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International Investment | UK M&A Legal Trends Report 2017
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Contents
Introduction. .............................................................................................................................................................1
Key findings ..............................................................................................................................................................2
Pricing mechanisms .................................................................................................................................................3
Retentions .................................................................................................................................................................5
Earn-outs ..................................................................................................................................................................7
Purchase price caps on liability ...............................................................................................................................8
Sellers’ limits on liability ............................................................................................................................................9
Gaps between exchange and completion .............................................................................................................11
General disclosure of data room/due diligence documents ..................................................................................12
Restrictive covenants .............................................................................................................................................12
Statistics included in this report .............................................................................................................................13
Contacts .................................................................................................................................................................13
1
Introduction
The United Nations Conference on Trade and Development (UNCTAD) published its latest annual investment report – The World Investment Report 2017 – in June 20171. The report reveals that despite the uncertainty of Brexit, in 2016 the UK was the second largest recipient of foreign direct investment (FDI)2, attracting $254 billion. Only the US attracted more FDI with $391 billion of investment. The UK was number 14 in the 2015 report with $33 billion, with the increase largely due to large cross-border M&A deals in the UK, which amounted to $251 billion (again, only the US was higher with $361 billion cross-border M&A deals).
These figures clearly illustrate the scale of international investment into the UK and the importance of the UK in the global investment/M&A market.
Here in TLT’s Corporate team we have seen a corresponding increase in mid-market M&A deals involving an international element and FDI in the UK. In 2016 there was an increase in our deals involving an international element to 41% from 35% in 2014. Overseas buyers included companies based in France, Germany, Japan, Sweden and the US.
The value of our international deals covered a range from £1 million to £32.2 million, with an average deal value of around £13 million and in aggregate represented nearly £200 million in value, which was 40% of our overall aggregate deal value.
1 The World Investment Report presents foreign direct investment trends and prospects at global, regional and national levels – see: unctad.org | World Investment Report 2017
2 According to the Balance of Payments Manual: Fifth Edition (BPM5) published by the International Monetary Fund, FDI refers to an invest-ment made to acquire lasting interest in enterprises operating outside of the economy of the investor. Further, in cases of FDI, the investor´s purpose is to gain an effective voice in the management of the enterprise. Some degree of equity ownership is almost always considered to be associated with an effective voice in the management of an enterprise; the BPM5 suggests a threshold of 10 per cent of equity ownership to qualify an investor as a foreign direct investor. For further information, see unctad.org unctad.org | Foreign direct investment
Of our deals involving an international element:
■ 87% of those deals involved an international investment in the UK;
■ the remaining 13% of those deals involved a UK buyer acquiring an overseas target; and
■ the aggregate deal value of the deals involving an international investment in the UK was £185.5 million (around 93% of the aggregate international deal value).
Both the percentage and the value of deals involving an international investment into the UK clearly illustrate the continued attraction of the UK to international investors.
The purpose of this report is to:
■ highlight the trends in key legal issues which arise on the acquisition and disposal of private companies in the UK; and
■ compare whether a different approach is taken by international buyers to the general legal trends in the UK M&A market.
Alice Gardner Partner T+44 (0)333 006 0341 E [email protected]
Figure 1 deals involving an international element. Figure 2 breakdown of international deals.
87%International investmentinto the UK(£185.5m)
13%UK buyer acquiringoverseas targets
(£14.5m)
2
Below is a summary of our key findings, the remaining part of our report provides a more detailed analysis of the trends and themes we have identified.
Pricing mechanisms
■ completion accounts are the dominant pricing mechanism – seen on 54% of all deals and 60% of our international deals;
■ a locked box mechanism was seen on 24% of all deals and 13% of our international deals; and
■ working capital (i.e. a cash free/debt free basis, assuming a normalised level of working capital) was measured on 65% of all deals and 75% of our international deals.
Retentions
■ retentions were used in 46% of all deals and were more common in our international deals (67%) indicative of a more cautious approach of international buyers; and
■ on international deals buyers generally seek a higher retention relative to the purchase price and there is a desire of buyers to have the protection offered by retentions – particularly in relation to liability for warranty and tax covenant claims and specific indemnity claims.
Earn-outs ■ earn-outs are not commonly used in the UK, but
are more common on international deals; and
■ most earn-outs were for 1 and 2 years.
Purchase price caps on liability ■ a cap of 100% of the purchase price was by far
the most common cap – accounting for 60% of all deals and 74% of our international deals, showing that international buyers are typically less prepared than domestic buyers to accept a cap of lower than 100% of the purchase price.
Sellers’ limits on liability ■ in both our international and UK deals most
aggregate claims thresholds/baskets were agreed in the region of up to 2% of deal value;
■ for non-tax warranties, claims periods of more than 2 years were extremely rare – most claims periods were between 13 months and 24 months for both UK and international deals; and
■ 7 years is the most popular tax claims period.
General disclosure of data rooms/ due diligence documents
■ general disclosure of data room/due diligence documents is common in UK deals – we saw this on 76% of all deals and 80% of our international deals.
Key findings
‘International buyers generally adopt a more cautious approach on retentions and limits on sellers’ liability, but trends on international deals are not substantially different to other UK mid-market deals.’
3
Completion accounts v locked box
A fundamental aspect of any share purchase deal is the pricing mechanism applied to establish the price payable for the target. It is very common in M&A deals for the final price to be determined by some form of price adjustment mechanism. Typically, this will involve:
■ a completion accounts or locked box mechanism being used to check the financial position of the target at completion, or at an agreed date prior to completion; and/or
■ a proportion of the purchase price being determined by reference to the financial performance of the target after completion, under an earn-out arrangement.
A completion accounts mechanism involves the final purchase price being calculated after completion has taken place, by reference to accounts relating to the target which are drawn up to the completion date. This approach allows the buyer to test, and ultimately adjust, the price it will pay by reference to the actual completion accounts of the target. The completion accounts will, therefore, show the position as at the completion date, but will be prepared within a specified time scale after completion. A completion accounts mechanism is typically used in many jurisdictions.
An alternative to the completion accounts mechanism is a locked box mechanism, where accounts are prepared to an agreed date before completion, and then “locked” to allow no subsequent adjustment. As this mechanism does not allow for any further price adjustment between the date of the locked box accounts and completion, any “leakage” of value is restricted by specifying certain transactions that cannot be undertaken by the target during this period, and which would otherwise cause its value to fall (e.g. dividends, management charges, bonuses or transaction costs put through the target). Buyers are protected against leakage by sellers giving covenants, warranties and indemnities, which give the buyer recourse on a pound-for-pound basis if any leakage occurs, apart from any agreed “permitted leakage” (e.g. agreed dividends). Locked box mechanisms are generally not as common in jurisdictions outside the UK.
Locked box mechanisms are used in much the same way as completion accounts to determine the purchase price, for example to agree the target’s net asset value on the basis of an agreed balance sheet, or to provide for a working capital adjustment to the price. However, the key difference with a locked box mechanism is that everything is
negotiated and agreed before the share purchase agreement is signed – no price adjustment is made after completion. A locked box mechanism tends to be seller-friendly and is often used instead of a completion accounts mechanism in a seller’s market.
Hybrid approach
We have also seen the development of a new hybrid approach of a quasi-completion accounts and locked box mechanism. This typically involves completion accounts being prepared for the month end before completion. These accounts become the “locked box” accounts for the period to completion, with the usual leakage protection mentioned above.
Pricing mechanism
Completion accounts
Locked box
Quasi completion accounts and locked box
None of the above (Fixed price deals)
Completion accounts
Locked box
Quasi completion accounts and locked box
None of the above (Fixed price deals)
14%
54%
24%
8%
7%
60%
13%
20%
Pricing mechanisms
Figure 3 pricing mechanisms for all deals (top) and international deals (bottom).
4
The deals surveyed clearly illustrate that completion accounts remained the dominant pricing mechanism – 54% of all deals we surveyed involved completion accounts (see figure 3 top) (this was up from 46% in our 2014 Monitor). In terms of our international deals, this figure increased to 60% (see figure 3 bottom)
The locked box mechanism was used in 24% of all deals we surveyed (this was down from 34% in our 2014 Monitor). This figure decreased to 13% for our international deals, perhaps indicating that international buyers prefer to use the more familiar completion accounts mechanism.
The hybrid approach of the quasi-completion accounts and locked box mechanism was seen in 8% of all deals we surveyed. Interestingly, all of the deals which made up that 8% were international deals, which shows that international buyers/sellers have been prepared to accept a locked box mechanism on deals, when combined with the traditional approach of preparing completion accounts when it comes to the locked box accounts. When we look solely at our international deals, the quasi-completion accounts and locked box mechanism was seen in 20% of those deals.
What completion accounts measure
When we look at what the completion accounts on our deals measured as the basis for adjustment, working capital (i.e. a cash free/debt free, assuming a normalised level of working capital adjustment) was
measured in 65% of those deals and net assets were measured in 35% of those deals. For our international deals involving completion accounts, working capital was measured in 75% of deals and net assets were measured in 25% of deals.
Who prepared the first draft of completion accounts?
Buyers clearly prefer to prepare the first draft of completion accounts, as this allows them the opportunity to both investigate the target business they have acquired and lead any negotiation as to price adjustment which may follow. Buyers prepared the first draft on 61% of all deals we surveyed involving completion accounts and this figure slightly increased to 67% on our international deals.
Germany
In January 2016 TLT, led by Alice Gardner, advised Hamburg headquartered DVV Media, a global publishing company, on its acquisition of the entire issued share capital of Road Transport Media Limited, who own publications including Commercial Motor, Motor Transport and Truck & Driver.
‘Completion accounts remain the dominant pricing mechanism, which is even higher on international deals where overseas buyers are more familiar with this procedure.’
5
What is a retention and when is it used?
The buyer may wish to retain part of the purchase price at completion to secure certain post-completion liabilities or obligations of the sellers. This is achieved by placing an agreed amount, typically an agreed percentage of the purchase price, into a retention account (also referred to as an escrow account) either for a fixed period or for the duration of the sellers’ relevant liability or obligation.
The retention account will usually be set up and managed jointly by the buyer’s solicitors and the sellers’ solicitors or by a professional escrow agent. However, you may also see a retention account set up and managed by one of the parties’ solicitors or, in rare situations, jointly by the parties.
Using a retention account creates a fund from which the liabilities or obligations can be paid, so for example, the buyer will be able to ensure that funds are available to satisfy warranty claims it brings against the sellers.
Retention accounts are typically used:
■ to secure obligations of sellers for warranty and tax covenant claims;
■ to secure obligations of sellers for specific indemnity claims; or
■ to secure the parties’ potential payment (or repayment) obligations under a price adjustment mechanism – e.g. completion accounts.
Often, multiple retentions are used to cover a combination of the above.
In terms of looking at how retentions typically work, we will assume that a retention is used to secure the sellers’ liability for warranty claims. If the buyer brings a claim against the sellers for breach of warranty and either:
■ the amount of the claim is agreed between the parties; or
■ the buyer receives a judgment for a specific amount in its favour,
the retention account holder will pay the relevant amount to the buyer from the retention account (usually with an amount which represents the interest earned on that amount while it has been held in the retention account). At the end of the retention period, and assuming that there are no outstanding claims for breach or price adjustment payments being brought by the buyer, any amounts remaining in the retention account are paid to the sellers.
Deals using a retention
Retentions were used in 46% of all deals we surveyed (this had increased significantly from 31% in our 2014 Monitor). Retentions proved to be even more popular in our international deals – 67% of those deals involved a retention. This figure is perhaps indicative of a more cautious approach of international buyers – retentions are a very common mechanism and are used both in US and European deals, so we are not surprised by this difference.
Retention: size relative to price
More than20% of
purchaseprice
Less than5% of
purchaseprice
International deals All deals
10% to14.99% ofpurchase
price
15% to20% of
purchaseprice
5% to9.99% ofpurchase
price
12%
10%
24%
30%
5%
10%
35%
20%
24%
30%
Figure 4 shows the size of the retention relative to the purchase price for all deals and our international deals.
It can be difficult to draw any firm conclusions from the above, because whether or not a retention is used on a deal and, if it is, the size of the retention relative to the purchase price are always key negotiating issues and will often depend on the negotiating strength of the respective parties. However, the figures would seem to suggest that on international deals buyers will generally seek a higher retention relative to the purchase price. This may be due to different cultural approaches to retentions and the desire to use a retention where sellers are in a different jurisdiction to the buyer.
Retentions
6
What did retentions cover?
In the deals we surveyed, multiple retentions were often used on deals to secure a combination of:
■ the parties’ potential payment (or repayment) obligations under a completion accounts adjustment mechanism;
■ obligations of sellers for warranty and tax covenant claims; and
■ obligations of sellers for specific indemnity claims.
In all deals where a retention was used:
■ to secure the parties’ potential payment (or repayment) obligations under a completion accounts adjustment mechanism, 54% of those deals were international deals;
■ to secure obligations of sellers for specific indemnity claims, 67% of those deals were international deals; and
■ to secure the obligations of sellers for warranty and tax covenant claims, all of those deals were international deals.
These figures clearly indicate the desire of international buyers to have the protection offered by retentions, particularly in relation to the sellers’ liability for warranty and tax covenant claims and specific indemnity claims, which perhaps shows that international buyers are less comfortable with taking credit risk on the sellers.
Retention time period
For all deals we surveyed where a retention was used, the most common retention period was until completion accounts had been finalised – this was seen on 30% of those deals. There is quite a dramatic drop in the corresponding figure on our international deals where a retention was used, as we only saw this period on 14% of those deals. This is linked to the point made earlier that since retentions are used more in international deals to secure warranty claims against sellers, the retention period is longer to fit in with the warranty claims period.
Germany
In July 2016 after the Brexit vote TLT, headed by John Wood, advised Bandvulc Group, a leading UK fleet management service provider and independent truck tyre retreader, on its sale to German headquartered Continental Tyre Group, a leading global tyre manufacturer.
19–24months
Until completion
accountsfinalised
International deals where a retention was usedAll deals where a retention was used
7–12months
13–18months
0–6months
12%
No specific time limit (e.g. linked to resolution of
outstanding claims)
More than 3 years–5 years
More than 5 years
25–36months
4%
17.5%
4%
14%
17.5% 17.5%
4% 4%
17.5%
3%
13%
11%
3%
30%
7%
17%
3%
13%
Figure 5 shows details of the retention time period for all deals and international deals.
‘International buyers seek a higher retention relative to purchase price.’
7
What is an earn-out?
An earn-out is a mechanism which involves at least part of the purchase price being calculated by reference to the post-completion performance of the target.
Earn-out arrangements can vary widely but under a typical structure, the buyer will make an initial payment on completion, followed by one or more deferred payments contingent upon the target company’s financial performance during an agreed period following completion. They will typically only be used in the UK where the sellers continue managing the target after completion, rather than the sellers completely exiting.
When was an earn-out used?
Earn-outs are not commonly used in the UK (perhaps due to perceived difficulty of administering earn-outs and protecting the sellers’ position). On all deals we surveyed, an earn-out was used on 27% of deals. They were more common when we look only at our international deals, and were used on 40% of those deals.
These figures may be explained by sellers being more likely to want, or being required by buyers, to continue to manage the target after completion where an overseas buyer acquires the target. They could also illustrate that value expectations needed to be bridged, by utilising an earn-out, on deals involving an international buyer.
What did the earn-out test?
In all deals involving an earn-out, the most common metrics used was EBITDA/profit, which was used on 50% of those deals. Turnover/revenue from certain products/contracts was used on 40% of those earn-outs.
Looking at earn-outs used on our international deals, we see a stark contrast. EBITDA/profit was used on only 17% of those deals. Turnover/revenue from certain products/contracts was used on 50% of those earn-outs.
Earn-out time period
Longer earn-out periods were more common in our international deals – 34% of earn-outs on international deals were for 3 or 5 years. This illustrates a desire for international buyers to require a longer-term view to be taken on the future performance of targets on earn-outs.
Earn-outs
4 yearsLess than12 months
International deals All deals
2 years 3 years1 year to23 months
0%
17%
50%
33%
0%0%
5 years
10%10%
30%
33%
0%
17%
Figure 6 shows the earn-out time periods for all deals and our international deals.
8
Earn-out size relative to price
Our findings indicate that an earn-out between 11–20% of the deal value was the most popular for all earn-out deals and our international earn-out deals, which provides a meaningful incentive for sellers whilst ensuring they are not overly exposed to future performance.
Otherwise, there was a fairly even spread of the size of earn-outs relative to purchase price, although that spread was across different ranges of deal value for all deals and our international deals.
Germany
In late 2014 TLT, led by Jon Gill, advised leading mid-market private equity firm LDC on the multi-million pound sale of its stake in the UK’s leading average speed enforcement business Vysionics to Jenoptik AG, a Frankfurt Stock Exchange listed optoelectronics business.
Sellers are keen to limit their liability under warranties and tax covenants which they give on deals. A key limitation is a financial cap on the sellers’ maximum liability.
It is common in most jurisdictions to have a cap on liability, usually a percentage of the deal value, which may vary dependent on deal size – typically for most small and medium sized deals the sellers’ liability will be limited to the amount of the purchase price (or possibly enterprise value, if higher), whereas in large transactions a lesser figure may often be negotiated. The level of the cap will also vary between different jurisdictions.
In all deals we surveyed, a cap of 100% of the purchase price was by far the most common cap – accounting for 60% of deals. A 100% cap was even more common on our international deals – accounting for 74% of international deals. This illustrates that international buyers are typically less prepared than domestic buyers to accept a cap of lower than 100% of the purchase price.
Purchase price caps on liability
1–24%100%
International deals All deals
50–74% 25–49%75–99%
11%9%
6%
14%
6.5%
60%
74%
6.5% 6.5% 6.5%
5% and under
6–10%
11–20%
21–30%
Above 30%
Unascertainable(and uncapped)
10% 10%
10%
40%
10%
20%
16.67%
50%
16.67%
16.66%
Outer ring show all dealsInner ring shows international deals
Figure 8 shows purchase price caps on liability on all deals and international deals.
‘40% of all earn-outs and 50% of international earn-outs were for between 11–20% of the deal value.’
Figure 7 shows the earn-out size relative to price on all deals and our international deals.
9
Other common limitations on sellers’ liability under warranties and tax covenants include (but are certainly not limited to):
■ an aggregate claims threshold or basket which seeks to prevent any claims being brought until a certain aggregate amount has been reached;
■ a time limit for making claims:
– it is common in most jurisdictions to have time limits for bringing claims, usually within a specified number of years from completion (which should typically allow for one or more full audit cycle of the target following completion); and
– a longer period is usually agreed for certain warranties, such as tax and environmental (to cover the period during which the relevant tax authorities can re-open tax assessments or to cover those types of claims which could take longer to emerge); and
■ limiting the share of the liability where there are multiple sellers – joint and several liability or several liability – where there are multiple sellers, each may seek to limit its liability to its share of the purchase price it receives and/or there may be a separate contribution agreement between the sellers to deal with this.
Aggregate claims threshold or basket
In all deals we surveyed, most aggregate claims thresholds were agreed in the region of up to 2% of deal value – these accounted for 79% of all deals. A similar trend was also reflected in our international deals, where 87% of international deals were agreed in the region of up to 2% of deal value. In a similar theme to the cap on sellers’ liability, these figures are indicative of international buyers being typically less prepared than domestic buyers to accept an aggregate claims threshold of more than 2% of deal value, showing the lower levels of risk an international buyer is willing to take.
At the other end of the spectrum, the figures are more or less the same, in that an aggregate claims threshold of more than 5% was only seen on 6% of all deals and on 6.5% of international deals.
France
In June 2016 TLT, headed by Alice Gardner, advised Briefing Media, the UK’s leading agriculture information and events group, on its acquisition of French based Global Data Systems.
Sellers’ limits on liability
More than4%–5%
Up to1%
International deals All deals
More than2%–3%
More than3%–4%
More than1%–2%
6.5%
31%
27%
60%
Morethan 5%
6%
9%
3%
0%
48%
3%
0%
6.5%
Figure 9 shows the aggregate claims threshold/basket as a percentage of deal value on all deals and international deals.
10
Time limit for making claims
There will usually always be a much longer period agreed for bringing tax warranty (and tax covenant) claims than the period agreed for bringing non-tax warranty claims. In addition to sellers giving detailed tax warranties, sellers will also usually enter into a tax covenant to provide protection to a buyer against potential tax liabilities, loss of tax reliefs etc, of the target – typically, buyers will bring a tax claim under the tax covenant rather than for breach of the tax warranties.
Non-tax warranty claims period
There is little difference in the non-tax warranty claims time periods we saw on all deals we surveyed and our international deals:
■ claims periods of more than 2 years were extremely rare – only 3% of all deals, and none of our international deals, had a claims period of more than 2 years;
■ most claims periods were between 13 and 24 months:
– 48% of all deals we surveyed, and 46.5% of our international deals, had a claims period between 13 to 18 months; and
– 43% of all deals we surveyed, and 46.5% of our international deals, had a claims period between 19 to 24 months.
The above indicates that buyers (both international and domestic) continue to insist upon a non-tax warranty claims period of at least one full audit cycle of the target following completion.
Tax claims period
In UK deals a tax claims period of 7 years is usually agreed. This was essentially borne out by all deals we surveyed, where 85% of deals had such a claims period.
Our international deals show that international buyers were not prepared to accept a tax claims period of less than the usual 7 years, as all international deals had a 7 year tax claims period.
Under 12 months
13–18 months
19–24 months
25–36 months
6%3%
43%
48%
7%
46.5%
46.5%
Outer ring show all dealsInner ring shows international deals
Figure 10 shows non-tax warranty claims period on all deals and international deals.
11
Limiting the share of the liability where there are multiple sellers – joint and several liability or several liability
Where there are multiple sellers giving warranties, the generally accepted position in UK deals is that the warranties are given “jointly and severally” i.e. if one of the sellers fails to pay their part of any warranty claim then the other sellers must make up the full amount. Where warranties are given by sellers “jointly and severally” any proceedings for breach of warranty may be initiated against some or all of the sellers, who will be liable for the full amount of any warranty claim.
Where warranties are given by sellers “severally” each seller gives the warranties as separate (cumulative) obligations. Each seller can be liable for the whole amount of any warranty claim unless otherwise stated – so, sellers will usually want to state that each seller’s liability is limited to the proportion of shares they are selling and in relation to any warranty claim, each seller will only liable for a similar proportion of that claim. For example, if there are 3 sellers each owning 1/3 of the shares, each seller will only liable for 1/3 of the purchase price and in relation to any warranty claim, each seller is only liable for 1/3 of the amount of that claim. Where warranties are given by sellers “severally” any proceedings for breach of warranty must be initiated separately against each seller.
On 74% of all deals surveyed with more than one seller, warranties were given jointly and severally. That figure rose to 83% when we look at our international deals with more than one seller showing that buyers are generally unwilling to accept individual credit risk on sellers that could prejudice their ability to seek recovery.
Japan
In May 2016 TLT, led by Andrew Webber, advised the shareholders of Wessex Garages on the sale of the company to VT Holdings Co Ltd, a major Japanese headquartered motor company.
United States
In December 2015 TLT, headed by Andrew Webber, advised the management team at M-Netics, an enterprise mobility solution provider, on its sale to Peak-Ryzex Plc, one of the largest enterprise mobility integrators headquartered in North America.
In the UK, it is usual for exchange (signing) and completion (closing) of share purchase deals to take place at the same time. The main driver for this is the desire for parties to have the certainty of a simultaneous exchange and completion. Otherwise there are risks and complexities that need consideration during the interim period.
Occasionally there may need to be a gap between exchange and completion. This is most often seen where regulatory, shareholder or other third party approvals must be obtained before the transaction can proceed or, in the case of listed buyers, where the buyer is carrying out a share issue to help fund the acquisition.
Where there is a gap, the conditions that need to be satisfied before completion are usually transaction-specific. Material adverse change (MAC) clauses (whether expressed as a condition or as a right to terminate) are not common in UK deals, although they are seen. A MAC clause seeks to allow the buyer to withdraw from the transaction if a “material adverse
change” occurs in relation to the target company’s business, assets or profits between exchange and completion.
Only 3% of the deals surveyed included a gap (primarily due to the need to obtain regulatory approvals). This was down slightly from 8% in 2014. All of the deals involving an international element exchanged and completed at the same time.
Sweden
In June 2016 TLT, led by Andrew Needham, advised the shareholders of Berwin Group, a leading UK rubber compounder, on its sale to HEXPOL, a Swedish listed polymer compounding group.
Gaps between exchange and completion
12
General disclosure of data room/due diligence documents
Restrictive covenants
Buyers will usually want to prevent sellers from being involved in a competitive business that could harm the goodwill of the target after completion. Share purchase agreements will, therefore, commonly include restrictive covenants which seek to limit the sellers’ activities following completion. These would typically prevent sellers from doing any of the following after completion:
■ carrying on any business in competition with the target;
■ poaching customers, suppliers or employees of the target; and
■ using any intellectual property belonging to the target.
It is common for restrictive covenants to be given by sellers on UK deals; in fact, it is extremely rare for them not to be given and there would usually
be exceptional deal-specific circumstances when they are not given. This was borne out by our 2016 Monitor, where restrictive covenants were provided in all deals we surveyed.
United States
Following the Brexit vote, in September 2016 TLT, headed by Antonia Silvestri, advised the management and shareholders of Exception EMS, a Wiltshire based specialist electronics manufacturing company, on its sale to US listed Fabrinet, a leading global electronics manufacturing provider.
In the UK, like many jurisdictions, sellers can disclose information which qualifies any of the warranties given by the sellers in the share purchase agreement. A buyer will not be able to bring a warranty claim against sellers if the disclosure satisfies any relevant standard of disclosure which is set out in the agreement (for example, the disclosure must contain sufficient detail to enable the buyer to make an informed assessment of the matter disclosed and determine its effect on the value of the target). There are commonly two types of disclosure:
■ general disclosures – these are deemed to be automatically disclosed against all of the warranties. Typical general disclosures include matters which appear in public records which the buyer should be aware of on the basis of its due diligence enquiries; and
■ specific disclosures – these are disclosed against specific warranties and will refer to actual matters concerning the target which, if not disclosed, would constitute a breach of warranty.
The disclosures will usually have a set of supporting documents which evidence the matters disclosed, which is known as the disclosure bundle. Sellers will usually want to “generally disclose” all matters contained in a data room or in due diligence documents and information supplied to the buyer and its advisers during the due diligence process. However, a buyer will seek to limit this and insist that the sellers must “specifically disclose” any relevant matters that are contained in the data room/due diligence documents, so that the buyer can assess any relevant matters against the specific warranties.
In all deals which we surveyed, the data room/due diligence documents were generally disclosed on 76% of those deals. We saw a similar theme on our international deals, where the figure increased to 80%.
These figures support the general view that such general disclosures are becoming more common in UK deals. While it will always depend on the circumstances of a deal, they could also perhaps illustrate the existence of a “seller’s market”. Previously, market trends had been thought to show that international buyers are not willing to accept general disclosure of the data room, taking a US style approach to only accepting disclosure of specific documents against specific warranties rather than disclosing a whole data room.
Japan
In September 2015 TLT, managed by James Webb, advised Smart Transactions Group Limited, a UK leader in digital payments and ticketing, on the multimillion pound sale of its subsidiary, Applied Card Technology Limited, a leading UK smart travel ticketing provider based in Chippenham to Japanese based Fujitsu.
13
Statistics included in this report
In autumn 2016 we published our M&A Market Monitor 2016 (2016 Monitor), in which we looked at the key legal issues which arise on the acquisition and disposal of UK private companies, and identified legal trends and themes which arose in negotiating the key terms of those transactions.
Our analysis was based upon the key private M&A share transactions we advised on during the previous 18 months (both buy-side and sell-side). These transactions covered a range of values (ranging from less than £1 million to £35 million) and in aggregate represented nearly £500 million in value (with an average deal value of around £12 million).
We produced a similar M&A Market Monitor in 2014 (2014 Monitor) and, compared to the 2014 Monitor, we experienced an increase in average deal value of 50%, with our aggregate deal value more than doubling during the period.
The statistics referred to in this report generally use the 2016 Monitor findings, although in some instances we also refer to the 2014 Monitor findings.
You can obtain a copy of our 2016 Market Monitor www.tltsolicitors.com/insights-and-events/publications/m-and-a-market-monitor-2016/ or by contacting Alice Gardner at [email protected].
Contacts
Alice Gardner | T +44 (0)333 006 0341 E [email protected]
John Wood | T +44 (0)333 006 0135 E [email protected]
Andrew Webber | T +44 (0)333 006 0085 E [email protected]
Andrew Needham | T +44 (0)333 006 1445 E [email protected]
Antonia Silvestri | T +44 (0)333 006 0189 E [email protected]
Ian Roberts | T +44 (0)333 006 1446 E [email protected]
Jon Gill | T +44 (0)333 006 0793 E [email protected]
Kay Hobbs | T +44 (0)333 006 0977 E [email protected]
Robin Staunton | T +44 (0)333 006 0302 E [email protected]
Stephen Devlin | T +44 (0)333 006 0657 E [email protected]
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