Mergers & Acquisitions Comparative Guide

• Published date: 28 April 2021
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity
• Law Firm: Fladgate LLP
• Author: Mr Anthony Shatz and Paul Airley

1 Deal structure

1.1 How are private and public M&A transactions typically structured in your jurisdiction?

Private M&A transactions: Most private M&A transactions in England and Wales are structured as share purchase deals, under which the entire issued share capital of the target is acquired by the buyer from the seller for an agreed consideration. The target becomes a wholly owned subsidiary of the buyer. All assets and liabilities of the target remain in that entity and in effect are acquired by the buyer by virtue of the acquisition.

The main agreement governing this type of transaction is the share purchase agreement, which is usually accompanied by a separate tax deed under which the seller indemnifies the buyer for the pre-closing tax liabilities of the target.

Alternatively, private M&A transactions may be structured as business purchase deals, under which certain assets and liabilities of the target - for instance, fixed assets, intellectual property, debtors and goodwill - are acquired by the buyer from the seller and absorbed into the buyer, but with the target itself being retained by the seller.

Public M&A transactions: Public M&A transactions in England and Wales involve the acquisition of the entire share capital of the target.

Public M&A transactions are subject to the UK Takeover Code, as published from time to time by the UK Panel on Takeovers and Mergers. The panel is the supervisory body for code takeovers.

The code applies to takeovers of UK, Channel Islands and Isle of Man incorporated companies listed on a UK, Channel Islands or Isle of Man stock exchange (including the London Stock Exchange (LSE) Main Market and the LSE's AIM market, as well as to unlisted public limited companies registered in any such jurisdiction and which are considered to have their central management and control in that jurisdiction. The code is also applicable to unlisted private limited companies from such jurisdictions in certain circumstances.

However, the code does not govern the sale and purchase of the business and assets of a listed company, the process for which would be akin to private M&A, but taking into account the additional requirements set out in the relevant listing rules (eg, requirements relating to shareholder approval of major transactions).

The code is designed to ensure that:

• shareholders in a target are treated fairly and are not denied an opportunity to decide on the merits of a takeover;
• shareholders holding shares of the same class in the target are afforded equivalent treatment by a bidder;
• there is an orderly framework within which takeovers are conducted; and
• the integrity of financial markets is maintained.

At the time of writing, the Takeover Panel is undertaking a substantive review of the code and 2021 may result in significant changes being made to it.

1.2 What are the key differences and potential advantages and disadvantages of the various structures?

Private M&A transactions: The key advantage of a share purchase deal is its relative simplicity, in that the buyer acquires the entire issued share capital of the target, which brings with it all assets and liabilities of the target. However, this usually results in the buyer wishing to ensure via a separate tax deed that it is indemnified for any pre-closing tax liabilities of the target.

As part of the negotiation process, the buyer will seek to agree a price adjustment mechanism - usually either a completion accounts mechanism or a locked-box mechanism - to ensure that the target is being acquired on a 'cash-free, debt-free' basis.

The key advantage of a business purchase deal is that it enables the buyer to cherry pick which assets and liabilities it wishes to acquire in relation to the target. However, such transactions are often more complex and time consuming to negotiate, can give rise to complex price adjustment provisions and will result in a very different tax treatment for both the buyer and seller. Also, various third-party consents may need to be obtained - for instance, from contractual counterparties and landlords; and a Transfer of Undertakings (Protection of Employment) Regulation consultation process may need to be undertaken with the employees of the target.

Public M&A transactions: If a target is subject to the Takeover Code, the acquisition of its shares must be conducted as a public M&A transaction in accordance with the code.

There are two principal mechanisms to effect a takeover in the United Kingdom under the code:

• a contractual offer to all of a target's shareholders to acquire their shares; and
• a court-approved scheme of arrangement, which is a statutory mechanism involving a shareholder vote and court approval, under which 100% of the target's share capital is acquired by the bidder.

For a contractual offer to succeed, a bidder must secure acceptances in respect of shares in the target carrying more than 50% of the voting rights in the target; but it may choose a higher threshold before the offer can become can unconditional.

A scheme of arrangement requires the approval of a majority in number, representing 75% in value of each share class, of shareholders attending and voting at the relevant shareholder meeting, together with court approval.

1.3 What factors commonly influence the choice of sale process/transaction structure?

Private M&A transactions: Tax planning will usually be the most significant driver in determining the transaction structure. Whether a transaction is structured as a share purchase or a business purchase will entail each of the buyer and the seller considering how the transaction will be treated for tax purposes, in particular in relation to each of corporation tax, capital gains tax, stamp duty land tax and stamp duty. On the tax analysis only, the buyer and seller may arrive at different conclusions as to the optimal structure for the deal.

In addition to tax planning, other factors that commonly influence the transaction structure will include:

• whether any assets or liabilities need to be carved out of the acquisition;
• the strategy in relation to the target's employees;
• the extent to which the seller group needs to provide transitional services to the target post-closing;
• the debt and equity financing for the transaction; and
• the approach to confidentiality, announcements and publicity.

The sale process for a private M&A transaction will usually be either an 'off-market' private deal negotiated between buyer and seller or a seller-driven auction process. Auction processes tend to arise on larger deals and/or where the seller is a private equity sponsor, but can feature on any M&A transaction where the demand for the target is high and the seller and its advisers can generate competitive tension via an auction process.

Public M&A transactions: The advantages of a contractual offer are that:

• effective control (with more than 50% acceptances) can be achieved more quickly; and
• there is greater flexibility to amend terms in a competitive situation.

Hostile bidders invariably elect to make contractual offers as an acquisition by scheme of arrangement, which usually requires substantial coordination between the bidder and the target.

The advantages of a scheme of arrangement include the fact that all target shareholders will be bound by the scheme if it is approved by the required majority of shareholders and by the court.

Under a contractual offer, it may be necessary to invoke squeeze-out rules to acquire 100% of the target's shares, which require acceptances in respect of 90% of the target's shares to which the offer relates.

The scheme of arrangement has traditionally been the more popular deal structure, particularly for larger-value, recommended bids. Out of the 40 firm offers announced in 2020 for Main Market or AIM companies subject to the Takeover Code, including six offers with a deal value above '1 billion, 29 were structured as a scheme of arrangement (73%) and 11 as contractual offers (27%). The majority (37 firm offers: 93%) were recommended by the target board.

2 Initial steps

2.1 What documents are typically entered into during the initial preparatory stage of an M&A transaction?

Private M&A transactions: In a private M&A deal, the principals will usually enter into:

• non-binding heads of terms that will summarise the key commercial terms of the deal; and
• a mutual non-disclosure agreement (which may include non-circumvention provisions and restrictive covenants).

The parties will also need to appoint various advisers, each of which will necessitate the negotiation and agreement of an engagement letter with each of those advisers.

Once heads of terms are signed, the parties will embark on the due diligence process. The shape and size of this will vary from deal to deal, but the process will usually entail the buyer's accounting and legal advisers - and potentially other diligence experts - submitting due diligence questionnaires to the seller and its advisers.

In the case of a sell-side auction process, the preliminary documents will be different. In such cases, the sell-side corporate finance adviser will usually issue a process letter to potential bidders inviting them to submit by a certain date a conditional offer letter, and potentially also comments on a sell-side produced draft share purchase agreement. The seller may also have a produced a suite of vendor due diligence reports on the target. At the time of being granted preferred bidder status, the preferred bidder may be granted a period of exclusivity to close the transaction; it may also be required to submit equity and debt commitment letters to evidence certainty of funds for the transaction.

Public M&A transactions: Compared to private M&A transactions, only limited due diligence is undertaken in public M&A transactions, as the code obliges the target to provide equal access to due diligence information to competing bidders. A potential purchaser will review publicly available...