Posted: 03/10/2019
Europe continues to present many opportunities for US investors looking to tap into the technological innovations, market opportunities and talent that exist within the UK and the continent. Areas such as technology, financial services, automotive, life sciences and industrials are all key sectors where transatlantic M&A opportunities have been rife.
For many strategic and private equity backed companies, Europe is a key part of their international growth strategy, and the acquisition of one or more targets is a key first step to establishing their presence in those markets.
However, executing M&A within Europe can give rise to specific cross-jurisdictional challenges depending on the countries in question, which can be relevant from as early as term sheet stage.
As in the US, confidentiality agreements followed by a letter of intent or term sheet are a common starting point for a European deal. It is also generally common for a buyer to seek exclusivity before incurring significant expense and management time on due diligence.
When negotiating within civil law jurisdictions including, for example, France, Germany and Spain, buyers will need to beware that there may be obligations imposed on them as a matter of law to negotiate in good faith. As is consistent with good practice, it is therefore imperative to spell out in the letter of intent or term sheet which provisions are intended to be legally binding and that neither party is under an obligation to close until definitive transaction documents have been signed.
Unlike in the US, in the UK there is no regime allowing for the merger of two or more companies (other than on a cross-border basis across Europe). M&A involving a UK target will usually involve a transfer of shares (which is slightly more common) or assets / business to the buyer.
The deal transaction document within Europe will include the SPA (or APA in the case of an asset acquisition). There will also usually be a separate tax deed (unlike in the US, where the tax covenant is typically included within the SPA itself).
There may be stamp duty payable on the acquisition. In the UK, for example in a share deal, this is 0.5% of the acquisition cost, which is payable by the buyer.
The civil law systems in certain continental jurisdictions provide for strict transfer requirements, often involving a notary (whose fees are sometimes determined by reference to the overall transaction amount). The closing formalities will often need meticulous planning with any transaction fees to be taken into account.
In the UK especially, the general approach to an acquisition is “buyer beware”, and as such due diligence is usually fairly extensive. There will normally be a separate disclosure letter (rather than disclosure schedules), where the seller will include both specific and general warranties. It is also common for UK sellers (and sometimes those on the continent) to seek to disclose the entire data room, albeit in the UK this is usually subject to the concept of “fair disclosure”.
Price adjustments are fairly universally accepted across Europe, whether by reference to net cash, working capital or net assets.
Whilst a completion accounts pricing structure (ie with a post-closing adjustment) is fairly common, in the UK in particular it is not unusual for the seller to seek a “locked-box” structure. This is a pricing mechanism whereby the value of the business is calculated by reference to a historic, pre-closing balance sheet. With a locked box deal the economic value of the business would transfer to the buyer as at the pre-closing balance sheet date, and there is no post-closing adjustment (other than an indemnity for post-effective date “leakage”).
Earn-outs are also found in some European deals, particularly in lower mid-market deals where they can be used to bridge the value gap.
Unlike in the US, material adverse change clauses are not particularly common in the UK, with the parties typically aiming for simultaneous signing and closing or otherwise focusing solely on the conditions that need to be addressed to allow closing to occur.
As noted above, the starting point is generally buyer beware. There are limited obligations on buyers to voluntarily disclose problems within the business, so the due diligence process and robust deal protection measures are key.
Whilst in the US it is common for all representations and warranties to be given on an indemnity basis, this is not universally the case across Europe. In the UK in particular, it is common for sellers to resist giving warranties on an indemnity basis.
Consistent across jurisdictions, it is reasonable to expect 100% or uncapped coverage for breaches of fundamental representations, although sellers will typically seek to cap business warranties at a lower amount.
It is also common across jurisdictions for a de minimis threshold to apply. In the UK, this will typically be accompanied by a tipping basket.
The time limits for bringing warranty claims are usually fairly consistent with US expectations, and buyers can expect one full audit cycle post-closing, absent any specific reasons to provide for the contrary.
Warranty and indemnity insurance is also becoming increasingly common in some of the larger European markets, including the UK.
English law remains one of the natural choices of law for international M&A transactions. Within Europe, domestic deals are likely to end up subject to local law, especially when there is an asset sale.
The UK follows the US in usually specifying that disputes will be resolved through the courts, whereas it is slightly more common on the continent to find the parties submitting to arbitration. London, Paris and Switzerland are all traditional centres of arbitration.
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