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Your questions, answered

Will Procter, Senior Associate, Corporate

1. How does disclosure differ between US and UK/European M&A transactions?

Disclosure is a key area where the US and UK/European M&A markets differ. The position in the US is generally more buyer-friendly. Representations and warranties are typically only qualified by specific disclosures in a set of disclosures schedules prepared by the sellers. In addition, buyers often have the benefit of pro-sandbagging provisions, meaning they can bring post-closing claims for breaches of representations and warranties even if they were aware of the breach before signing the purchase agreement.

In contrast, the UK/European approach to disclosure tends to favour sellers. In addition to specific disclosures against warranties, it is customary for the contents of the data room and certain publicly available information to be generally disclosed against the warranties (subject to meeting the standard of “fair disclosure” set out in the purchase agreement). Sellers also frequently try to include anti-sandbagging provisions, which prevent buyers from bringing warranty claims for matters they knew about prior to signing.

For private equity buyers in the UK and Europe, this seller-friendly environment highlights the importance of a thorough diligence process and a clearly defined standard of disclosure in the purchase agreement.

2. What are the main differences in price determination mechanisms between US and UK/European deals?

While the closing accounts method – where the final purchase price is determined post-closing based on the actual cash, debt, and working capital as at the closing date – is frequently used in the UK, we see many deals adopting the locked box mechanism. This approach fixes the purchase price at signing, based on a historic balance sheet at an agreed date prior to signing (referred to as the “Locked Box Date”) rather than at the date of closing, and avoids the need for post-closing adjustments.

Private equity sellers often prefer the locked box mechanism because it offers price certainty at signing and can simplify the process (e.g. no post-closing true-up). For buyers, there are benefits too, particularly in terms of execution speed and reduced friction post-closing, which is valuable when integrating add-ons or preparing for a future exit. That said, buyers need to be confident in the quality of the locked box accounts and ensure the purchase agreement contains protections against leakage of value from the target company during the period from the Locked Box Date to the date of closing.

3. What is a key difference in the approach to recourse against the seller between US and UK/European deals?

In US M&A transactions, representations and warranties are commonly given on an indemnity basis. An indemnity is a promise to reimburse the buyer for specific liabilities, should they arise. The purpose of an indemnity in an acquisition context is, broadly speaking, to transfer the risk of a specified event or matter to the indemnifying party and to allow the indemnified party to recover on a pound-for-pound basis in respect of that matter or event.

On the other hand, in the UK and Europe, indemnification is typically limited to specific known issues that have been identified in diligence, fundamental claims (e.g. title and capacity) and tax claims. A buyer’s basis of recovery for non-tax/non-fundamental claims is usually via contractual “warranties”. A breach of warranty will only give rise to a successful claim for damages if the buyer can show that the warranty was breached and that the value of the target is less than it would have been had the warranty been true. The onus is therefore on the buyer to show that a breach has occurred and it has suffered a quantifiable loss.

4. What funding mechanics should US buyers be aware of when acquiring UK targets?

In UK M&A transactions, it is customary for the buyer to pre-fund its lawyers prior to signing and closing, with closing taking place on the basis of an undertaking given by the buyer’s lawyers to the seller’s lawyers. The purchase price is typically transferred to the seller’s lawyers within one business day of closing, and the seller’s lawyers deal with the distribution of the sale proceeds to the sellers and settling sell side transaction costs – this is not a buyer action.

Where a US private equity buyer is relying on debt financing to fund the purchase price, it is important to engage with the lender early in the process to ensure they are comfortable with the UK style pre-closing funding mechanic.