1. Introduction

If you are a US based buyer bidding to acquire a European target group, it will be important to take legal and other advice on at least the following areas:

2. Regulatory

Merger Control, Foreign Direct Investment and the EU’s Foreign Subsidy Regulation will need to be considered at the macro level, and how (if at all) these impact the deal, deal timing, and costs.

If the target group is operating in a regulated sector, there will also be additional regulatory aspects to consider and the time needed to get clearances. Eg financial services companies regulated by the FCA or PRA in the UK or BAFIN in Germany – as clearances can take 6 to 12 months for new applicants and such regulators assess whether the buyer is a fit and proper person to own and control or have an interest above certain thresholds in such a business.  Defence, media, healthcare, gambling and others also have their own additional regulatory regimes to consider.  

For any buyer using debt financing, it will be important to ensure that the financing availability lasts until the long stop date in the sale and purchase agreement (and any extended period), and you will need to factor in the cost of such debt availability.  A buyer should also avoid signing up to “hell or high water” clauses as these oblige a buyer to do anything to satisfy the conditions in order to complete, which puts all risk on the buyer and can be very onerous.

3. Locked box accounts 

In the US, most deals are structured so that the ultimate purchase price is paid by reference to completion accounts as at the date of completion, but drawn up post completion typically by the buyer.  Usually, a net assets or working capital adjustment and specified accounting policies are agreed by the parties as to how such accounts are drawn up, and the relative targets by reference to which the purchase price paid by the buyer at the time of completion is adjusted. 

Contrast with EU/UK where use of Locked box Accounts is prevalent. Here the deal is priced by reference to a historic balance sheet (usually less than 6 months old) as if the buyer bought the target as at that date, with leakage protection for the buyer so that the seller cannot extract value or benefit from the target group in the period from the locked box date to completion.  For example, if the seller extracts dividends or management charges, this will found a buyer leakage claim, unless this is agreed in a permitted leakage schedule, which may still result in a value adjustment under the Enterprise Value to Equity Bridge or the consideration being paid by the buyer for the target group.  

The seller also usually seeks a ticker fee on the equity price offered by the buyer from the locked box date to completion to compensate it for the net of tax cash generated in the target from the locked box date to completion.  It is of course key for a buyer to diligence the locked box accounts since they are the foundation for the purchase price being paid by the buyer, and that the management accounts post the locked box date justify payment of any ticker fee requested.  

4. Works councils

Another key difference between the US and European markets are workers’ rights, and requirements to inform/consult works councils, trade unions and employees about the deal (and the deal timetable will need to accommodate these requirements). There are different requirements across Europe, but generally these are a lot stronger in the EU. Companies above a certain size, or with a certain number of employees, are required to elect and have employees sit on a works council, and which can also mean they have a seat on the board in countries such as France or Belgium. Where a company has operations in multiple EU countries it may also trigger requirements to inform/consult the European Works Council.

Legislation around the rights of works councils to be consulted on possible acquisitions and to have a say on them is particularly broad in France and Belgium and relatively broad in Italy, the Netherlands and Germany. 

In France you cannot sign an SPA above a certain size where a French company has 50 employees or more if you haven’t gone through a mandatory consultation process of up to 60 days. In some deals French law even requires employees to be informed about the deal 2 months before the signing, and given an opportunity to make an offer to buy the target. That 2 month period can be cut off early if each employee confirms in writing they do not intend making an offer. Any agreement reached is designed as a put and call option allowing the buyer to put the deal on the seller on the agreed terms once the 60 day process has elapsed and similarly for the seller to call on the buyer to honour the same if the buyer doesn’t exercise the put.  

Failure to go through this process in France is a criminal offence and the transaction can be set aside/ines can be levied of up to 2% of the purchase price. Although not the same for every country, failure to consult can result in hefty fines and claims if not carried out properly. The UK tends to be less problematic absent any strong trades union issues and agreements being in place which capture M&A.   

5. Use of W&I insurance

Like the US, Rep and Warranty insurance (called Warranty and Indemnity insurance (“W&I”) in UK/EU) works the same way in the EU/UK and has similar limits and approach. Most, but not all EU/UK deals will have this feature as part of an auction process, resulting in sellers having a GBP£1 or EUR1 liability cap for any claim covered by the W&I, and leaving buyers having to look to the W&I for any claim. Buyers should look at the best W&I terms being offered by interested insurers as part of the auction process, but should also consider if they have any better agreed terms with any regular insurer they already work with. However, not all insurers will offer W&I across all EU markets and (where available) may also qualify the W&I coverage markedly in certain countries around perceived country risks. Costs can also differ significantly with the W&I costs on English law deals often being cheaper. W&I usually covers most warranties and provides a synthetic tax covenant to cover material unknown tax liabilities that relate to the pre-completion period, subject to standard exceptions.

6. Vendor Due Diligence (“VDD”) and Due Diligence (“DD”) in the context of W&I insurance

Sellers often commission VDD reports which cover, accounting, finance, tax and commercial, as well as legal and sometimes insurance and technical DD reports. VDD can be very useful as buyers can bid on an informed basis. A buyer will (if successful) expect to get reliance on the VDD reports, and only conduct top up DD to cover updates since the date of the relevant reports, key areas of focus and/or gaps in the reports. In some cases (where a legal factbook) is produced, reliance is not given on such reports, which means there can be a gap in coverage as many top up reports from buyers, will assume the veracity of such legal fact books as part of any top up DD. As always, with W&I, the quality of cover being offered is dependent on the degree of DD undertaken by the buyer. Buyers who cover DD in house, tend not to get the cover expected as insurers want to see proper DD reports which cover all the key areas expected to be covered by the W&I.  

7. Warranties and disclosure process

In the US, typically you see warranties given at signing and closing with a disclosure schedule forming part of the SPA, with limited ability for a buyer to claim once closing has occurred. In the UK/EU context, sellers typically give title and capacity/authority warranties at both signing and closing not usually subject to disclosure, with the buyer having the ability to claim for up to the full amount of the consideration paid if there is a breach of such warranties. Business and tax warranties tend only to be given on signing (and not closing where there is a split exchange and completion), with buyers taking the risk after signing, and having to rely on conduct of business undertakings in the period between signing and closing to found any claim. A disclosure letter is usually delivered to the buyer by the seller (just management sellers where the sale is of a private equity backed business) immediately prior to signing, disclosing how any warranty may be untrue.  General disclosure of the data site tends to be a given on UK/EU deals, whereas in the US, this is seen as more contentious.  

8. Management incentives

Management is typically incentivised by private equity buyers by being granted sweet equity in the new buy side vehicle from completion. Such sweet equity (typically being low cost to the managers) should mean that managers are well rewarded in a tax efficient manner if they deliver the returns expected by the private equity house sponsor that is backing the management team to deliver. With a corporate acquiror, management incentives tend to be more option or bonus based long term incentive plan arrangements which are typically less tax efficient. 

There can be a significant disparity between the differing incentives being offered by potential buyers to the existing target management team, and which can be dictated by the relevant buyer’s views on the management team and their quality, whether they already have an existing business into which the new target can be rolled in, and how replaceable such managers are, or their house approach. 

9. Restrictive covenants

US buyers can get restrictive covenants from sellers in the SPA when buying in the UK/EU. Private equity sellers won’t give a non-compete in favour of the buyer, but will typically agree to covenant not to solicit key employees in the business, for between 1 to 3 years post Completion depending on the buyer’s bargaining position. With a corporate seller, you can get such covenants at least for 3 years.   

For individuals who are minority sellers, (if any such covenants are agreed to be given) they tend to be of a shorter duration apart from the CEO and possibly the CFO where you may get up to 2 years, with the lower periods up to 6 months for more junior executives. In employee service agreements, the duration of non competes tends to be no longer than 12 months for the most senior employees, and in some countries in Europe, these are only valid if the executive is being paid during that restrictive period.

10. Know Your Client (“KYC”) and payment mechanics

Anti-money laundering rules and regulations are more stringent in the UK/EU than the US, with KYC identification required by those involved in UK/EU M&A, including opposing or other country counsel, banks, escrow agents, payment agents, other professional advisers etc. Having KYC ready as a buyer will help smooth the path of the deal.

Consideration payments on UK/EU deals used to be routed through seller or buyer counsel, with counsel providing undertakings to hold client/third party money to order pending completion. Nowadays, there is an increased use of payment agents who make all the payments identified in the funds flow paper produced for the transaction. US buyers should note the time taken to transfer monies to Europe to meet banking deadlines, as the time difference works against US buyers. Usually, monies are transferred to a UK/European bank account at least a business day ahead of closing to avoid missing a completion deadline. Exchange rates and fees should also be considered to ensure the buyer can satisfy payment in full on completion.

Leaving aside tax, tax structuring issues and financ-ing which are beyond the scope of this article, although there is a lot to consider, with the recent strength of the dollar, there are bargains in the UK/EU markets if a US buyer is prepared to navigate the regulatory and legal landscape.