M&A is back on the agenda.
Global M&A activity has finally reached pre-crisis levels with tracked deals in 2014 valued at a massive $3.5 trillion. In the US, large companies such as Google, Apple, Facebook and Microsoft continue to be active buyers as they compete to become the dominant technology presence in our lives.
The UK has been a happy hunting ground for US buyers. US buyers of UK technology companies are often attracted by our talent and intellectual property. The UK is also seen as a staging post for greater expansion into continental Europe.
Culturally, we have a lot in common with our cousins across the pond. We share the same language and enjoy a ‘special relationship’ that was forged in the heat of two world wars. However, there are important differences in the approach taken by US buyers to the legal aspects of buying private companies when compared with UK norms.
As a general rule the approach taken in the US is more buyer-friendly than in the UK. This can be seen in the following areas:
These prevent the sellers from competing with the business they have sold for a certain period. It is unlikely that a restrictive covenant in excess of three years would be enforceable in the UK. In contrast, restrictive covenants in the US are commonly up to five years long.
In the US the usual remedy for breach of warranties is indemnification. This allows the buyer to recover the full amount of loss suffered due to a breach of warranty (ie on a £ for £ basis). There is no need to prove a link between the breach and the value of the company acquired.
In the UK warranties are not normally given on an indemnity basis. As such, the buyer has to demonstrate this link – ie that the loss resulting from the breach caused a diminution in value of the company acquired. This is a more onerous test, and so more seller-friendly.
Disclosure is a process whereby the sellers disclose certain information to qualify the warranties set out in the share purchase agreement. For example, if a warranty said that the target company was not engaged in any litigation yet the sellers knew that it was, then they would disclose the details of this litigation in the disclosure letter. If they made full and proper disclosure, they would not be liable under this warranty.
In the UK the disclosure process is generally seen as more
‘pro-seller’ than in the US. In the UK it would be normal to agree “general” disclosures. General disclosures deem disclosure of all information that is available from certain publicly available sources (eg filings at Companies House) even if the buyer does not actually carry out the relevant searches. A large disclosure bundle of documents (and sometimes the entire data room) would often be deemed to be disclosed against the warranties. This is tempered by the UK concept of “fair” disclosure whereby a disclosure will only qualify a warranty if it is full, accurate and clear to enable the buyer to have a proper understanding of the issue.
In the US market practice is for specific disclosures to be made against specific warranties only. “General disclosures” and the notion of disclosing an entire data room are alien concepts.
There are many more examples of the differences in practice between the UK and US. These include the approach to escrow accounts, the level of liability caps and the approach to purchase price adjustments.
Knowledge of these differences and being empathetic to the other side's customary way of doing deals can help avoid misunderstandings and secure a smooth transaction process.