When it comes to investment-friendly places in Europe, Britain ranks high. Just last year, a survey by EY revealed that despite geopolitical changes such as Brexit, it is still the destination that appeals most to international investors.
The survey also predicted that inbound investments would only rise further. Yet, as in many other jurisdictions, some UK-specific regulatory quirks when it comes to buying British companies could leave bidders in line for a surprise.
Here are a few ideas of what stakeholders should expect when they decide to buy British companies.
Buying a British business, 1.01
English law operates in a way that means the onus is on the bidder under the principle of caveat emptor. This means buyers needs to know what they are getting themselves into and is usually achieved through a process including sufficient due diligence and warranty and indemnity insurance in the final sale agreement.
The main legal agreement, meanwhile, usually comes in the form of a Sale and Purchase Agreement (SPA), and includes warranty and indemnities, liability limitations for the seller, as well as seller restrictions and confidentiality agreements.
“A key issue is always pension liabilities if the target has a final salary scheme,” said Marc Israel, partner at White & Case.
Yet, Israel suggested that the overall acquisition of a company under English law is relatively straightforward. “The SPA can set out whatever arrangements the parties want to put in place and there can be mechanisms to deal with changes in the target business between signing and closing,” he said.
Why the market, not the law, may be the issue
In what is becoming an increasingly turbulent market against a backdrop of ongoing political and economic uncertainty, bidders definitely need to know the facts.
"Acquisitions of British companies this year have been impacted by strong headwinds in the form of economic uncertainty, price volatility and rising inflation,” warned Phil Cheveley, M&A partner at Shearman & Sterling in London. "Public M&A transactions have become particularly challenging in view of the volatility in public markets. It is increasingly challenging to align bidder and target expectations as to valuation and premium. This is not unique to the UK, however."
Thus, global trends as opposed to the actual M&A process may be the biggest headache for overseas bidders buying companies in the UK.
“Inflation is a significant challenge that shows no signs of abating, especially as the conflict in Ukraine endures,” said James Heller, a partner at Baker McKenzie. “Exacerbated by rising interest rates pushing up the cost of borrowing and wage stagnation, many in the City of London are bracing for economic headwinds. Any slowdown is unlikely to be localised to the UK.”
What about ‘Made in Britain’?
As said, like in any jurisdiction, bidders can expect a unique Britishness when it comes to certain rules and principles in the purchase process.
This is particularly the case for public companies, according to Cheveley, who suggested that a significant impediment for some overseas bidders contemplating a UK public takeover is the prohibition on deal protection measures – such as break fees and exclusivity arrangements, which remain standard in many other markets.
Although this regime has been in place since 2011 when the Takeover Code was amended in the wake of the Kraft Foods’ bid for Cadbury in 2011, it can still be a shock.
“If a bidder hasn't recently transacted in the UK market, they can be in for a surprise and may become a go-or-no-go decision for some would-be bidders,” Cheveley suggested.
At the time, the American food manufacturer entered what some commentators have referred to as a “bitter battle”, having originally made a hostile bid for Cadbury in 2009. The takeover spurred debate in the UK too, prompting amendments to the Takeover Panel’s code.
Overseas bidders looking to acquire in the UK should also be prepared to deal with regulators, whether that be the Competition and Markets Authority or the Takeover Panel. "A cultural challenge for some is the role of the regulator in UK public takeovers,” said Cheveley.
The Takeover Code cannot be construed literally as it is principles-based and requires frequent interactions with the Takeover Panel from a very early stage in any transaction, Cheveley explained. “This modus operandi can be quite a departure for overseas bidders looking at UK public targets,” he added.
In addition, the UK is also subject to global trends when it comes to foreign access to domestic markets. “The UK has not been immune to the recent waves of protectionism and nationalism that we have seen across the EU and other parts of the world,” said Heller.
Brexit is a prime example of this, and will continue to have relevance as the UK builds out its regulatory framework to replace the EU rulebook.
“The recent introduction of foreign investment regulation in the UK is a good example,” Heller added. “Foreign investors, especially those in jurisdictions viewed with suspicion by regulators, will be under significant additional scrutiny when looking to invest in the UK in sensitive sectors or in businesses that support these.”
What is the National Security and Investment Law?
The National Security and Investment (NSI) Law came into force in January and is anticipated to change the game significantly for M&A activity in the UK.
“The NSI Act requires mandatory notification for some deals that needs to be taken into account, including as regards timing and the long-stop date,” said Israel.
The NSI also expands on the types of transactions covered by national security reviews. It moves beyond mergers and acquisitions to include a much broader range of deals including minority investments, acquisitions of voting rights and acquisitions of assets – including land and IP.
However, some think that NSI may not be that much of step-change after all.
“Although it is difficult to say whether or not these changes have deterred investment into the UK, our experience to date is that it has not,” said Israel. Rather, the additional factors brought in by NSI should be taken into account in any transaction planning, he added.
"National security laws that were introduced last year made a lot of people nervous,” said Cheveley. “National security is very much perceived as a political issue, and many practitioners were concerned about the impact of the inherent political uncertainty on M&A. On a more practical level, some also wondered whether the regulator would be able to review a potentially high volume of deals sufficiently quickly."
This could also be linked to global trends in the field. In France and Germany, new scrutiny requirements were applied at a similar time to the UK. For its part, the EU introduced the Foreign Direct Investment regulation, which came into force in 2020 and set a basic framework for member states when it comes to foreign investment screening.
Elsewhere, the US is equipped with the Committee on Foreign Investment in the US (CFIUS) – an interagency committee founded by Gerald Ford in 1975 and mandated to scrutinise the implications of such investments. CFIUS’s level of intervention has varied over the years, with suggestions that scrutiny was minimal during the Reagan administration, but picked up again after the 9/11.