‘England and America are two countries divided by a common language’ according to George Bernard Shaw. It can certainly seem like it when embarking on a transatlantic business acquisition.
The subtle – and sometimes fundamental – differences in the approaches of the two jurisdictions can be frustrating for those familiar with their own domestic approach but unaware of what their cross-pond cousins consider the norm.
So here’s our guide to some of the key differences:
Conditions to completion (or closing)
UK deals are generally structured so the deal and business risk pass to the buyer at exchange (or ‘signing’), meaning any conditions in acquisition agreements are usually limited to legal or regulatory matters. Extensive conditions, particularly subjective ones within the control of the buyer, are rare and strongly resisted by sellers.
In contrast, on US deals risk typically doesn’t transfer until completion (or ‘closing’) and therefore agreements often contain more significant conditions. These could include: finance conditions, so the buyer can withdraw from the transaction if it fails to raise the necessary finance; ‘MAC clauses’, to protect the buyer against any material adverse change in the target’s performance; and a ‘bringing down’ of the representations and warranties, with the seller being required to reconfirm the accuracy of those statements at completion.
You say ‘reps and warranties’; we say just warranties
In US transactions, the statements about the target will be characterised as ‘representations and warranties’. The two terms are used inter-changeably without affecting the remedies available to the buyer if one of those statements turns out to be false.
But in the UK, whether a statement is classed as a representation or a warranty will affect the possible remedies available to the buyer for a breach of that statement. If a warranty is breached, this gives rise to a simple claim for contractual damages. If the untrue statement is a representation, however, the buyer may be able to set the contract aside or claim damages calculated on a tortious basis which could result in a higher sum being recovered by the buyer.
Unsurprisingly, UK buyers may want to preserve these potential additional remedies but most well advised sellers will insist on references to representations being removed and the sale agreement stating expressly that the buyer’s only remedy for breach is contractual damages.
The warranties on both UK and US deals will generally cover the same key areas of the target business. Typically, however, US buyers expect to receive greater warranty cover including protection against both undisclosed liabilities and material adverse changes in the target, as well as confirmation of the accuracy of all warranties and disclosures. Such wide warranties would be strongly resisted on UK deals.
Measuring the buyer’s loss
On US deals, the buyer will expect to be indemnified on a $ for $ basis in respect of any breach of the representations and warranties. This means the buyer will be able to recover the full amount required to rectify the breach, regardless of whether or not it resulted in a reduction in the value of the shares acquired.
In the UK, however, it is rare for warranties to be given on an indemnity basis. Instead, on a claim for contractual damages the buyer will have to show that as a result of the breach of warranty the value of the shares acquired has been reduced. Only reasonably foreseeable losses will be recoverable and the buyer will be under a duty to mitigate its loss.
On both US and UK deals the seller’s liability under the agreement will be limited by various express provisions. In particular:
- A cap on the seller’s total liability. In the UK, this is often 100% of the purchase price although smaller caps can sometimes be agreed. In the US, however, much smaller caps are the norm, often as low as 20%.
- A threshold or hurdle level. Although in both jurisdictions this is linked to deal value, in the UK it is structured as a ‘tipping basket’, so once the agreed threshold is reached the seller is liable for the whole amount not merely the excess over the threshold, but in the US a ‘deductible’ is more common, with the seller only being liable for the excess over the agreed hurdle.
- A time limit. In the UK, two years or two audit cycles has become the market standard but time periods in US deals are often shorter at around 12 months or one audit cycle.
The lower cap and shorter time limit on US deals are the trade-off for the more extensive warranty cover given to US buyers.
UK warranties will be qualified by disclosures from the seller in a separate disclosure letter. This will contain both general disclosures of publicly available information and specific disclosures cross-referenced to the warranties. Typically, all the disclosures will qualify all the warranties, regardless of which specific warranty they are actually disclosed against.
In contrast, US disclosures are contained in a schedule to the acquisition agreement rather than a separate letter. General disclosures are rarely accepted by a US buyer and specific disclosures only operate to qualify those warranties to which they expressly cross-refer.
Which approach wins?
There is a general perception that UK law and custom favours the seller (with risk passing on exchange, more limited warranties and wider disclosures) whilst the US approach favours the buyer (with risk not passing until completion, more extensive warranties and limited disclosures). Which approach is adopted on each transaction will be affected by a number of factors including which law is to govern the agreement, the facts and circumstances of each deal, the bargaining strengths of the parties and the attitude of their lawyers.
Perhaps unsurprisingly, given the influence of the US on the world stage, some of the standard positions on US deals are beginning to creep into UK transactions. ‘Completions’ are increasingly referred to as ‘Closings’; caps on liability are beginning to come down from the standard 100%; and there is more resistance to the general disclosure of documents without specific reference to them in the disclosure letter. Whether the UK continues to resist these influences from across the pond remains to be seen.