Getting ready for the acquisition process
The key to completing an acquisition efficiently is to make sure you have your house in order so that you can negotiate deal terms and execute quickly. Below are some key issues to consider.
Your professional advisers
Choosing the right professional advisers (including lawyers, accountants, corporate finance advisers and W&I brokers) is key to the successful acquisition of any UK or European business. We will help you get the right ones in place.
Legal and regulatory landscapes:
It goes without saying that the legal and regulatory frameworks in the UK and Europe are increasingly complex and materially different from those in the US, particularly in fields such as antitrust, employment and data protection. You need local experts in the field to help you navigate the relevant legal and regulatory landscapes and ensure that the acquisition complies with, and (importantly) is structured optimally in light of, local laws.
Sector expertise:
It's essential to have advisers on board who are not only well-versed in the relevant legal framework but also deeply embedded in the target’s ecosystem/sector.
Cultural nuances:
An understanding of local business practices and cultural nuances is essential both for making a deal happen and for successful integration post-closing. Advisers familiar with the local business environment, and how best to translate that into the way US companies like to work, can facilitate smoother negotiations and integration and help you overcome both literal and figurative language barriers.
Cross-border issues:
In multijurisdictional transactions, deal terms and issues which arise are likely to traverse more than one legal regime. It's important to have advisers on board who can handle cross-border complexities and translate technical issues into a commercial narrative which you can understand and act on with ease.
Tax efficiency:
Tax advisers are crucial so transactions are structured in a tax-efficient way, while also complying with all relevant tax laws and avoiding potential pitfalls such as double taxation.
Local accounting standards:
The UK and most European countries use International Financial Reporting Standards (IFRS), which differ from US Generally Accepted Accounting Principles (GAAP). Professional advisers with expertise in these standards can ensure that financial statements are properly interpreted and explained to you and make sure that any accounts to be delivered in connection with the transaction (such as locked box or completion accounts) are prepared on an appropriate basis.
Post-acquisition integration and reporting:
Advisers play a key role in post-acquisition integration efforts, helping to align accounting policies, systems and procedures across entities. They can also advise you on the different ongoing reporting obligations which may apply in different jurisdictions, including statutory audit and book-keeping requirements and local filing obligations which you may not be familiar with as a US buyer.
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Agreeing the term sheet/LOI
In both the UK and the US, the Letter of Intent (LOI) or term sheet (as the LOI is more commonly called in the UK) plays an important role in setting out the headline terms of the transaction, including valuation, structure, governance, warranties, covenants and conditions. While term sheets aren't usually legally binding in either the UK or US (except for certain specific provisions such as exclusivity, confidentiality, costs and governing law), they are helpful in ensuring that parties are all on the same page before proceeding to negotiate the longer-form documents.
Once a term sheet has been signed, it is often regarded as ‘morally binding’, and it can be difficult to move away from any fundamental points agreed. Therefore, it is crucial to get lawyers involved as early as possible so that the transaction parameters can be clearly agreed.
Don't be alarmed if the term sheet is only a few pages long. UK legal documents are typically more concise and seek to encapsulate general principles, compared to the more exhaustive approach that US documents take. The desire to cover more contingencies in the US is generally reflective of the more litigious environment on that side of the Atlantic. That’s not to say that litigation is not a risk, but it is certainly less common in the UK and Europe than in the US.
Some headline considerations to bear in mind when negotiating the commercial points in the term sheet are set out below. Each of these points is explained in further detail in the Deal structure and Understanding the market sections of this guide.
Structure:
The UK does not have a merger regime equivalent to that in Delaware and other states. If you want to acquire a UK business, you'll need to buy the shares in the relevant company (or its parent) or buy some, or all of its assets. The European Union (EU) does have a cross-border merger regime, but to take advantage of this structure, both companies involved need to be incorporated in different EU Member States, and very few deals are closed using this structure in practice.
Price:
As well as the headline figure, it's important for a term sheet to outline when and how any consideration is to be paid. US term sheets tend to be comparatively detailed about the purchase price. Some of the purchase price is often retained by the buyer (in escrow or as a holdback) in case it needs to be applied to the true up process. The methodology for reaching the total consideration should be included but expect to see some differences. US strategic buyers may be more familiar with a completion accounts mechanism, whereas UK sellers tend to push for the use of a locked box.
Conditions:
In UK term sheets, you should expect to see no or very few conditions compared to the wide array typically included in the US. Any conditions that are included will likely be limited to mandatory or suspensory regulatory or antitrust approvals.
Non-solicitation:
In both the UK and US, it is rare for non-solicitation provisions to be included in term sheets as they are often regarded by sellers as aggressive and premature (given due diligence won't have been carried out in detail at this stage).
Costs:
In both the UK and the US, each party is usually responsible for its own costs, whether or not the deal goes ahead. However, a break fee is sometimes incorporated to compensate a party for devoting resources to a transaction which ultimately doesn't go ahead. Break fees are becoming more common in US transactions, to mitigate against the risk posed by the fact that US corporations are being increasingly targeted by antitrust authorities when they acquire smaller businesses. They remain less common in the UK but are agreed from time to time depending on the relative negotiating strength of the sellers.
Governing law:
We are agnostic as to whether the term sheet is governed by English or US law. However, the choice of governing law in the term sheet is often indicative of the governing law of the transaction documents. As a result, it can really set the tone of what the transaction will look like, including the form of the transaction documents and the starting point on negotiation of UK vs US standard market terms, so it's important to consider this at an early stage.
Obligation to negotiate:
In the US, term sheets often contain an express requirement to negotiate in good faith, but this isn't legally enforceable in the UK. However, many European jurisdictions impose a duty to negotiate in good faith, which extends to both pre-contractual and contractual stages of negotiation.
Setting your due diligence process up for success
English law operates on the basis of caveat emptor – "let the buyer beware". This means that the onus is on you, the buyer, to do your research before you commit to buying a company or its assets. This contrasts with the generally accepted US approach, where the burden often falls on the seller to identify potential due diligence issues (although this is more a general principle rather than established law).
You'll want to learn as much as possible about the target, its management team, its products, its business plan and the wider market in which it operates. This due diligence will enable you to make an informed assessment of the value and potential of the target.
The earlier you start the due diligence process, the better. An early start and an efficient process allows for a thorough investigation and ample time to identify and address potential issues. Prevention is always better than cure.
It's important to think of due diligence as an iterative process of Q&A, with the issues being fed into the negotiation as they arise. Due diligence findings will form a crucial bargaining tool, as you'll be in a better position to assess risks and liabilities and to identify issues which necessitate a price chip or contractual protections in the purchase agreement. An understanding of market practices and cultural expectations on both sides of the Atlantic are key to framing the dynamics of the transaction and putting you in the best buy-side position possible.
Legal due diligence is only one part of the due diligence process. Financial and tax due diligence will also be key, and there'll also typically (depending on the nature of the target business) be commercial, IP, insurance, technology and environmental, social and governance (ESG) due diligence processes undertaken at the same time. It's important for these processes to run in parallel and for all advisers to be communicating, to ensure a comprehensive and cohesive approach.
Our long history of working with US buyers means we know how to run an efficient due diligence process. We know what to look out for and can keep you focused on what matters, anticipating and addressing issues before they cause delays.
Get ahead of the game with due diligence
We can get started on due diligence on a UK or European target before you get access to a data room, using publicly available information. By doing so, we may be able to identify potential hurdles or blockers to the deal early on (for example, from shareholders and regulators) and avoid running into issues at a later stage when they're more difficult to resolve. Any issues identified at this stage can also be used in discussions around pricing.
In the UK, companies have an obligation to file certain matters relating to their shares and financial situation at Companies House (the UK company registry), which maintains a publicly available register. This register provides a useful starting point for several legal due diligence items, which we've listed below.
Shareholder base:
UK companies submit a yearly confirmation statement to Companies House which contains details of the shareholders of the company. This can tell you who the major shareholders are at the time of filing and whether they're venture capital (VC) or PE funds, strategic investors or founders/early-stage angel investors. It can also inform you of the number of shareholders and whether there is a long tail of smaller shareholders. If there are a lot of smaller shareholders, this could influence the deal timeline, and you may want to look into the drag-along provisions in the target’s governance documents – just in case!
Articles of association:
UK companies are required to file their key governance document, the 'articles of association' (broadly equivalent to a US corporate charter), at Companies House. By reviewing the articles, you can find out how the company's waterfall provision works, the different share classes the company has and the specific rights attached to those shares, and any consents that might be required to close the transaction (eg certain investor or director approvals). Bear in mind that the articles won't necessarily be comprehensive, and they'll need to be reviewed alongside any shareholders' agreement, if there is one, and once this is disclosed by the target.
Accounts:
UK companies must file their annual accounts at Companies House. Reviewing these with your accountants at an early stage can provide valuable insights into the financial health and performance of the target and its assets and liabilities, which can inform valuation discussions and provide negotiating leverage later down the line. The accounts will also likely contain useful details on outstanding material litigation and off-balance sheet obligations that could affect the attractiveness of the transaction and how well the target's operations can be integrated with yours post-closing.
Debt repayment and release of security:
Details of charges over certain company assets need to be registered with Companies House. If there are any charges showing in respect of the target company, we can help you work out how to deal with the repayment of any external debt and the release of any security.
Certain European jurisdictions also have publicly searchable registers and databases which can be of use at the preliminary stages. We have teams of lawyers across Europe who can assist you with any initial research needed into a European target.
Keeping antitrust in contemplation
Regulators in the UK and across Europe are increasingly hawkish when it comes to scrutinising and intervening in transactions, whether that’s under merger control laws, foreign direct investment (FDI) rules or national security (NS) legislation. Jurisdictional assessments are rarely straightforward or clear-cut (eg the UK’s new National Security and Investment Act 2021 covers 17 sensitive sectors, each of which is broadly defined, and most European jurisdictions now have some form of FDI or NS regime).
Many of these regimes are suspensory and can involve lengthy approval processes, so it's important to identify whether any filings and/or approvals are likely to be required as early as possible. You can find more in-depth information on potential antitrust issues that could arise on an acquisition in the Antitrust considerations section of this guide.
Our highly experienced Competition, EU and Trade team offers thorough, practical advice to help you avoid risk and maximise opportunities. Knowing that prevention is always preferable, we can help you ensure you're compliant with competition rules to avoid any delays to your transaction.