The full legal and business impact of the Brexit vote remains to be seen and will largely depend on the form the UK's exit from the EU takes. This is, however, little comfort to those in the process of M&A transactions in the UK. This update gives a snapshot of some of the issues to be considered if you're in the process of signing that next deal.
The Brexit vote will add a new layer of complexity to due diligence on targets. Buyers will need to understand how Brexit will impact the target business. We may see due diligence taking longer to complete whilst more in -depth review and analysis is carried out. Some of the issues to consider include:
- Employees/workers - what is the immigration status of the workers based both in this country and the EU and do any workers undertake travel to and from the EU?
- Key contracts – do any contracts refer specifically to EU laws or regulations? Do any contracts grant rights or impose restrictions within the EU, such as distribution rights or non-compete clauses? Whether or not such rights or restrictions would continue to apply in relation to the UK following Brexit would be a matter of contractual interpretation for the courts.
- Long term contracts – will Brexit trigger an early termination clause in any long term contracts?
- Exchange rates – are amounts to be paid fixed by reference to a euro/US dollar amount pre Brexit? Post Brexit this could result in a greater sterling amount. Extreme fluctuations in exchange rates (as we have recently seen) could result in such contracts no longer being profitable.
- EU grants and funding – does the business receive any grants or other funding from the EU? If such funding or grants were to be terminated when the UK leaves the EU, what impact would that have on the business?
- IP – It is hoped that a regime will be put in place to allow companies that rely on e.g. EU trade marks (previously community trade marks) and Community designs for protection in the UK, to automatically receive an equivalent trade mark in the UK, but this is another unknown.
Certain M&A transactions are subject to scrutiny either by the European Commission under the EU Merger Regulation, or by the Competition and Markets Authority (CMA) in the UK. The "one stop shop" principle of the EU Merger Regulation provides for notification of the largest transactions that may affect competition at EU level, to the European Commission for clearance on an EU-wide basis, leaving smaller transactions, that may affect competition at Member State level, subject to possible scrutiny in one or more Member States. Unless agreement is reached on the continued application of the EU Merger Regulation in the UK post Brexit, the one stop shop principle will cease to apply. Deals affecting the UK which trigger both the EU Merger Regulation and the UK jurisdictional thresholds would then be subject to parallel scrutiny by both the European Commission and the CMA. This could present significantly greater regulatory hurdles for the parties involved and scope for divergent decisions.
MAC Clauses - private M&A deals
Whether buyers will be able to rely on Brexit (or the events following on from Brexit) to trigger a MAC will depend upon the specific wording of the MAC clause. For those currently drafting MAC clauses, the courts may interpret a general clause quite narrowly so care should be taken in spelling out what constitutes a MAC - especially if one wants to capture the consequences of Brexit.
MAC Clauses- Deals subject to the City Code on Takeovers and Mergers (the 'Code')
Offerors of bids subject to the Code may also seek to rely on a MAC clause. It is, however, unlikely that the Takeover Panel (the 'Panel') will diverge from its current practice, as contained in the Code, which provides that (except for the acceptance condition and certain other regulatory or legally required conditions), 'An offeror should not invoke any condition ....so as to cause the offer not to proceed...unless the circumstances are of material significance to the offeror in the context of the offer'.
Whether a circumstance is of sufficient material significance will be judged by the Panel at the time of those circumstances arising. Past practice indicates that such circumstances would need to be sufficiently materially adverse so as to 'strike at the heart of the purpose of the transaction'. That threshold was set high by the Panel, in relation to the purported utilisation of a general MAC condition by WPP Group plc, during its bid for Tempus Group plc, when the Twin Towers attacks occurred during the course of its bid. The Panel concluded, in that case, that the threshold for material significance had not been met.
It is also a requirement of the Code that, before a bid is firmly announced, an offeror has sufficient financial resources to pay the purchase price should a bid become unconditional. Extremely few conditions to bid financing would be allowable and they would, in all likelihood, not include Brexit-related conditions.
SPA issues re consideration clauses
Completion account provisions and earn out provisions, particularly those that run for a lengthy period, may well see an impact from Brexit where there are any sterling/euro conversions from other currency denominated revenues, given the likely volatility in the currency markets.