David Wallis and Peter Sugden outline what commercial teams need to know about US/UK deals.
There are differences in private M&A market practice between the US and the UK that we believe commercial teams need to know in order to avoid these issues coming up too late in the process if lawyers are only engaged later on.
By some measures, 2015 saw an increase in the value of insurance sector deals, although volumes globally were down compared with 2014. A good proportion of the deal activity in the UK market tends to be driven directly or indirectly by US capital (the relative proportion of US money versus money from other jurisdictions ebbs and flows of course, but rare is a process where there is no US involvement).
Our work so far in 2016 has seen a continuation of US buyers looking at a range of assets, both carriers and brokers.
Deal teams on either side of the Atlantic often approach negotiations differently, and bring different experiences and market norms to bear. To avoid unnecessary friction in any process, those closest to the negotiations need to appreciate the differences in culture, style of negotiation and documentation, and bear these in mind at the very start.
Culture and approach
Many M&A advisers will say that a "US-style" approach to negotiation can be more direct and more confrontational than a "traditional UK" approach. Whilst there is some truth in this, we also see large differences in style between individuals and teams from across Europe.
As all readers will know, dealing with people from different countries and cultures can involve additional complexity, and requires special care to be taken in communication. Even amongst English speakers, as the joke goes, we can often be divided by a common language.
The governing law can make a difference. Cross-border deals around the world are done under many governing laws, but most US/UK deals will either be done under English law or New York law.
Both US- and UK-style acquisition agreements tend to be longer and are more heavily negotiated than agreements under the laws of continental Europe, which are often very different.
Subject to exceptions, under English and New York law, the parties can essentially record what they want in their agreement.
A US-style acquisition agreement can be more buyer friendly – the converse of a UK-style acquisition agreement. The approach to "representations and warranties" and "disclosure" is the clearest example of this.
Limitations on liability under UK-style agreements can, however, be more buyer friendly – so there is some balance here. There are differences in the approach to "walk away rights" too.
Under English law, a buyer usually needs to prove that the target company is worth less overall as a result of a warranty breach. So the fact that an asset is missing, for example, does not necessarily mean that a successful claim will be able to be made.
US buyers often find this incomprehensible – they are used to being able to recover on what is called "an indemnified basis" – i.e. on a dollar for dollar basis.
The US approach to disclosure against warranties requires the seller to list qualifications to warranties (i.e. the exceptions to the statement that make the statement untrue) in a disclosure schedule.
It is far less typical under a US-style deal to allow a seller to qualify a warranty by reference to a document in the data room.
The US approach puts a lot of risk on the seller, and the disclosure exercise can be expensive and time-consuming for management as well as external advisers.
Whilst always a matter for negotiation, it is common under the UK approach for a seller to benefit from information contained in the data room. Buyers almost always require a seller to make "specific disclosures" too, but there is the potential safety net for the seller of being able to rely on information provided to a buyer in the data room.
This could be abused, of course, with sellers looking to hide needles in haystacks, and this has led to the concept of a "fair disclosure" override, whereby (in short) the information needs to be reasonably obvious to qualify a warranty, but the fact that it wasn't included in the disclosure schedule (usually a separate "disclosure letter" in the UK) doesn't in itself mean the seller is sunk.
There is a great deal of "market" information available about US deals, given the filing requirements of EDGAR (the Securities and Exchange Commission's publicly available database of US securities filings, including sale and purchase/merger agreements), and lots of reports are written each year profiling, for example, liability caps.
Liability caps tend to be lower under US deals, with 10-20 percent of the equity value of a target common. Practice is currently very mixed in the UK, and from the position 15 or 20 years ago where liability caps of 100 percent of the equity value were seen, especially for smaller deals, a number closer to 50 percent is now more typical.
We increasingly see caps closer to the US level, particularly in competitive auction sales.
Under US deals, claims cannot usually be brought until the aggregate amount claimed exceeds a deductible level, whereas under UK deals a so-called "tipping basket" is more common (i.e. once a threshold amount has been reached, all claims up to and beyond that amount are claimable, subject to any de minimis exclusions).
Whenever the closing of an acquisition takes place some time after the deal is signed and announced (e.g. because the regulators' consents are needed), buyers often require a material adverse change (MAC) clause, sometimes referred to as a material adverse effect. This concept protects the buyer if something of significance happens between signing and closing.
US buyers, especially those that are listed, almost always insist on a MAC clause. Unlike in the UK, there is a relatively sizeable body of law on MAC clauses.
Such clauses are always heavily negotiated. From a seller's perspective, a "narrow" clause will provide the greatest deal certainty. A buyer will, however, want the broadest clause possible.
One relatively recent development in US/UK practice has been to include Delaware law-governed MAC clauses in English law-governed acquisition agreements.
Typical Delaware-style clauses tend to be construed by the state’s courts in a way that makes it difficult for a buyer to walk away. US buyers are generally comfortable with these clauses. What we are seeing though is that buyers then seek to add further specifics – for example around capital requirements.
It is difficult to draw too many jurisdictional conclusions on the approach to actuarial matters. As a gross simplification, we tend to see US buyers looking for greater levels of warranty protection on actuarial matters than is typical in a UK context. This can be a really difficult area on insurance deals, as these matters obviously go directly to value.
Mention of even a few of the differences between what a US and a UK party may expect shows that what might be seen as "legal" points are in fact anything but, and it is beyond the scope of this article to highlight other important differences such as financing conditions and break fees.
We've seen problems arise when commercial negotiating teams aren't familiar with these differences (and unless they've done a lot of US/UK deals, why should they be?), and/or they don't involve appropriate legal advisers early enough.
A reference to "customary terms" in a US/UK term sheet almost always leads to some difficult discussions...
This article is provided for educational and information purposes only and is not intended and should not be construed as legal advice.
The article was first published in the Insider Quarterly.