US corporates are the most prolific acquirers of European technology businesses – indeed, according to Tech.eu, in 2014 they were on the buy-side of over a third of all European technology deals - nearly four times as many as second-placed Germany. We at TLT have certainly seen this in practice, acting on transactions including the sale of Secondsync to Twitter, Inc, the merger of BGF-backed Sub10 Systems with CBF Networks, Inc. and the sale of Tellermate to Brookside Equity Partners, and indeed US buyers are a prominent feature on our WIP list at present.
Given this dynamic, we thought it might be useful to share some experiences of the US approach to acquisitions, which differs in a number of respects from what would be viewed as standard UK market practice.
The first point to resolve is often the choice of law for the transaction, ie whether this will be subject to English law, or New York or Californian law. US buyers may look to assert that the law of their jurisdiction should apply, but this should be firmly resisted - for a UK target, with UK shareholders, English law should be the norm, and clearly UK resident sellers do not want to be subject to any risk of disputes being resolved in the US courts in future.
The all-important pricing mechanism is another area where market practice is subtley different. The principal mechanisms used in M&A deals are completion accounts (where accounts are drawn up after completion to test the position at completion) and a locked box (where the business is sold on the basis of a balance sheet that pre-dates completion). Although both mechanisms are used in the US and the UK, the standard US approach, which is also viewed as more buyer-friendly, is to use completion accounts. However, that is not to say that in a competitive process with a clear explanation of the locked box mechanism, which is aimed at delivering certainty of price for the sellers, the US purchaser cannot be persuaded to accept this approach.
The approach to exchange and completion (or "signing" and "closing" in US parlance) is also worth noting. In the UK, we would typically seek to avoid a split exchange and completion if at all possible, to avoid the uncertainty of a gap and the risk to ultimate execution that this involves. US buyers will often look for a separate signing and closing, with the opportunity to conduct further diligence in the gap (and the right to terminate in the event of a "material adverse change"), so understanding the proposed execution process will be key.
In terms of contractual protection, it is common in both UK and US share purchase agreements to include detailed warranties regarding the target and its assets and liabilities, which will be subject to heavy negotiation. US law refers to these as "representations" or "reps" and warranties, using the terms interchangeably, whilst in the UK there is a big difference in law between the two, as a breach of a "representation", which may result in an action for misrepresentation, has a wider range of remedies that may be sought. This may include the calculation of damages on the higher, tortious basis and also the possibility that the agreement could be rescinded, so making the position clear at heads of terms stage will avoid difficult and expensive negotiations later in the process.
Whilst both US and UK share purchase agreements will include certain limitations on the sellers' liability, UK deals will usually contain more extensive legal limitations but have a larger amount of the consideration at risk. Whilst this will certainly not always be the case, US buyers tend to be more comfortable in accepting a lower cap on liability provided there is a significant portion of the consideration placed into escrow to provide security for any claims.
A further difference arises when sellers seek to disclose against the warranties themselves in order to make the buyer aware of relevant matters and therefore protect against a future warranty claim. In the UK, sellers will usually be able to specifically disclose against the individual warranties but also to generally disclose certain matters against the warranties as a whole (which may, for example, include the data room). The approach in the US is more restrictive as although specific disclosure will be made, the concept of general disclosure is not commonplace and disclosures will often only qualify the specific warranty that they are disclosed against.
However, notwithstanding these differences in market practice and domestic legal position, we have found US purchasers to be sophisticated, collaborative counterparties and provided there is an understanding of their expectations and approach, and a willingness to ensure things do not get lost in translation by making the position clear at the outset, a smooth process and successful outcome should be easily achievable.
Contributor: James Webb
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com