Selling a business to overseas buyers has a number of potential pitfalls (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. The Corporate Team at Paris Smith have many years of experience in acting for the sellers of UK companies in disposals to overseas buyers, and acting for foreign buyers on UK acquisitions. As has been shown by the protracted ongoing dispute arising from the sale (nearly a decade ago) of Autonomy to Hewlett Packard, these risks can be substantial.
Notwithstanding (or, in some cases, because of) Brexit, levels of interest in UK companies from overseas buyers has remained high in the period to Q1 2020.
Covid-19 has inevitably had a dampening impact on many current transactions, although we are still acting on several deals for overseas buyers.
10 potential pitfalls to avoid when selling a business to overseas buyers
We set out below 10 of the most common pitfalls to avoid:
- 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. Alternatively, on some deals Paris Smith have acted on, parties who are both from non-UK jurisdictions have elected to use English law and UK style transaction documents.
- 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 cap on seller liability and duration of claims periods may be more generous. The disclosure process can also vary significantly between jurisdictions, as can market practice in respect of retentions/escrow; earn outs; de minimis and threshold limitations; the impact of buyer knowledge; use of W&I insurance; the applicability of a gap between exchange and completion and whether warranties are repeated; and material adverse change and other conditions to completion.
- 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 Europe than the US, where completion accounts mechanism are 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 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. The location, size and geographical operations of an overseas buyer could also impact on the risk of a transaction being reviewed by relevant competition authorities.
- 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 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 are thinking of selling a business to overseas buyers or would like to discuss the legal aspects of preparing your business for sale generally, or any other advice on M & A transactions, please contact Jonathon Roy, Michael Moore, Amanda Brockwell or Richard Atcherley.
If you are thinking of selling your business generally, you may like to read our blog “Risks to avoid when selling your business“.
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