Market practice differences in UK and US M&A

While there is a long track record of US companies investing in the UK by acquisition and vice versa, there are significant differences in culture and market practice around M&A transactions. A resulting lack of understanding between the parties can seriously disrupt transactions. However, advisors sensitive to these matters can make the road to closing significantly smoother and really add value to the process.

The most frequently disruptive disconnect is an insistence by US counsel on sellers “warranting and representing” matters relating to the target. In the US this is uncontroversial, as “represent” and “warrant” amount to broadly the same thing. In the UK, by contrast, market practice is that sellers never “represent” anything. This is partly because misrepresentation damages can be significantly higher than those for breach of warranty; even more importantly, a successful misrepresentation claim may result in the sale being reversed in its entirety – an unappealing prospect for a seller.

With respect to the measure of damages, again there are differences in practice. In the US, the measure of damages is spelled out in the sale and purchase agreement (SPA). This is rare in the UK where instead  the parties will rely mainly on the applicable case law.

Another significant difference is the likelihood of a warranty claim. In the UK, warranty claims are very rare, and generally only arise where there has been a breach which has a major impact on the value of the target. In the US such claims are more common.

This cultural difference does impact the price of warranty insurance, which is becoming increasingly common in the UK and the US. In the UK, the premium will typically be 0.75% to 1.2% of the cover written (plus tax), and will be paid by the seller (usually by way of price reduction). In the US, premiums are 3% to 4% of the policy limit and may be paid for by either party.

Beyond warranty insurance, US buyers will often try to ensure there is cover for indemnification claims by placing some of the price into an escrow account. This is now rare in the UK as regulatory changes make it difficult to open and operate escrow accounts. Instead there will often be a set-off against deferred consideration.

There are also important differences between the US and the UK in earn-out requirements. In the UK, sellers typically will not be required to keep working in the business during the earn-out period in order to get paid, as this can result in the earn-out being taxed as income, increasing the tax payable from 20% to 47%. In the US, by contrast, it is possible in certain circumstances to tie the earn-out payment to sellers’ continued employment without it being taxed as ordinary income.

Parties to trans-Atlantic M&A transactions should make sure they work with advisors who understand the cultural and market practice differences between the UK and US. This will ensure minimal misunderstandings and make for a smoother road to closing.

John is a Partner in the Corporate, Commercial, and Finance team, specialising in M&A and the business needs of entrepreneurial, high-growth, and family businesses. He advises them from start-up through to listing and beyond.

Christopher Andres-Pochon is a partner in LP’s corporate group. His practice focuses on mergers, acquisitions, joint ventures, and corporate governance matters. He has extensive experience advising clients in cross-border transactions, real estate joint ventures, M&A, and other investment opportunities.