This article originally appearing in The Scotsman on Monday 30th October 2017.
The United Kingdom’s vote to leave the European Union caused unprecedented levels of uncertainty for UK businesses.
The uncertainty was predicted, but one unexpected result of Brexit is the relatively limited impact it has had on the corporate asset market, particularly across the UK/US deals corridor.
The immediate fall-out of Brexit saw volatility in the currency markets, with a dramatic decrease in the value of the pound.
This did not result in a corresponding drop in external investment, with the Merger and Acquisition (M&A) market in the UK remaining at a similar level to the rest of the world. The second half of 2016 and first half of 2017 have seen an increased prevalence of US purchasers in the UK M&A market place.
One of the underlying reasons for the increase of US purchasers in the UK is thought to be the fall in the value of sterling against the US dollar. Put simply, UK assets have become cheaper for US buyers. ADVERTISING
Although undoubtedly a factor, it would be an oversimplification to say that the fall in value of the pound is the sole reason for the increase in US buyers of UK companies. Post-Brexit, UK companies remain an attractive option for US buyers and there are numerous reasons for the increase in US/UK M&A activity:
- The US still sees the UK as a crucial stepping stone into Europe and the globalised world.
- The US and the UK have commonality in business practice, culture and language – US buyers understand and are comfortable with the familiarity.
It is recognised the UK has a skilled workforce and access to highly trained workers and managers.
The growth of the Technology, Media and Telecoms (TMT) sector is widely reported and it remains the most dominant sector for M&A activity. However, US interest is not limited to TMT-based businesses, with traditional manufacturing and retail businesses also being of interest to US buyers. Generally speaking, the sector seems to be irrelevant as long as the target company has a good business model with a strong balance sheet and quality recurring profits.
Although the UK and US have similar business practices, there are key differences in their legal approach to transactions, which could have a significant impact on the liability of the selling shareholders and could interfere in the ability to close a transaction.
Consequently, if you and your business are approached by a prospective US buyer, it is important to have advisers who have experience in the US market place to guide you through the process. The commercial, legal and strategic advice is crucial to ensure you are adequately protected from liabilities post completion and that a viable deal does not fall over because of a lack of familiarity with the cultural deal differences and the solutions for addressing those issues.
Some key areas where there are differences in the UK vs US approach are as follows:
In the US damages for breach of warranty are typically calculated on a Pound for Pound indemnity basis against the full amount required to remedy the defect. The buyer does not need to demonstrate a link between the breach and the value of the target company. In the UK, in the event of a breach of warranty claim, the buyer must prove they have suffered a loss, i.e. a reduction in the value of the company, and they also have duties to mitigate their loss.
The length of time which a claim can be made for a breach of warranty post completion is different in the UK and the US. In the UK, warranty claims are usually only “live” for two years post completion, while in the US claims remain “live” for upwards of four years.
In both the UK and US selling shareholders are subject to non-compete and non-solicitation restrictive covenants post completion. In the UK, the time periods for these restrictive covenants are usually around two years, while in the US they will tend to seek protection for around four to five years and the actual restrictions are much wider.
The common theme is that a seller’s exposure to liability in a US deal can be considerably higher than under UK deal terms.
It is imperative that if looking to sell to a US purchaser, experienced advisers, such as Turcan Connell, are engaged to ensure that UK deal terms are agreed and used as far as possible and appropriate protections are in place for the seller.
Bethan White is a senior solicitor in Turcan Connell’s Business Law Team.