Private mergers and acquisitions in the UK (England and Wales): market analysis overview

Q&A guide to private mergers and acquisitions market practice in the United Kingdom.

The Q&A gives a high level overview of key issues including current major trends, private M&A activity, structuring and documentation in transactions, governing law and arbitration, and reform and future market trends.

This Q&A is part of the multi-jurisdictional guide to private mergers and acquisitions law. For a full list of jurisdictional Q&As visit www.practicallaw.com/privateacquisitions-mjg.

Laurence Levy, Jeremy Kutner and Simon J Little, Shearman & Sterling LLP
Contents

Market overview

1. What are the current major trends in the UK private M&A market?

During 2012 and 2013, a feature of the UK private M&A market has been a significant expansion in the sources of financing for leveraged acquisitions. This has included a noticeable increase in the use of high yield bonds, European borrowers accessing the US loan financing markets and the emergence of a group of alternative fund lenders, in some cases making available unitranche loans. Equity sponsors and other leveraged borrowers now have a variety of financing options, often offering quite different results in terms of pricing, covenant flexibility, ability to raise additional financing and intercreditor complexity.

The stronger private equity sponsors, in particular, are seeking to secure the best of all worlds by combining the most attractive features of the different markets, resulting in an evolution of what is "market" for leveraged loan documentation.

In the private equity M&A market, during 2012 and 2013 there has been an increase in bilateral transactions (in place of auctions) in many cases to US trade buyers. In those cases, this has resulted in an "Americanisation" of deal terms, including the inclusion of material adverse change (MAC) conditionality and use of escrow structures in the event of a claim under the acquisition agreement. To the extent that a particularly attractive company is put up for sale, pre-emptive strikes have also been seen, with fully formed deal documentation coupled with an attractive valuation, to secure a quick acquisition without the competitive tensions associated with auction processes.

 
2. What has been the level of UK private M&A activity in 2012/13?

According to data compiled by ThomsonOne, in the 12 months ending 30 June 2013, the aggregate value of the UK private M&A market was about GB£12 billion. This was comparable to the preceding 12 month period, although the volume of transactions declined by about 8%, with ThomsonOne recording fewer than 1,500 transactions during the 12 month period ending 30 June 2013. The energy and power, industrials and real estate sectors accounted for the majority of the UK private M&A market by value and about 19% by volume.

 

Deal structures

3. What are the current trends in the structuring of UK private M&A transactions?

Share acquisitions with cash consideration remain the prevalent form of transaction structure. This may be attributable to the comparative simplicity of completing a transaction structured as a share acquisition and, from a valuation perspective in a volatile macro-economic environment, the certainty of receiving cash consideration.

Fixed price transactions (often in the form of "locked boxes") continue to be the structure of choice for private equity sellers, although they are also increasingly used by trade sellers conducting auctions. Earn-outs and deferred consideration are not common features of the UK private M&A market as a whole, although this can vary from sector to sector.

However, post-completion adjustments to the purchase price are a common feature of the UK private M&A market, particularly where there is a significant delay between signing and completion and where a business is to be carved out of a larger group. Adjustments are most commonly made to account for variations in working capital and net debt.

The use of escrow structures has increased in the private equity M&A market as a basis for making contractual claims in respect of warranties and post-completion purchase price adjustments.

 
4. What are the current trends in the terms and documentation of UK private M&A transactions?

Material adverse change (MAC) conditions are increasingly negotiated between buyers and sellers, particularly in cross-border transactions where such provisions may commonly feature in a buyer's domestic market. However, MAC conditions continue to be uncommon in transaction documentation. Where MAC conditions are agreed, they will often only be triggered if an event satisfies a high financial threshold. Exceptions to the scope of the definition of MAC or material adverse effect are typically included (for example, industry conditions or general economic or political circumstances), although such exceptions are often subject to a qualification that the relevant conditions or circumstances do not have a disproportionate impact on the target company or its group. Also, MAC conditions are being seen where US sources of financing are used for acquisitions, because the terms of US financing will include MAC conditionality.

Buyers are increasingly succeeding in broadening the scope of warranty coverage, although sellers often succeed in disclosing all due diligence information (rather than a limited subset of it) against such warranties. While certainly not the norm, private equity sellers have, on occasion, conceded business warranties. However, such concessions often tend to be in respect of identified issues which cannot be addressed through further diligence or otherwise reflected in the price (although, in these cases, recovery may be limited to an amount set aside in an escrow account for a short period of time). Also, possibly reflecting an "Americanisation" of terms in larger transactions, and continued macro-economic uncertainty against which transactions are conducted, there is an increasing tendency to seek repetition of warranties at completion. Where warranties are repeated, it is more common for repetition to be limited to "core" warranties regarding title to the shares or assets and the capacity and authority of the seller to enter into and complete the transaction.

Warranty and indemnity insurance has a growing profile in the UK private M&A market. For example, since 2010, Marsh, one of the leading insurance brokers in the warranty and indemnity insurance market, has seen year on year increases in the number of transactions in the UK using insurance products, with an aggregate increase of 43% over 2010. This trend has been driven by sellers seeking a clean exit by "stapling" warranty and indemnity to the sale process, so that a broader set of warranties can be presented but with limited post-completion financial exposure for the seller. Buyers are also arranging warranty and indemnity insurance to secure sufficient financial protection needed to proceed with a transaction, without seeking to raise a seller's post-completion financial exposure and so prejudicing the competitiveness of their offer.

Limitation periods for warranty claims are customarily sufficiently long to permit one audit cycle and claims thresholds do not usually operate as deductibles from the amount recoverable from a seller (that is, once a claim exceeds the negotiated threshold, the entire value of a claim is recoverable and not only the excess).

 
5. What are the current trends in how UK private M&A transactions are conducted?

There is particular focus on due diligence to test valuation assumptions and operational risks. Regulatory and compliance risks, particularly where the target group has international operations, are increasingly subjected to detailed attention during due diligence, in light of the reputational and financial damage that can arise from acquiring operations associated with money laundering, bribery or corruption.

 

Cross-border litigation and arbitration

6. Is it common market practice for a share purchase agreement to provide for a foreign governing law and/or jurisdiction? If so, in what circumstances does this occur and which governing law and/or jurisdiction are common choices?

Transactions principally relating to assets located in the UK, particularly where the parties are based in the UK, are customarily governed by English law. International transactions, even those without a connection with the UK, are also commonly governed by English law. This is due to the:

  • English legal system having an international reputation for integrity and impartiality.

  • Flexibility that English law permits in devising contractual relations.

  • Breadth and depth of legal, financial and other advisers familiar with the English legal system and market.

 
7. Is it market practice for an arbitration provision to be included in UK private M&A documents? Are arbitration clauses enforceable in your jurisdiction? Do local courts respect the choice of jurisdiction in an arbitration clause?

Arbitration clauses are most commonly used in the following cases:

  • International transactions involving parties located outside the UK, where arbitration offers enhanced international enforceability compared to court judgments and a neutral forum for disputes in which neither side is considered to hold home advantage.

  • Where there are perceived benefits to adopting a private or confidential dispute resolution procedure provided by arbitration.

  • Where the parties' ability to select an arbitrator is important (for example, where disputes might require particular technical expertise or specialist knowledge of an industry or sector).

As one of the world's leading centres of international arbitration, London is a consistently popular choice as the seat (or legal place) of arbitration. English courts readily enforce arbitration agreements and must stay a court action on the application of a party to an arbitration agreement, if the court is satisfied that a valid and operative arbitration agreement exists.

 

Recent developments and proposals for reform

8. Have there been any significant recent or proposed legal developments affecting the market that could impact on transactions?

The European Commission (Commission) has published a consultation paper inviting public comments on its proposal to improve the effectiveness of Regulation (EC) 139/2004 on the control of concentrations between undertakings (Merger Regulation) (see Practical Law Competition Legal update, Commission consultation on measures to improve the effectiveness of EU merger control). This is to address, among other things, non-controlling minority shareholdings. The proposals subject to consultation aim to expand the powers of the Commission, so that they are comparable to those of EU national level regulators and other regulators outside the EU, who have the power to investigate acquisitions of shareholdings below the Merger Regulation level of control. Following completion of the consultation period on 12 September 2013, the Commission is expected to decide whether to proceed with a legislative proposal.

The impact of the proposals on UK private M&A transactions should not be overstated as, according to the Commission's own assessment, there are only a limited number of problematic cases involving non-controlling minority shareholdings. However, the Commission notes that it might issue guidance on the type of cases it would most likely examine and, until such guidance is published, there could be uncertainty for parties regarding the circumstances in which a transaction may be investigated on the basis of a perceived competition problem.

In the UK, various procedural changes will be implemented as a result of the merger of the two UK competition regulators, the Office of Fair Trading and the Competition Commission, and the creation of the Competition and Markets Authority (CMA) with effect from 1 April 2014 (see Practical Law Corporate Legal update, Competition: BIS reform of merger regime). The Phase I investigation timetable will be set at 40 working days (subject to extensions in certain cases) and the CMA will have enhanced powers to request information and to adopt interim measures to cease or unwind pre-emptive action (that is, action which could prejudice the outcome of its review) in relation to both anticipated and completed transactions.

 
9. What will be the main factors affecting the market in 2013/14, and how do you expect the market to develop?

A continued focus on legal compliance is expected, as regulators continue to pursue enforcement of corruption, bribery and money laundering laws, and stricter anti-corruption regimes are adopted around the world.

Emergence from recession and a positive economic outlook is expected to have a positive impact on M&A activity, providing a better environment for financial sponsors to exit investments and for corporates to use cash balances.

 

Contributor profiles

Laurence Levy

Shearman & Sterling LLP

T +44 20 7655 5717
F +44 20 7655 5479
E laurence.levy@shearman.com
W www.shearman.com

Professional qualifications. England and Wales, Solicitor, 1988

Areas of practice. Public and UK private M&A; joint ventures; restructurings; general corporate advisory transactions.

Recent transactions

  • General Electric Company on its successful US$4.3 billion bid to acquire the Avio Group.

  • Tata Steel on its US$469 million sale of Teesside Cast Products to Sahaviriya Steel Industries of Thailand and related joint venture to operate Redcar Wharf.

Jeremy Kutner

Shearman & Sterling LLP

T +44 20 7655 5743
F +44 20 7655 5443
E jeremy.kutner@shearman.com
W www.shearman.com

Professional qualifications. England and Wales, Solicitor, 2003

Areas of practice. Public and UK private M&A; joint ventures; restructurings; general corporate advisory transactions.

Recent transactions

  • Nokia on its EUR1.7 billion acquisition of Siemens' stake in Nokia Siemens Networks.

  • Vivendi on the GB£487 million sale of Parlophone Label Group, by its subsidiary Universal Music Group, to Warner Music Group.

Simon J Little

Shearman & Sterling LLP

T +44 20 7655 5615
F +44 20 7655 5332
E simon.little@shearman.com
W www.shearman.com

Professional qualifications. England and Wales, Solicitor, 2002; New York, US, Attorney-at-law, 2008

Areas of practice. Public and UK private M&A; joint ventures; general corporate advisory transactions under English and New York law.

Recent transactions

  • Citi on its acquisition of ING's Custody and Securities Services Business in seven countries across Central and Eastern Europe.

  • IntercontinentalExchange Inc. in connection with its agreement to acquire a 79.12% interest in the derivatives and spot natural gas business of APX-Endex from NV Nederlandse Gasunie.


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