Thinking of selling to a US buyer? If so, read on…
As M&A becomes increasingly international, historic differences between UK and US practice are diminishing but several key distinctions remain. Recognising these can help to bridge the transatlantic gap in negotiating terms of purchase agreements. Some of these key differences include the following:
- Deal Certainty: US purchase agreements typically contain more conditions to a purchaser’s obligation to complete the transaction than those in the UK. Regulatory approvals and financing conditions, allowing the buyer to withdraw from the deal if it has failed to obtain the necessary financing, are common in US purchase agreements. Consequently, termination fees are more common than in the UK, where if financing is not received, the purchaser will pay a fee to the seller.
- Pricing Mechanisms: A purchase price adjustment mechanism based on completion accounts remains the most common approach for US buyers and a seller is often required to deposit a portion of the purchase price into an escrow account as security for its obligation to pay any “true-up” on the purchase price.
- Seller Liability: Seller liability, including the level of warranty protection given and the limitations on liability for breach by the seller are usually heavily negotiated in US and UK transactions alike. However, the risk allocation under the warranties tends to favour the purchaser in US purchase agreements and the seller in UK agreements as described below.
- Warranty Coverage: Coverage provided by representations and warranties is generally broader in the US than in the UK. Warranties and representations in the US will typically be less qualified by a materiality threshold and the seller’s knowledge, especially in relation to undisclosed liabilities.
- Representations and Warranties: The UK distinction between representations and warranties has no practical consequence in the US; whereas in the UK a seller should generally resist giving representations as opposed to warranties.
- Disclosures: The approach to disclosures differs. US convention is for the buyer to allow specific disclosures only in respect of each warranty and representation against which disclosure is being made. General disclosures are not common.
- Indemnities: While in the UK seller indemnities are reserved for particular identified areas of risk, and remedies for a breach of a warranty will be limited to a contractual claim for damages, US purchase agreement typically include provisions indemnifying the purchaser against breach of the representations and warranties.
- Escrow: An escrow may be the exclusive source of recovery for indemnification claims, particularly for a private equity seller.
- Financial sellers: In UK practice if a seller is a private equity sponsor, it is rare for it to provide warranties beyond “fundamental” items such as title to shares and capacity. In contrast, under US practice, private equity sponsors more frequently provide representations and warranties, but their monetary exposure to claims will typically be limited to a portion of the purchase price deposited in an escrow account at completion
- Applicable law: The choice of governing law and place of any dispute resolution has many practical implications and should be addressed at an early stage. We generally advise that a purchase agreement is governed by Scots or English law rather than US law, both because the business being sold is UK-based and because the UK courts are generally more accessible and less expensive for a UK based seller. If US law is to apply, be aware that US law varies on a state by state basis which may create material differences in a purchase agreement.
There are many other differences of course, ranging from vocabulary (ordinary share/common stock; waistcoat/vest; braces/suspenders) to regulatory matters such as foreign investment in the US and the devil is in the detail of the documents.
To find our more then please contact Tracey Ginn at email@example.com or on 0131 226 8232. Tracey is MBM Commercial’s US and UK Corporate Partner and advises clients on doing business transactions in the US.