A recent conversation with a US M&A lawyer flagged to me that whilst many people consider corporate transactions to be familiar both sides of the Atlantic, there are a number of “cultural” divides which can cause hours of frustration (and significant hikes in associated fees) purely down to the fact that advisors have not appreciated what is market standard in the other party’s jurisdiction. Many do realize and just plough on regardless with a “who shouts loudest” mentality. Neither approach tends to work and most clients are disappointed in the overall outcome of the deal…partly because the buyer then needs to work alongside the (seller and) employees of the target’s business.
It’s therefore worth thinking about where expectations lie when starting to negotiate an acquisition. Often the early discussion and Term Sheet are handled by the buyer’s team – whether from the C-suite or in the corporate development team. Really basic issues like what “stock” means can create confusion…most US buyers will assume stock to mean shares in the corporation, whereas reference to stock in the UK can be misconstrued as stock-in-trade/inventory and therefore suggesting an asset deal. Pretty fundamental as a starting point.
The one I see most often is the lack of reference to an escrow/retention account in the Term Sheet. I’m told by my US counterparts that that is because everyone realizes that some sort of hold-back (for reps and warranties indemnification or for post-closing adjustments) is part of every deal. Whilst it is becoming increasingly the case that UK deals include a similar provision, it is definitely not presumed and so a seller who receives a term sheet without reference to any hold-back tends to have his or her expectations raised that all consideration will be distributed on closing.
Speaking of closing…most deals in the UK are still signed and closed (or exchanged and completed) simultaneously. The impact of that is that there is no need to worry about defining MAC (material adverse change) clauses which can become the bane of many deals when there is a delay between signing and closing. Obviously there are circumstances when a delay is necessary for regulatory or (particularly in public companies) shareholder approval, but those tend to be the exception rather than the rule.
Shareholder actions are not part of European deals. There are laws allowing minority shareholders to take action where they have been prejudiced but my experience has shown that such actions are rare and would only be used in exceptional circumstances. That therefore allows for a smoother deal to be done.
Certainty also falls under the “locked-box” concept which has increasing popularity. It’s seller-friendly and so is particularly used in auction scenarios. It basically locks down the valuation/financial aspects of the deal at a date agreed by the parties (sometimes completion, sometimes a month end prior to completion). The only adjustments to such pre-determined price relates to non-authorized “leakage” but otherwise the regular business activities between the locked-box date and closing are considering to be part of the value attributed to the deal.
Finally (and there are so many more issues I could raise), it’s worth being aware that when undertaking diligence and agreeing the scope of reps and warranties, key or sensitive issues which apply to a US business may be over-shadowed by other more critical issues in a European target. For example, it’s vital to do a full review of the workforce – their employment terms, benefits, what type of retirement plan they have, whether they have been granted stock options. So often acquirers consider down-sizing post-deal and often there can be material barriers to achieving this objective (which may have been factored into the valuation calculations).
So, the main take-away from this post is to just give some thought to how best to approach a cross-border acquisition. They can be a fantastic way to expand your business into another region and enable you to hit the ground running, but equally they can cost you too much and significant heartache in arguing about the wrong things and ignoring the issues that are key to the deal.