How different is an M&A sale transaction if the buyer is from the US rather than the UK?
Our US Team continues to be busy advising on transatlantic sale and purchase transactions and in the current active M&A environment, it is useful to consider the main differences to expect when dealing with a US buyer. Generally, the principles of UK and US purchase and sale agreements are similar but there are some significant differences in approach. These include:
Asset vs. Share Sale:
- Asset sales tend to be more common in the US, including for liability and tax reasons. In an asset sale, the buyer can determine which assets of the target company it will acquire and any liabilities that it will assume as part of the transaction. Also, a US buyer should be able to “step up” the tax basis of several assets over their tax values and obtain tax deductions for depreciation and/or amortization.
- However, a share sale is likely to be preferred by UK sellers and is typically a less complex transaction than an asset sale. Importantly, in an asset sale UK sellers may not be eligible for favourable capital gains tax treatment under Business Asset Disposal Relief.
- To bridge this gap, it can be helpful to make a potential buyer aware of UK market norms and the relative simplicity of a share sale as well as the implications of an asset sale such as the tax disadvantages for sellers and the application of TUPE to employees. The sellers may also suggest various “sweeteners” such as fee-sharing and specific protections against any anticipated liabilities.
- Completion escrow: A US buyer will typically prefer to make all payments to sellers, including any post-completion adjustment to the purchase price and any deferred consideration, through a third-party escrow agent. While this may add another layer to an already complex process, such arrangements are routine for US businesses and typically work smoothly.
- Warranty/Indemnity Escrow: A proportion of the purchase price (g., 10 – 15%) may be placed in escrow for a period after completion (e.g., 18 – 24 months) as the exclusive source of recovery for any warranty and indemnity claims other than fundamental warranties and fraud.
- Warranty and indemnity coverage: A US buyer will expect risk allocation to favour it, with robust warranty coverage from the sellers, often on an indemnity basis, and more limited disclosures.
- Limitations: The flip side of this more extensive coverage is that limitations on the warranties and indemnities tend to be more detailed and include a variety of express limitations on the buyer’s ability to recover losses from the sellers.
- FX Risk: A US buyer will often want to avoid any exchange rate exposure and to pay the purchase price and any other payments due to the sellers in US dollars, whereas UK sellers may prefer to receive sales proceeds in Sterling. This is a matter for negotiation and an issue to consider at an early stage in discussions with a buyer, so that preparations may be made such as fixing and FX rate, hedging and setting up US dollar bank accounts.
We recommend that sellers identify such different perspectives at an early stage in a transaction, ideally at the term sheet stage, and endeavour to agree the structure and the approach to payments, warranties and indemnities, liability limitations and any escrow.
Regardless of the structure of the transaction, and whether US or UK law applies, our US Team is familiar with the relevant issues and able to support businesses with pre-sale guidance and advice and support throughout an M&A transaction.
[This information is very much a high-level summary and should be treated as such. Legal advice should be taken on any M+A transaction. While all reasonable care has been taken in its preparation of this information, no responsibility is accepted by MBM Commercial LLP for any errors it may contain, whether caused by negligence or otherwise, or for any loss, howsoever caused, occasioned to any person by reliance on it. Individual advice should be sought before considering any of the matters detailed in this presentation. If you have any questions regarding your business operations in the US, please get in touch with a member of MBM’s US Team.]
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