mergers & acquisitions Selling your business to an overseas buyer
Although Brexit is expected to have some negative impact on the level of inward investment into the UK, levels of interest from overseas buyers remain high, especially with the incentive of the exchange rate, writes Jonathon Roy of Paris Smith
The corporate team at Paris Smith have many years of experience of acting for the sellers of UK companies in disposals to overseas buyers, and acting for foreign buyers on UK acquisitions. During numerous such transactions it has become apparent that there are a number of potential pitfalls when dealing with overseas buyers (especially if they have limited experience of UK acquisitions) that, if they are not addressed sufficiently early in the process, can lead to major misunderstandings, unnecessary frustrations and sometimes even termination.
• Choice of law and jurisdiction. If the target is a UK company then it would normally be preferable for English law to apply. However, that is not always possible. Some foreign buyers may insist on their local law, especially if they use their own in house legal teams for the transaction, or use their local law firm which may not have a UK office. In those circumstances the sellers are likely to require some foreign law input, which will increase their deal costs.
• Style of transaction documents. The format, substance and length of typical corporate transaction documents can vary significantly between different jurisdictions. The parties should be clear upfront about which type of documentation is to apply. If it is conceded that an overseas buyer will draft their local style of documentation, then the sellers should be advised on the extent to which that could impose greater risk on them than would apply with typical UK market practice. The use of non-UK-style documents is not necessarily prejudicial to selling shareholders; for example, although a US purchase agreement will typically have more indemnities than a UK equivalent, the limitations on seller liability may be more generous. The disclosure process can also vary significantly between jurisdictions.
• Some overseas buyers may have different expectations regarding the scope and duration of non-compete covenants, especially if there is a significant difference between the extent to which such covenants are enforceable in their local jurisdiction compared to enforceability under English law.
• Buyer expectations in respect of employee arrangements can cause problems. For example, US buyers may be relatively unfamiliar with the concept of substantive contractual and statutory rights for employees. Attempts to unilaterally impose new contractual terms on key employees can have a significantly detrimental impact on ongoing employee relations (and potentially on achievement of earn-out targets, if applicable), especially if the new contracts are not sensitive to standard local practice. Also, some overseas buyers are unfamiliar with the concept of not paying separately for the benefit of restrictive covenants.
• Differing expectations and experiences of overseas buyers in respect of transaction structures can be significant. For example, locked box arrangements are more common in certain jurisdictions than others, where completion accounts mechanism may be more usual. If sellers are using completion accounts with an overseas buyer, it is obviously important to ensure that the buyer’s expectations in terms of accounting policies do not significantly differ from the relevant UK accounting practices.
• When structuring the transaction, it can sometimes be difficult to persuade an overseas buyer of the potentially very significant impact on the seller’s tax position of a business/asset sale compared to a share sale, especially if the buyer is not familiar with the UK tax system.
• If some or all of the consideration is satisfied by the issue of shares in an
THE BUSINESS MAGAZINE – SOLENT & SOUTH COAST – SEPTEMBER 2016
overseas buyer, then obviously some due diligence on the legal rights and restrictions attaching to those shares may be required.
• Different expectations regarding regulatory issues can also lead to difficulties. However, this can work both ways; for a target which has substantial exports in a regulated sector, an overseas buyer located in a key sales territory of the target can be more sophisticated than a UK buyer in assessing compliance risks and requirements.
• Although it is not an issue which exclusively affects corporate sales to overseas buyers, significant problems can arise if the target and the buyer have overlapping exclusive territorial distribution networks, or if the seller has previously entered into non-compete arrangements which extend to all group companies from time to time and therefore potentially impact on the buyer.
• A lack of sensitivity to cultural differences can detrimentally impact the progress of a transaction, especially in circumstances where tempers may already be frayed as a result of additional workloads incurred during the due diligence and transaction process generally. Maintaining a good working relationship and rapport with all parties on a transaction is normally key to achieving a mutually satisfactory result.
If you would like to discuss the legal aspects of preparing your business for sale, or advice generally on M & A transactions, see details below.
Jonathon Roy - 023 8048 2301
jonathon.roy@
parissmith.co.uk
Michael Moore - 023 80482 2290
michael.moore@
parissmith.co.uk
Richard Atcherley - 023 8048 2105
richard.atcherley@
parissmith.co.uk
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