniority or one or more members of the corporate development department of an acquisitive strategic company, in each case who typically ultimately answer to the private equity fund's investment committee or the strategic company's board of directors, depending on the size and nature of the transaction. If the buyer is an existing portfolio company of a private equity fund, key participants may be both:

  • senior management of the portfolio company; and
  • deal professionals from the fund.

2.3 Can the seller pay adviser costs or is this limited by rules against financial assistance or similar?

There is no legal prohibition on the seller paying adviser costs other than in the case of an insolvency or potential insolvency.

3 Due diligence

3.1 What due diligence is typically conducted in private M&A transactions in your jurisdiction and how is it typically conducted?

In private M&A transactions, the major types of due diligence are:

  • financial;
  • legal;
  • operational; and
  • tax.

Also, acquisitions of certain business may require industry-specific due diligence, such as industry-specific code reviews or engineering requirements analysis.

Legal due diligence focuses on all legal aspects of the target's business, including:

  • corporate organisational and governance matters;
  • licences;
  • regulatory issues;
  • intellectual property;
  • contracts; and
  • legal liabilities.

Legal due diligence will also identify any legal prerequisites to consummating the transaction, such as third-party consents or required regulatory approvals.

Financial due diligence focuses on the financial performance of the target by analysing current and past financial statements – often through conducting a third-party quality of earnings – to ensure that the financial condition of the company as presented by the seller(s) is accurate.

Unlike other types of diligence which relate primarily to historical matters, operational due diligence is forward looking and is often used to assist the buyer in determining its value creation strategy for the target business going forward. Buyers will focus on understanding:

  • the target business model;
  • human capital;
  • long-term assets; and
  • applicable risk and mitigating factors.

Tax due diligence focuses on all of the target's tax affairs (local, state, federal and foreign) from both a corporate and commercial perspective to ensure that all tax liabilities and required filings have been appropriately handled. In addition to tax diligence, tax advisers often assist with structuring the transaction to ensure the most efficient tax outcomes for the parties.

Normally, due diligence involves reviewing documents of the target, including:

  • corporate records;
  • contracts;
  • spreadsheets populated with information about ongoing litigation and case records;
  • certificates; and
  • financial reports.

Due diligence materials are frequently made available in a virtual data room. However, part of the due diligence will also be conducted through site visits (which may be particularly important for the operational aspects of the due diligence) and management meetings, in which the buyer will be able to interact with seller's management.

3.2 What key concerns and considerations should participants in private M&A transactions bear in mind in relation to due diligence?

Key concerns and considerations which participants in private M&A transactions should bear in mind in relation to due diligence include the following:

  • Time constraints: The parties may wish to complete the transaction by a certain date (eg, fiscal year end); or the seller may have enough bargaining power to limit the time allowed for due diligence (eg, in a private auction). Often, asking the seller to acquire documentation or information can take time that the parties may wish to instead expend on negotiating key terms and otherwise closing the transaction.
  • Cost: The buyer may limit the scope of the due diligence investigation to reduce its expenses. Sometimes a buyer conducts its investigation in stages and only increases spending on due diligence as the likelihood of the deal closing increases.
  • Competition: If the buyer and seller compete with each other, they may want (or be required by antitrust laws) to keep certain information, such as pricing, confidential until after the transaction is consummated. They also may want to set forth ‘clean team' protocols, among other things, to restrict one side from:
    • engaging in direct contact with employees from the other side;
    • exchanging sensitive information; and
    • soliciting employees.
  • Morale: Overall, the due diligence process will be an opportunity for the buyer's side get to know the company, its managers and equity holders; but it can also be an intimidating or time-consuming process for the sell-side employees outside of their ordinary scope of work which, if not well run, can lead to a decline in morale or a poor first impression of the buyer among the target employees.

3.3 What kind of scope in relation to environmental, social and governance matters is typical in private M&A transactions?

In the United States, environmental, social and governance (ESG) matters are more relevant in the realm of public transactions; but often private acquirers will look to compare a target's ESG policies and strategy with their own to assess the level of alignment or conflict. Buyers may also assess a target's activities to determine not only their legality, but also whether the current business practices are likely to be viewed favourably by key stakeholders (eg, a private equity fund's ultimate investors or the customers of the combined business). Special areas of consideration include:

  • supply chain;
  • emissions (including any climate-related claims and the data supporting them, to avoid ‘greenwashing' concerns); and
  • diversity and inclusion with respect to human capital.

Buyers may also want to understand what due diligence the target conducts on its own suppliers. The level of attention dedicated to these matters is often specific to the parties involved and/or the applicable industry. While still rare, there are some instances of specific representations and warranties in definitive agreements relating to ESG, such as:

  • the so-called ‘Weinstein Clause' – a representation that, to the knowledge of the company, no claims of sexual harassment have been made against any current or former executive officer which arose in light of the #MeToo movement; or
  • depending on the industry in which the company operates, ESG-specific risks that might not otherwise be covered by traditional compliance with laws representations and warranties, relating to issues such as:
    • modern slavery;
    • greenwashing;
    • maintenance of financial risks; and
    • sustainability policies.

4 Corporate and regulatory approvals

4.1 What kinds of corporate and regulatory approvals must be obtained for a private M&A transaction in your jurisdiction?

The corporate approvals required for a private M&A transaction will be determined by:

  • the state law of the state of formation of the relevant entity (whether the buyer, seller or target); and
  • the entity's organisational documents.

They often involve a combination of approvals from:

  • all or some of the equity holders of the relevant entity; and
  • the board of directors or other governing body (eg, the managing member of a limited liability company or the general partner of a limited partnership).

Mergers in particular are governed by state law and involve detailed filing requirements (eg, the preparation and filing of articles or certificates of merger).

The most common regulatory approvals that may or may not apply to a private acquisition are antitrust approvals under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Transactions in regulated industries must comply with applicable special regulatory regimes particular to transactions in these industries – these include:

  • banking (eg, the Federal Reserve pursuant to the Bank Holding Company Act of 1956);
  • telecommunications (eg, the Federal Communications Commission pursuant to the Communications Act of 1934); and
  • energy (eg, the Federal Energy Regulatory Commission pursuant to the Federal Power Act of 1935).

Typically, the approval of the relevant federal or state governmental agency is required before transactions in these industries may be completed.

4.2 Do any foreign ownership restrictions apply in your jurisdiction?

The United States traditionally has maintained an open investment environment, with few limitations on foreign ownership. However, this is changing. At the US Federal level, the Corporate Transparency Act (CTA), which takes effect January 1, 2024, requires Beneficial Ownership Reporting to the US Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) by certain domestic and foreign entities. The CTA is expected to impact over thirty-two million pre-2024 entities and about 5 million entities per year formed in 2024 and over the next decade. Similar legislation is being considered at some state levels.

Several US states, such as Florida, have passed legislation limiting foreign ownership of real property. Florida's legislation, which became effective July 1, 2023, restricts certain persons from ‘foreign countries of concern' from directly or indirectly owning or having a controlling interest in Florida real property.

Additionally, in certain industry sectors, foreign ownership might be limited to a certain percentage (eg, aircraft or maritime vessels ownership, banking). Generally, however, foreign ownership is allowed in all sectors, but may require mitigation or be precluded on a case-by-case basis based on who the foreign investor is. As a general matter, persons or countries subject to economic sanctions may not invest in the United States (and in the case of arms embargoes, may not invest in the defence industry).

The Committee on Foreign Investment in the United States (CFIUS) may review foreign acquisitions and certain minority foreign investments on the basis of national security. CFIUS is particularly interested in transactions involving:

  • defence;
  • high tech;
  • critical infrastructure; or
  • government contractors.

Transactions involving critical technologies, certain enumerated critical infrastructure assets and companies that collect or maintain sensitive personal information of US nationals trigger a mandatory review requirement (in the case of infrastructure and data, the mandatory filing is predicated on substantial foreign government involvement). In parallel to the CFIUS review, other agencies may exercise review of foreign ownership or control in their respective areas – for example:

  • the Department of Defense reviews foreign transactions involving a government contractor authorised to access classified information;
  • the Department of Energy (DOE) reviews transactions of cleared contractors involved in DOE classified projects; and
  • the Federal Communications Commission reviews foreign acquisitions of telecommunications companies.

Each transaction should be evaluated on its merits to determine:

  • the applicable regulatory regime of review; and
  • whether a mandatory filing or mitigation of foreign ownership is required or voluntary filing is warranted.

Countries of particular concern to date include China, Russia and Venezuela; but even such investments may clear the review, often with some form of mitigation of the foreign ownership risk.

4.3 What other key concerns and considerations should participants in private M&A transactions bear in mind in relation to consents and approvals?

When preparing to enter into a private M&A transaction, a seller should conduct its own seller due diligence process in order to review its corporate documents, third-party agreements and permits/licences to determine whether:

  • any third-party consents or governmental approvals must be obtained prior to the consummation of the transaction; or
  • any third parties are required to be notified of the transaction either pre or post-closing.

The parties should also carefully consider the timing and process for contacting third parties regarding a transaction in order to increase the odds of a positive outcome, keeping in mind:

  • the relationship (if any) with the third party; and
  • any timing requirements.

As part of the due diligence process, the parties will also determine:

  • which governmental authorities have the right to review or consent to the transactions;
  • which party will control the notification process and any associated filings;
  • the allocation of the cost of such notifications and filings; and
  • the consequences of failure to obtain any required consents.

To the extent that significant regulatory approvals are anticipated, the parties may choose to sign the definitive agreements prior to making any requiring filings, with closing of the transaction conditioned upon receipt of the necessary approvals.

5 Transaction documents

5.1 What documents are typically prepared for a private M&A transaction and who generally drafts them?

The primary acquisition agreement will be:

  • an equity purchase agreement in an acquisition of the target's equity interests;
  • an asset purchase agreement in an acquisition of the target's assets; and
  • a merger agreement in a private merger.

Additional ancillary agreements may need to be drafted and executed at signing or closing, such as:

  • employment agreements for key employees;
  • transition services agreements;
  • escrow agreements;
  • rollover equity documentation; and
  • any required corporate or third-party approvals and governmental filings.

In an auction process, the seller typically provides a ‘bid draft' which the prospective buyer is expected to mark up and submit as part of its bid proposal (or in some cases in the second round of proposals). In a proprietary process, drafts can be prepared by either the buyer or seller, although private equity or other financial buyers and large strategic buyers typically expect to provide the initial drafts.

5.2 What key matters are covered in these documents?

They key matters covered in the main agreements of a private M&A transaction are as follows:

  • Purchase and sale agreement: This describes:
    • the equity interest(s) or asset(s) being purchased;
    • the form and amount of purchase price (or a mechanism for determining the purchase price); and
    • how and when the purchase price will be paid.
  • There is also commonly a separate section detailing:
    • the purchase price adjustment mechanism;
    • the terms for any escrow/holdback; and
    • the terms and conditions of any earn-out.
  • Representations and warranties of the parties: These:
    • contain statements of fact and assurances made by the parties – primarily by the sellers with respect to the target; and
    • serve as the foundation for an indemnification claim in the case of a breach.
  • Representations and warranties may be limited in scope with respect to materiality, knowledge, time or by the disclosure schedules.
  • Conditions to closing: When the transaction is divided into a separate signing and closing, each party may require the other to fulfil certain conditions prior to the closing of the transaction. If one party has not satisfied a condition, the other party is typically not required to close until the condition is satisfied; however, a party can always waive its own closing condition.
  • Covenants: Definitive acquisition agreements may contain a variety of covenants which apply pre-closing (in the case of a separate signing and closing) or post-closing. Pre-closing covenants are often intended to preserve the state of the target business in the interim period and typically restrict the seller(s)' conduct of the business. Post-closing covenants are most commonly restrictive covenants such as non-compete or non-solicitation covenants intended to prevent a seller from undermining the target business post-closing; but may also include affirmative mutual covenants to preserve certain tax or business records of the target for a specified time.
  • Termination rights (if a separate signing and closing): These may include, for example, a termination right for the parties:
    • if all conditions precedent are not met by a certain date; or
    • upon the failure to obtain required regulatory approvals or the occurrence of a material breach or material adverse event.
  • Indemnification: This contains:
    • the parties' respective post-closing remedies for losses under the definitive acquisition agreement;
    • the procedures for making a claim; and
    • any applicable limitations.

5.3 On what basis is it decided which law will govern the relevant transaction documents?

There are several important factors when deciding which law will govern the relevant transaction documents, such as:

  • the jurisdiction of the parties;
  • the common law case law of the relevant state; and
  • whether such state would have subject-matter jurisdiction over the transaction.

In many cases, the parties will choose the law of the jurisdiction in which the target is located; but many significant private acquisitions in the United States between sophisticated commercial parties are often governed by the laws of the state of Delaware, due to the extensive case law relating to corporate matters and the number of entities formed in Delaware. Parties may also opt to apply the laws of one state to govern the transaction, but may choose a venue for the resolution of disputes in a more convenient location.

6 Representations and warranties

6.1 What representations and warranties are typically included in the transaction documents and what do they typically cover?

The seller's and/or target's representations and warranties are generally much more extensive than the buyer's, unless the seller is receiving equity in the buyer as all or part of the consideration. The seller's representations and warranties typically include:

  • organisation, authority and enforceability;
  • title to the equity interests/assets being sold (and the sufficiency and/or condition of those assets);
  • capitalisation and subsidiaries (as applicable);
  • no conflicts;
  • compliance with laws;
  • financial statements;
  • no undisclosed liabilities;
  • no material adverse change;
  • tax matters;
  • litigation matters;
  • material contracts;
  • employee and benefits matters;
  • environmental matters;
  • IP matters;
  • real property matters;
  • broker fees; and
  • others which may be specific to the relevant industry.

Typical representations and warranties of the buyer include those regarding:

  • organisation, authority and enforceability;
  • broker fees; and
  • in some cases, sufficiency of funds (which may be more or less detailed if third-party debt or equity financing is expected).

If the buyer or its affiliate is issuing equity interests as all or part of the consideration, the seller will require more detailed representations and warranties from the buyer in respect of the issuer of such equity interests.

Whether the seller's representations and warranties are broad or narrow depends on the allocation of risk between the parties, including the utilisation of representations and warranties insurance. If there are multiple sellers, some sellers may only make limited representations and warranties solely with respect to their individual ownership of and ability to transfer their equity interests. In that case, a key equity holder or the parent company typically makes the representations and warranties with respect to the target or business.

6.2 What are the typical circumstances in which the buyer may seek a specific indemnity in the transaction documentation?

Indemnification is typically available in all forms of private M&A transactions in the case of:

  • breaches of or inaccuracy in representations and warranties;
  • breaches of covenants; and
  • losses caused by identified known issues (eg, pending litigation matters).

In equity acquisitions (and in some asset acquisitions), there will also be indemnification for:

  • pre-closing taxes; and
  • any indebtedness or transaction expenses that remain unpaid at closing and are not otherwise taken into account in a post-closing purchase price adjustment.

In asset acquisitions:

  • the seller often also indemnifies the buyer from losses attributable to any excluded liabilities; and
  • the buyer provides a reciprocal indemnity for any losses attributable to assumed liabilities.

Alternatively, the parties may opt for the ‘our watch, your watch' approach, whereby the buyer:

  • purchases assets and assumes liabilities of the target business only to the extent that such assets and liabilities relate to the post-closing period; and
  • receives an indemnity from the seller with respect to any liabilities relating to the pre-closing period.

6.3 What remedies are available in case of breach and what is the statutory timeframe for bringing a claim? How do these timeframes differ from the market standard position in your jurisdiction?

The primary remedy available to either party is the indemnification mechanism. The definitive agreement often specifies whether recourse is limited to the negotiated indemnity or whether other forms of recourse (eg, suing the breaching party for additional recourse) are available; although most of the time indemnification will be the only remedy available outside of fraud or injunctive relief with respect to certain covenants.

In the United States, the statutes of limitations for bringing a breach of contract claim differ by state. As a general rule, the survival clause may have the effect of shortening the default statute of limitations for breach of contract, but it may not extend survival beyond it. Statutes of limitations for claims for breach of contract vary considerably by jurisdiction. For example:

  • Delaware has a three-year statute of limitations (which may be extended to up to 20 years in the acquisition agreement for acquisitions in excess of $100,000); and
  • in New York, the statute of limitations is six years.

Different states may also have different standards for when the statute of limitations for a direct claim for breaches of representations and warranties begins to run as compared to that for claims for damages paid to third parties.

6.4 What limitations to liability under the transaction documents (including for representations, warranties and specific indemnities) typically apply?

Typical acquisition agreements will limit liability with respect to duration and amount.

Most representations and warranties contained in a definitive acquisition agreement will be subject to a negotiated survival period (often 12 to 24 months post-closing), after which they terminate and no further claims may be made for breach or inaccuracy of such representations and warranties. Often certain ‘fundamental' representations and warranties (organisation, authorisation and enforceability; no brokers; and in some cases title to/sufficiency of assets and/or other transaction specific matters) will survive for a longer period (often three to five years post-closing), or in some cases indefinitely. Additionally, it is not uncommon for employment and tax representations and warranties to survive for the underlying statute of limitations plus 30 to 60 days. It is common for any post-closing covenants to survive for their stated term or until properly performed.

Limitations on the amount of liability often include the following:

  • Caps: These limit a party's maximum aggregate recovery to a stated amount. In the United States, it is not uncommon to cap the seller's liability to anywhere from 0.5% to 15% of the total purchase price, depending on the size and nature of the transactions and the use of representations and warranties insurance (RWI). Liability for breaches of or inaccuracies in ‘fundamental' representations and warranties or specific indemnities is often uncapped or capped at 100% of the purchase price.
  • Baskets (deductible or thresholds/tipping): These provisions require a party to reach an aggregate amount of losses before indemnification is available. With a deductible basket, the seller is responsible only for losses that exceed the basket amount. With a threshold/tipping basket, the seller is responsible for all losses once the basket amount is reached. As with caps, liability for breaches of or inaccuracies in ‘fundamental' representations and warranties or specific indemnities is often not subject to the basket.
  • De minimis claims threshold: This prohibits any claim below a certain amount and is often included in lieu of or as a threshold for ‘materiality' with respect to breaches of, or inaccuracies in, representations and warranties. These claims usually do not count towards the basket, whether structured as threshold or deductible.

Liability for fraud is typically expressly carved out from any of the aforementioned limitations. Many transaction agreements may also include a single or double ‘materiality scrape', whereby any materiality qualification is read out of a representation when determining:

  • whether a breach has occurred; and/or
  • the amount of losses attributable to such breach.

A materiality scrape is especially common when a seller has negotiated for a de minimis threshold for claims and/or a basket.

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

The use of RWI policies in connection with transactions has continued to accelerate over the last several years, with upwards of over 50% of transactions today incorporating the use of RWI policies. In recent months, the availability of RWI for transactions has increased, while the cost (both premiums and retention amounts) and limitations (exclusions and deemed revisions to the purchase agreement) have decreased. And while many RWI insurers continue to improve their respective underwriting processes, it remains crucial that buyers have an understanding of the use of RWI in transactions and select counsel who are familiar with the RWI purchasing process and policy terms in order to remain competitive and secure the best coverage.

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

There are several options to ensure the availability of funds to meet post-closing claims, with the most common being the use of an RWI policy or an escrow or holdback of a specific portion of the purchase price, often for a period coinciding with the survival period for non-fundamental representations and warranties.

In the case of a seller with a parent company with other substantive lines of business, a buyer may also request a parent guarantee. It is also common for a majority owner seller to take on joint and several liability for claims relating the target's representations and warranties so that the buyer can seek full recourse from a single – often more creditworthy – party. To the extent that a seller is an individual who will continue to be employed by or hold any equity interest in the go-forward business, it is also common to include the ability of the buyer to offset any amounts owed by such seller against amounts payable in respect of employment or equity compensation.

6.7 Do sellers in your jurisdiction often include restrictive covenants in the transaction documents? What timeframes are generally thought to be enforceable?

It is common in the United States to see a package of post-closing restrictive covenants applicable to sellers and their affiliates or related individuals included in the definitive acquisition agreement. The package tends to include:

  • both non-compete and non-solicitation components (employees, customers and/or vendors), which tend to have a survival period of between two and five years from closing; and
  • a confidentiality provision, which may not contain an express time limitation.

The enforceability of these covenants – in particular with respect to non-competes – will be subject to applicable state law, which may require specific limitations with respect to length of time or geographical scope; but unlike employment related non-competes, most states do allow for some form of non-compete tied to consideration received in the sale of a business. Recent proposed rulings by the Federal Trade Commission may impact on the enforceability of non-compete covenants.

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

Conditions precedent to closing are typical in almost all transactions with a separate signing and closing structure.

6.9 What other conditions precedent are typically included in the transaction documents?

Common closing conditions for both buyer and seller include:

  • the receipt of required governmental and other third-party consents;
  • the absence of injunction or other legal restraint on the transaction;
  • compliance by the other party with all pre-closing covenants; and
  • the receipt of any closing deliverables listed in the acquisition agreement.

Additional common closing conditions for the buyer include:

  • a bring-down of representations and warranties (sometimes qualified by a material or material adverse effect (MAE) standard);
  • the absence of material adverse changes or MAE;
  • the receipt of third-party consents; and
  • industry-specific conditions, such as obtaining certain licences; or deal-specific conditions, such as the seller's completion of a pre-closing reorganisation.

7 Financing

7.1 What types of consideration are typically offered in private M&A transactions in your jurisdiction?

The most common forms of consideration are:

  • cash;
  • equity;
  • a combination of the two; and
  • more rarely – typically in smaller transactions – promissory notes or other forms of indebtedness.

A buyer may also use debt financing to fund all or a portion of the cash purchase price ultimately paid to the seller(s), often using the target or assets as collateral to support the debt going forward.

7.2 What are the key differences and potential advantages and disadvantages of the various types of consideration?

Cash is often viewed as the most favourable form of consideration for sellers due to the liquidity and value certainty it provides. Equity consideration components are often included when the buyer desires to keep one or more sellers invested in the success of the go-forward business, especially if:

  • there are individual sellers who will continue to provide services to the business post-closing; or
  • it is looking to share the risk of success of the expected go-forward value of the acquisition with the seller(s).

The buyer may also use equity consideration and/or debt financing to reduce the amount of free-standing cash required to complete the acquisition.

Receiving equity consideration requires the seller(s) to due diligence the buyer or its affiliate; and if the equity consideration is not of a publicly listed entity, it may be difficult to value or create disagreement in value and will provide the seller(s) with limited liquidity, if any. Additionally, sellers often expect a premium when accepting equity consideration over the cash value. However, seller(s) can achieve certain tax benefits of equity considerations in an equity transaction if the exchange of their equity in the target for the equity consideration qualifies as a tax-free rollover.

7.3 What factors commonly influence the choice of consideration?

The form of consideration offered by a buyer is generally influenced by:

  • the availability of cash (either on-hand or via debt financing); and
  • the desired risk and reward allocation between buyer and seller for the go-forward business.

The form of consideration desired by the seller(s) is often influenced by the desire for liquidity versus the desire for tax-deferred treatment on some or all of the consideration and/or to share in the upside of the go-forward business.

7.4 How is the price mechanism typically agreed between the seller and the buyer? Is a locked-box structure or completion accounts structure more common?

In the United States, a completions accounts approach (referred to simply as a ‘purchase price adjustment mechanism') is most common and most transactions are done on a ‘cash-free, debt-free' basis. Typically, the parties:

  • establish an agreed level of working capital, which may be subject to a collar (although this is not especially common); and
  • follow a post-closing process whereby the buyer confirms the financial results of the target during a set period of time – usually 60 to 180 days – following which the purchase price is adjusted upward or downward to account for any difference in the finally determined net working capital as compared to what was estimated at the time of closing.

A typical definitive agreement will also contain a mechanism to handle any disputes between the parties with respect to the buyer's determination of the final working capital amount, which often refers the matter to an independent accounting firm for resolution.

7.5 Is the price typically paid in full on closing or are deferred payment arrangements common?

In many cases, where there is a purchase price adjustment mechanism or indemnification, a certain amount of the purchase price is either held back or placed in escrow:

  • for the purposes of the final calculation of the purchase price adjustment; or
  • to meet any indemnification obligations of the seller(s) post-closing.

Private M&A transactions may also include a deferred or contingent payment component – most commonly in the form of an earn-out, whereby the seller(s) are entitled to additional consideration post-closing if the target business achieves certain milestones or meets certain financial metrics following the closing.

7.6 Where a deferred payment/earn-out payment is used, what typical protections are sought by sellers (eg, post-completion veto rights)?

It has become increasingly rare for sellers to be able to require buyers to set aside deferred consideration amounts in escrow in the case of an earn-out; but this is still often used in the case of contingent payments triggered by the occurrence of a specific and generally anticipated event (eg, a bonus upon receipt of an executed agreement with a highly valuable customer that both parties are reasonably certain will occur shortly post-closing). Post-closing operational covenants on the buyer have also become exceedingly rare, and currently often the most a seller is able to obtain is a covenant not to act in bad faith or with the express purposes of interfering with the ability to achieve the earn-out requirements.

7.7 Do any rules on financial assistance apply in your jurisdiction, and what are their implications for private M&A transactions?

There are no rules on financial assistance that would apply to private M&A transactions other than in the case of an insolvency or potential insolvency.

7.8 What other key concerns and considerations should participants in private M&A transactions bear in mind from a financing perspective?

All parties in an M&A transaction involving committed third-party financing (whether debt or equity) would be well served to ensure that the acquisition timeline and conditions and those for the financing remain in sync. In order to be competitive in an auction process – or even many proprietary deals in competitive industries – buyers will need to be able to convince sellers of their availability and certainty of funding for the acquisition; and many sellers will want to understand the composition of funding and financing timeline at the letter of intent/term sheet stage. If the transaction contemplates a separate signing and closing, it is common for the buyer to deliver to the seller firm written commitments from its financing sources, ideally subject only to the same conditions as contained in the definitive acquisition agreement.

Separately, to the extent that the buyer is a newly formed special purpose vehicle that itself holds no substantive assets, a seller will often require an equity commitment letter and/or limited guarantee from the parent entity or investment fund ultimately funding the acquisition to cover the obligations of the buyer under the definitive acquisition agreement, including the funding of the purchase price or a reverse termination fee, if applicable.

8 Deal process

8.1 How does the deal process typically unfold? What are the key milestones?

  • Term-sheet/letter of intent stage:
    • The parties enter into a confidentiality agreement and undergo initial due diligence in order for the buyer(s) to formulate an offer.
    • The buyer(s) ultimately submit a non-binding offer to the seller(s) outlining the proposed transaction structure, amount and form of consideration (including any earn-outs, escrow/holdback or equity rollover) and other key terms.
    • The parties will also determine whether the transaction can be completed as a simultaneous signing and closing or if a separate signing and closing is necessary.
  • The timeline for this stage can vary widely based on:
    • the responsiveness and interest of the parties;
    • the level of adviser engagement; and
    • whether it is a proprietary or auction process.
  • Definitive agreements: Once the parties have come to an agreement on the key terms and likely entered into exclusivity, drafting and negotiation of the definitive acquisition agreement will begin. Due diligence will continue and any specific issues identified will inform the post-closing indemnification obligations of the seller(s) contained in the definitive acquisition agreements; if representations and warranties insurance (RWI) or third-party financing is being used, the underwriting process will run in parallel to the negotiation of definitive agreements and the lenders or insurance underwriters will ask to review:
    • any diligence memoranda prepared by the buyer's advisers; and
    • the definitive agreements and disclosure schedules.
  • This stage on average runs four to six weeks, but can be shorter or longer based on the level of organisation and motivation of the parties. It is generally considered advisable to add one to two weeks to any timeline involving RWI.
  • Signing/closing: Signings and closings in the United States often take place remotely via electronic exchange of digital signature pages (although certain debt financing transactions or governmental filings do still require wet ink signatures which may or may not need to be notarised). Parties will typically exchange signature pages in escrow via their legal advisers to be released via verbal or email confirmation once:
    • all documents are in agreed form;
    • deliverables have been received; and
    • conditions have been met.
  • In transactions involving third parties such as escrow agents, lenders or RWI underwriters, parties will also need to obtain and coordinate release of the signatures of such third parties contemporaneously with the release by the parties.

8.2 What documents are typically signed on closing? How does this typically take place?

If the transaction is structured as a simultaneous sign and close, all the transaction documents will be signed at closing, including:

  • the purchase agreement;
  • any shareholder/operating agreements;
  • finance documents; and
  • any consents/certificates.

If the transaction is structured as a separate signing and closing, the parties will typically sign the definitive acquisition agreement at signing, which often includes agreed forms of any other material transaction documents as exhibits to be signed at closing. The parties may also opt to negotiate the terms of the other material transaction documents between signing and closing, and as such:

  • may only list them as closing deliverables; or
  • may exhibit a term sheet covering the key terms of such documents as opposed to the fully negotiated forms.

Signings in the United States are often done remotely via the exchange of electronic signatures rather than in person.

8.3 In case of a share deal, what is the process for transferring title to shares to the buyer?

The definitive agreement in an equity acquisition will require the seller(s) to deliver:

  • either:
    • stock transfer powers (in the case of shares of a corporation); or
    • an equity interest assignment agreement (in the case of membership or partnership interests in a limited liability company or limited partnership); and
  • any certificates (or an affidavit of loss/destruction) representing the equity securities to be transferred to the extent they are certificated. It is not uncommon in the United States for equity interests in a limited liability company or limited partnership to be uncertificated.

8.4 Post-closing, can the seller and/or its advisers be held liable for misleading statements, misrepresentation, omissions or similar?

Buyers in equity acquisitions often request a representation commonly referred to as a ‘10b-5' representation, referencing the Securities and Exchange Commission's Rule 10b-5, promulgated under Section 10(b) of the Securities Exchange Act of 1934. Clause (b) of Rule 10b-5 makes it unlawful (if using interstate commerce, the mail or any national securities exchange), in connection with the purchase or sale of any security, to "make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading". While a buyer in a private M&A equity acquisition may already be protected by Rule 10b-5, including a 10b-5 representation in the definitive agreement gives the buyer a contractual right to indemnification and does not require the buyer to prove the seller's knowledge of the untruth or omission, or the buyer's reliance on the same.

Sellers will often resist inclusion of a 10b-5 representation and may go even further and include a non-reliance provision requiring the buyer to specifically disclaim reliance on any extracontractual representations and warranties made by the seller.

8.5 What are the typical post-closing steps that need to be taken into consideration?

Common post-closing actions include:

  • the preparation and filing any post-closing filings, including amendments to the target's organisational documents, if applicable;
  • actions with respect to the purchase price adjustment, such as:
    • preparing and delivering the closing statement;
    • resolving any disputes between the parties; and
    • calculating and paying any adjustment amounts (including releasing amounts from the purchase price adjustment escrow or holdback);
  • compliance with any earn-out, escrow or holdback provisions; and
  • other agreed post-closing items, such as:
    • issuing equity compensation to key target employees; or
    • obtaining customer/vendor consents that were not a condition to closing.

9 Competition

9.1 What competition rules apply to private M&A transactions in your jurisdiction?

US antitrust law governing M&A transactions includes pre-merger filing notification requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and related rules (‘HSR Act'). The HSR Act generally requires parties intending to merge, purchase or sell voting securities, assets or non-corporate interests to provide both the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice with information regarding their operations and the proposed transaction if certain minimum jurisdictional thresholds are met and no exemption is available. The three thresholds consist of:

  • a commerce test, which is met if either party is engaged in some activity affecting US commerce;
  • a size-of-transaction threshold, which is adjusted annually and is currently met if the acquiring person will hold in excess of $111.4 million of the voting securities, assets and/or non-corporate interests of the acquired person as a result of the acquisition; and
  • in any transaction valued at $445.5 million or less (also adjusted annually), a separate size-of-parties threshold which currently requires that:
    • one party have total assets or net sales of $222.7 million; and
    • the other have total assets or net sales (if manufacturing) of $22.3 million or more.

Filings are made separately by the ultimate parent entities of each of the acquiring and acquired parties and stay the consummation of a covered merger or acquisition for a minimum of 30 days or a cash tender offer for a minimum of 15 days while the regulators analyse whether the transaction is likely to substantially lessen competition and whether further action is warranted.

9.2 What key concerns and considerations should participants in private M&A transactions bear in mind from a competition perspective?

Regardless of whether a pre-merger filing under the HSR Act is required with respect to a proposed private M&A transaction as outlined in question 9.1, a number of US laws have been enacted with the intent that:

  • consumers benefit from the forces of competition; and
  • conduct that is deemed to harm competition is subject to monetary penalties and/or equitable relief.

Section 1 of the Sherman Act (15 USC Section 1) prohibits agreements between independent entities that restrain trade; and as merging entities are deemed ‘independent entities' until closing of a transaction, this section, if not observed, could also lead to gun-jumping allegations in the M&A transaction context. Section 2 of the Sherman Act (15 USC Section 2) addresses monopolisation concerns and prohibits the acquisition or maintenance of monopolies through exclusionary conduct. Section 7 of the Clayton Act (15 USC Section 18), in addition to providing the framework for the HSR Act, prohibits transactions that substantially lessen competition. These antitrust laws are primarily enforced by the Department of Justice and the FTC; but attorneys general from the US states may also bring antitrust lawsuits, as may private companies in some instances. Government investigations and enforcement actions are often lengthy and expensive.

10 Employment

10.1 What employee consultation rules apply to private M&A transactions in your jurisdiction?

There are no employee consultation rules governed by US law. If employees of a target are members of a union, the relevant collective bargaining agreement may contain employee consultation requirements. While some employees of a target who are involved in the transaction typically have knowledge of the transaction, most employees in the United States are informed at or after closing that the transaction has occurred.

10.2 What transfer rules apply to private M&A transactions in your jurisdiction?

There are no employee transfer rules governed by US law. Whether employees will automatically transfer from the seller to the buyer is dependent on the structure of the transaction.

10.3 What other protections do employees enjoy in the case of a private M&A transaction in your jurisdiction?

Employees do not enjoy any protections under US law in the context of a private M&A transaction. Any protections provided to the employees are accomplished through the purchase and sale agreement and the negotiations of the parties.

10.4 What is the impact of a private M&A transaction on any pension scheme of the seller?

In the United States, defined benefit pension plans or defined contribution retirement plans are generally sponsored or maintained by the employer or by a labour union in which the employer's employees participate (a union-sponsored multi-employer plan). In the context of an equity acquisition, any defined benefit pension plan and/or any defined contribution retirement plan sponsored by the target will continue with the target after the acquisition, unless the parties agree either:

  • to terminate the plan prior to the closing; or
  • to transfer the sponsorship of the plan to an out-of-scope entity prior to the closing.

If a plan is terminated or transferred to an out-of-scope entity pre-closing, the plan will not continue with the target upon the closing of the deal. In the case of an asset acquisition, the seller's defined benefit pension plan or defined contribution retirement plan will not transfer automatically to the buyer; it will have to be expressly assumed by the buyer if the buyer wants to maintain such plan after closing.

Generally, pension and retirement plan liabilities remain with the seller with respect to plans that are not assumed by the buyer or otherwise do not continue with buyer or the target post-closing. However, certain defined benefit pension plan or union-sponsored multi-employer plan funding liabilities may transfer to the buyer, even when such plans are not continued or assumed. Many employers terminate defined contribution retirement plans pre closing due to limitations that exist on the termination of such plans post-closing.

10.5 What considerations should be made to ensure there are no concerns over the potential misclassification of employee status for any employee, worker, director, contractor or consultant of the target?

Thorough diligence should be conducted regarding the target's workforce, including but not limited to:

  • each employee's job title, job duties, compensation and hours worked; and
  • for each consultant, his or her compensation and services provided.

Whether an employee or consultant is properly classified is governed by US law and the law of the state or locality in which the employee or consultant lives. Buyer's counsel should review whether the job titles, duties and compensation accurately fit an exemption from overtime law, as provided by the US Department of Labor, relevant state labour law and applicable case law. Therefore, local, state and US laws must be reviewed to determine whether an employee or consultant is properly classified.

10.6 What other key concerns and considerations should participants in private M&A transactions bear in mind from an employment perspective?

Buyers must conduct thorough diligence regarding all areas of employment law, including but not limited to:

  • compliance with applicable wage and hour laws;
  • pending, threatened or historical employment-related litigation or governmental audits or investigations;
  • review of employee-related policies;
  • compliance with immigration law and whether employees are authorised to work in the United States; and
  • past reductions in force/layoffs.

11 Data protection

11.1 What key data protection rules apply to private M&A transactions in your jurisdiction?

Various data protection rules apply to M&A transactions depending on:

  • the nature and scope of the transaction;
  • the parties involved; and
  • the data at issue.

These include:

  • state-specific consumer privacy laws (eg, California Consumer Privacy Act, Colorado Privacy Act, New York Shield Act); and
  • state-specific data breach notification laws and data protection laws (eg, Massachusetts Law 201 CMR 17.00, requiring a written information security programme for companies that process the data of Massachusetts residents).

Federal data protection rules may also apply, such as:

  • the Gramm-Leach-Bliley Act if the target is a financial institution; or
  • the Health Insurance Portability and Accountability Act if the target is a covered entity (hospital) or providing a service to a covered entity.

If the target maintains, collects or uses the data of residents located outside the United States, other international data protection rules may apply (eg, the EU General Data Protection Regulation).

11.2 What other key concerns and considerations should participants in private M&A transactions bear in mind from a data protection perspective?

A participant in a private M&A transaction should understand that privacy and data protection laws are constantly changing and evolving. The participant should also ensure that the target has a mechanism to share personal information in its privacy policy in order to facilitate the transfer of data after the acquisition. There are also additional considerations for emerging technologies (eg, blockchain and artificial intelligence), such as ensuring that the target has obtained sufficient rights and consents in the data to use it with their technologies. If data is part of the transaction, the buyer should confirm that proper consents were granted at the time of collection to allow the sale of the data from the target to the acquirer. A participant in a private M&A transaction should also pay particular attention to the target's information security posture to ensure that:

  • the target's diligence responses align with any information security audits the target has conducted; and
  • the target:
    • has appropriately responded to any security incident(s);
    • has sufficient insurance to cover such security incident(s); and
    • has a plan in place to remediate deficiencies that lead to any security incident(s).

12 Environment

12.1 Who bears liability for the clean-up of contaminated sites? How is liability apportioned as between the buyer and the seller in case of private M&A transactions?

Under federal law in the United States, current and former owners and operators of contaminated sites bear liability and responsibility for any releases of hazardous substances that could impact public health or the environment. Parties that arrange for disposal or transport hazardous substances also bear environmental responsibility for contamination. The primary environmental law that imposes this liability is called the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and charges the US Environmental Protection Agency (EPA) with:

  • cleaning up contaminated sites when necessary; and
  • making the ‘polluter pay" in proportion to responsibility for hazardous substance releases.

Many US states have similar state laws that are separately enforceable at the state level.

CERCLA has been amended within the last 20 years to add a defence from its strict liability regime if the buyer of contaminated sites (or a business owning and operating such sites) conducted adequate due diligence prior to closing and was innocent of the contamination condition. Therefore, if a buyer engages a qualified environmental consultant and undertakes a Phase I environmental site assessment (ESA) no more than six months before closing in compliance with specific standards set forth in federal regulations adopted by the EPA to evaluate the site conditions, the buyer will be deemed an ‘innocent' buyer and will not be liable or responsible for pre-existing site contamination conditions. Given the viability of this defence and the risk of losing the defence if so-called ‘all appropriate inquiry' due diligence is not done, it has become standard practice in the United States – whether commercial real estate is known to be contaminated or not – for buyers to conduct a proper ESA prior to closing.

With proper environmental due diligence, the buyer and seller:

  • can negotiate M&A transactions in the comfort that unknown environmental risk can be mitigated with a qualifying ESA; and
  • can allocate known environmental risk between buyer and seller just like any other known liability of a seller.

12.2 What other key concerns and considerations should participants in private M&A transactions bear in mind from an environmental perspective?

Risk associated with environmental matters is often allocated in a similar matter to other matters in a private M&A transaction. For example, if the parties are utilising representations and warranties insurance (RWI), the policy will typically be expected also to cover environmental matters with limited or no environmental exclusions, in which case the buyer's negotiation strategy often shifts from a focus on pressing for a seller's tail environmental liability to seeking the best coverage available from the RWI insurer.

Buyers can also take comfort that once a transaction is completed, not all pre-existing contamination or legacy environmental impacts to real estate require remediation anyway. It is very common in M&A transactions that the buyer seeks simply to leave contamination in place as it operates the acquired business or real estate into the future. Provided that there is no ongoing release of hazardous substances to the environment or risk to human health (eg, potential for vapour intrusion into the building from sub-surface volatile organic compounds), such a strategy would likely be viable. If the site contamination conditions are stable and there is no other need to excavate or dig on site – which would potentially expose sub-surface contamination – hazardous substances may be able to remain in place for many years without active remediation. In that situation, an ‘innocent' buyer simply needs to comply with EPA regulations for continuing obligations after closing, known as ‘common elements'. The continuing obligations in many respects resemble good housekeeping practices and common sense – for example:

  • taking reasonable steps to avoid further releases;
  • cooperating with government investigations of contamination; and
  • not disposing of additional hazardous substances after closing.

13 Tax

13.1 What taxes are payable on private M&A transactions in your jurisdiction? Do any exemptions apply?

The taxes payable on a private M&A transaction in the United States will depend on the form in which the transaction is structured (ie, an equity acquisition versus an asset acquisition). There are also certain structures in which the parties can elect to treat an equity acquisition as an asset acquisition for tax purposes.

The amount of taxes paid by a seller in an M&A transaction also depends on the tax classification of the seller. Individuals are subject to tax at graduated rates, with the highest federal tax rate at 37%. State and local taxes also may apply to an individual seller, depending on the seller's place of residence or place of business. Individuals who have gains from the sale of a capital asset held for more than one year (a long-term capital gain (LTCG)) pay tax at a maximum rate of 20% on such LTCG. Also, certain individuals are subject to a 3.8% net investment income tax on such gains.

Corporations do not have a tax preference for LTCGs and are subject to a 21% tax rate on their income, plus any applicable state or local tax.

Certain targets may be treated as tax transparent, in which case they will not pay taxes on a transaction structured as an asset acquisition. Instead, the tax-transparent target's gain from the sale of its assets flows through to its equity owners, which will each pay tax on such gain at the rates described above depending on:

  • their own tax classification; and
  • the character of the target's gain from the sale of its assets as either ordinary or LTCG.

Some small businesses may also take advantage of an exemption from tax for an individual who sells stock in a ‘qualified small business' corporation if certain requirements – including a five-year holding period for such stock – are met. If the exemption applies, it is limited to the greater of:

  • $10 million; or
  • 10 times the individual's investment in such stock.

13.2 What other strategies are available to participants in a private M&A transaction to minimise their tax exposure?

Participants in M&A transactions may be able to utilise certain limited structures in which the seller receives equity in the buyer on a tax-deferred basis. Not all issuances of buyer equity qualify for such tax-deferred ‘rollover'. The ability to do so depends on the tax classification of the buyer, as it is much easier to qualify for tax deferral where the buyer is an entity taxed as a partnership than an entity taxed as a corporation.

13.3 Is tax consolidation of corporate groups permitted in your jurisdiction? Can group companies transfer losses between each other for tax purposes?

Tax consolidation is available in the United States for federal tax purposes if:

  • there is a common parent corporation; and
  • it owns, directly or through other group corporations, at least 80% of the voting power and the value of the stock of the other corporations in the group.

States have different rules for consolidation or combination of business entities. Where a group files a consolidated federal tax return, the group can use the losses of members to offset income of other members, subject to certain limits applicable to net operating losses that apply to group members that have experienced a change in control after realising such net operating losses.

13.4 What other key concerns and considerations should participants in private M&A transactions bear in mind from a tax perspective?

The character of gain as ordinary as compared to LTCG is critical to individual sellers and to tax-transparent entities that have individuals as owners. Therefore, when an M&A transaction is structured as an asset acquisition or a deemed asset acquisition (for tax purposes), the sellers will want to focus on the manner in which the purchase price is allocated among the assets of the target. Allocations of purchase price to cash basis accounts receivable and other cash-basis assets will produce ordinary income; as will amounts allocated to tangible assets that have a depreciated tax basis below the allocated purchase price.

A buyer will often prefer an asset acquisition or a deemed asset acquisition so that the buyer receives a purchase cost tax basis in the target's assets, which will allow the buyer to claim depreciation and amortisation deductions for the amounts allocated to depreciable and amortisable assets.

In order to induce a seller to accept treating an equity acquisition as a deemed asset acquisition for tax purposes (if such treatment is available), a buyer may be willing to increase its purchase price, or ‘gross up' the seller to make the seller whole for its agreement to accept a deemed asset acquisition. This will be a subject for negotiation between the buyer and the seller.

14 Trends and predictions

14.1 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?

2022 and the first half of 2023 saw valuations, deal size and private M&A activity levels decrease from record highs in 2021 due to a variety of macroeconomic factors in the US economy, the US banking crisis and ‘cryptowinter'. However, there was an uptick in M&A activity in the second half of 2023 – in particular:

  • for small to medium-sized deals (sub-$100 million purchase price); and
  • in the energy, industrials and tech industries.

Seller-founders are increasing their share of the sell side to take up space created by private equity funds' hesitancy to sell portfolio companies at lower prices. While private equity remains active on the buy side, private equity-backed M&A transactions are still more likely to be smaller ‘add-on' transactions for existing portfolio companies due to a variety of factors, including:

  • a lower supply of target businesses of sufficient maturity to substantiate a new platform;
  • the tightening of credit terms and availability for new platforms; and
  • for some funds, limited availability of new capital due to over-deployment in recent years and challenges in recent fundraising.

Secondaries transactions and continuity funds are also on the rise as standard private equity exit transactions remain unfavourable as well as an increase in interest by private investors in co-investments, independent sponsor deals and other direct investment opportunities.

14.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

In January 2023, the Federal Trade Commission (FTC) proposed a new rule that would ban employers from imposing non-competes on workers, including a ban on non-competes entered into as part of a merger or acquisition other than those applying to a person holding 25% of more of the company being sold. However, recent reports indicate that the FTC's vote on the proposed ruling has been delayed to April 2024.

On 27 June 2023, the FTC released a proposal that would significantly increase the time and burden of Hart-Scott-Rodino Antitrust Improvements Act filings. The FTC predicted that the proposed changes would take a reporting party an extra 107 hours (to a total of 144 hours per filing) to submit the additional required information.

With secondaries transactions on the rise and many private equity funds actively targeting retail investors, both state and federal regulators are increasing their monitoring of the industry and proposing additional rulings related to reporting and disclosure, in particular with respect to valuation of investments. Most recently in May 2023, the Securities and Exchange Commission (SEC) adopted amendments to Form PF, the confidential reporting form required for SEC-registered investment advisers to private funds. The amendments expand existing reporting requirements for all registered private fund advisers and, for some advisers, require new enhanced disclosures and current reporting of certain events such as:

  • extraordinary investment losses;
  • general and limited partner clawbacks; and
  • adviser-led secondaries transactions.

Increased private equity activity in the healthcare industry has also prompted certain states to adopt reporting requirements for material transactions involving healthcare entities modelled after the federal Hart-Scott-Rodino (HSR) Act and often referred to as ‘mini HSRs' or ‘Baby HSRs' – in particular physician practices and even, in some cases, administrative services or managed care organisations. These state laws establish similar notification requirements to the HSR Act but are designed to cover transactions that are below the federal threshold.

It is expected that the adoption and implementation of the Inflation Reduction Act will promote increased M&A activity in the renewable energy sector through production tax credits and investment tax credits aimed at accelerating and promoting US production of clean energy infrastructure, which will make companies in the space more attractive investment opportunities for private equity firms and other corporate buyers looking for synergistic opportunities.

15 Tips and traps

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

It is important when considering a private transaction to have a clear understanding of the players and stakeholders in order to:

  • identify and mitigate any potential hold-ups in the process; and
  • ensure that the individual(s) at the negotiation table are, or have clear lines of communication with, the ultimate decision makers.

Additionally, both buyers and sellers would be better served by identifying and investing in qualified advisers with experience with both the industry and transactions of a similar size and nature to that which is contemplated. Too often, a hidden party with significant hold-up value or an unsophisticated adviser can cause significant time delays or misunderstandings between the parties.

It is incumbent upon any party to clearly communicate expectations and remain an active participant in the process, as even the best of advisers will be limited to the information provided and the directions given to them by the parties. It can often be helpful to identify a key team member or adviser to take charge of the process and hold all parties and advisers accountable for hitting key milestones.

Co-Authored by Enrique Conde.

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.

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