European and US private M&A practice have lots in common – with similar concepts, timings and workstreams (and public company M&A covered by separate rules). Yet misunderstandings can still arise. This guide highlights some of the key differences between European and US private M&A practice and is aimed primarily at US parties who are considering doing deals in Europe which has, notwithstanding the recent rally in the value of sterling, has been an increasing trend in recent months.
To take a few examples:
- Heads of terms: The contents of heads of terms (or a “letter of intent” / “memorandum of understanding”) are not usually binding, except where confidentiality undertakings, non-compete/non-solicitation covenants and/or exclusivity provisions have been wrapped up into the same document. However, similar to the US, in some European jurisdictions – such as Germany, France, the Netherlands and Italy – there is an overriding obligation on the parties to negotiate in good faith. In contrast, there is no such general good faith obligation under English law.
- Representations and warranties: It is usual in both the US and Europe for the seller to give warranties in respect of the target company/business. These are statements of fact which if untrue will give the buyer the right to claim for its loss. European warranties may not always be as extensive as in the US; the range of warranties offered in an auction draft sale and purchase agreement are typically much more limited. In the US, such statements are commonly referred to as reps and warranties. But in some European jurisdictions, such as the UK, a seller will resist referring to them as representations as this will widen the legal remedies available to the buyer beyond contractual remedies.
- Buyer’s knowledge: In the US, a buyer may seek to include a “pro-sandbagging” clause in the agreement – which allows it to bring a claim for breach of warranty notwithstanding that it had prior knowledge of that breach. In some jurisdictions, including the UK and the Netherlands, such clauses may not be enforceable: instead, where an issue has been identified, a buyer would typically seek specific indemnity cover from the seller or a reduction in the purchase price in respect of known issues instead. In addition, it is not uncommon in a number of European jurisdictions to have specific “anti-sandbagging” provisions which prevent the buyer from pursuing recovery for matters that can be shown to be within the knowledge of the buyer prior to signing. This is particularly the case where warranty and indemnity type insurance is being used since the buyer is required to make a no-claims declaration in favor of the insurer and as such it is a logical extension to extend this to the seller(s) too.
- Employee consultation: In many European jurisdictions, including Germany, the Netherlands and France, employee representative committees or works councils have compulsory information and/or consultation rights in respect of share sales. Exact requirements vary from jurisdiction to jurisdiction but employee engagement will need to be factored into the deal timetable. On top of domestic rules, the EU-wide transfer of undertaking (protection of employment) regulations and/or the Acquired Rights Directive apply to all business asset sales in Europe. Under these rules, employees working in the target business will transfer automatically to the buyer and a consultation process must be undertaken with them.
- Merger control: Merger control or anti-trust filings/approvals can also feature in a number of European jurisdictions such as Germany where the thresholds for merger control filings are relatively low. In other jurisdictions, such as the UK, there is a voluntary notification regime although, where competition is likely to be an issue, it is usually advisable to make a protective filing and seek clearance where the transaction falls within the jurisdiction of the relevant regulating body.
While in many cases the rules will be similar across the EU, where there are local difference, such as in relation to employee consultations and the need for notarization of certain documents, the consequences of getting it wrong can be significant. Engaging local counsel at the outset can be invaluable in highlighting which areas are essentially equivalent and where there are national regimes that require specific expertise.
Download our 2020 European and US Private M&A: a comparison guide, or connect with one of our experts to see how we can help with your next transaction.