Brexit: key considerations for M&A dealmakers
November 2017 | SPECIAL REPORT: PREPARING FOR BREXIT
Financier Worldwide Magazine
November 2017 Issue
Uncertainty remains as to how the UK’s likely withdrawal from the European Union (EU) will be implemented, what the UK’s future relationship with the EU will be and what will be the ultimate impact on UK law. Amid the ongoing twists and turns of the Brexit negotiations, M&A dealmakers and their advisers face the challenge of both second guessing the potential impact of withdrawal on target businesses, and assessing to what extent Brexit-related risks might best be addressed in the transaction documentation.
Despite the uncertainty, the M&A outlook is not necessarily gloomy. Deal activity in certain sectors has remained steady, partly as a result of sterling’s recent weakness attracting buyers from overseas – notably Asia and the US. In the recruitment sector, for example, there has been particularly strong deal activity in the £5m to £50m range, with small and medium-sized companies taking advantage of the current climate to add scale or exit.
While some Brexit-related consequences for businesses remain impossible to predict at this stage, there are practical considerations which dealmakers can and should bear in mind when contemplating and implementing private M&A transactions.
M&A due diligence
A prospective buyer and its advisers will need to consider how the relevant target business, and its industry or sector, might be affected by the UK’s withdrawal from the EU and possibly, in the shorter term, by the course of the Brexit negotiations.
Cross-border goods and services supply contracts. Could a supplier or customer’s costs be affected by new or increased tariffs payable on imports and exports following Brexit?
Payments in euros and other foreign currencies. To what extent might ongoing currency fluctuations resulting from developments in the Brexit negotiations impact on the value of sums paid and received under target business contracts?
Licences and consents. Will the target business continue to benefit from EU-wide approval schemes or reciprocal arrangements between the EU and the rest of the world?
Intellectual property and information technology. How reliant is the target business on EU registered trademarks and designs? While most IP laws derived from EU harmonisation will be retained in the short term, unitary EU rights, such as EU trademarks and designs, will no longer extend to cover the UK when Brexit takes effect. It is expected, however, that some form of process will be implemented to preserve the UK element of EU registered trademarks and designs. Should the target be applying for parallel UK registration in the meantime?
Freedom of movement. Will the target business’s ability to perform (or the costs of performing) certain contracts be affected materially by a reduction in the freedom of EU nationals to work in the UK or UK nationals’ freedom to work in the EU? Could key employees, or a proportion of the workforce, lose their right to work, or decide to leave before their status is at risk?
Access to funding. Does the target business depend on EU funding sources? Could inflation affect the target business’s borrowing?
Dependence on EU legal position. Contracts may have been drafted assuming a legal position which will change post Brexit. Depending on the significance of those contracts and whether they are likely to span Brexit, what are the risks associated with that legal position changing?
Contract terms. Are there particular terms in any of the target’s contracts that take on greater significance in light of Brexit? For example, the location of the parties or performance, whether the contract’s term is likely to run post Brexit, the potential application of termination provisions should Brexit have adverse consequences, or the application of the dispute resolution or jurisdiction clauses.
M&A transaction parties and their advisers should also be considering to what extent Brexit-related risks can be addressed by the transaction documentation.
Transitional services and other post-completion services. Where either the buyer or seller will be providing transitional services or any other post-completion services, should a mechanism be included for adjusting the terms on which the services are provided depending on the outcome on Brexit? The ability of a party to provide certain services could, for example, be dependent on having access to European markets or having ‘passporting’ rights in relation to financial services.
‘Brexit clauses’. While Brexit clauses have not so far been seen in many M&A transactions, as the UK’s post-Brexit relationship with the EU becomes clearer, there is likely to be increased emphasis on risk allocation between the buyer and seller, including, perhaps, through the use of these sorts of clauses. The triggers for a Brexit clause could include a change in law or regulation or a divergence between the rules applicable in the UK and those applicable in the EU. The consequences for which any such clause should provide would need to be carefully considered. For example, should the buyer have the ability to withdraw before completion or will a specified part of the target business not transfer to the buyer, or be transferred back to the seller, in the event that the clause is triggered?
Merger control. Until the UK leaves the EU, the current ‘one-stop shop’ approach will continue to apply, under which mergers that fall within the UK and EU merger regulation notification thresholds need to be notified only to the European Commission. After Brexit, it may be that separate reviews will be required by the EU Commission and the UK’s Competition and Markets Authority. Transitional arrangements will likely be put in place. Depending on the likely timing for completion and the business sector of the target, transaction parties will need to consider with their advisers how merger control notifications should be approached.
References to the ‘EU’ or ‘Europe’. If the sale agreement or any other transaction document, such as a transitional services agreement, will refer to the ‘EU’ or ‘Europe’, consider whether the relevant term should be interpreted as at the date of signature of the relevant document or as constituted from time to time. Absent any express language in the agreement, it will be an exercise in contractual interpretation, which may involve the court looking at the purpose of the relevant clause and the context.
Deferred and contingent consideration. Should the buyer seek to protect itself against Brexit-related risks by negotiating the inclusion of deferred or contingent consideration structures in the share purchase agreement?
Jurisdiction clauses. Should the transaction documentation be subject to the jurisdiction of the English courts or to arbitration, particularly where the transaction is cross-border in nature? While it is expected that exclusive English jurisdiction clauses will continue to be enforceable post Brexit in Member States, it is not yet clear how this will be achieved; there is no suggestion that the enforceability of arbitration agreements will be affected by Brexit.
While the ongoing uncertainty regarding the terms of the UK’s withdrawal from the EU means that a prospective buyer will not be able to protect itself against every potential Brexit-related risk, asking the right questions and considering the ‘worst case scenario’ when assessing and implementing M&A transactions should help to put the buyer in the strongest possible position.
Nicholas McVeigh is a managing associate at Mishcon de Reya LLP. He can be contacted on +44 (0)203 321 6259 or by email: email@example.com.
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Mishcon de Reya LLP