If no trade deal has been agreed to by the end of the implementation period on December 31, 2020, the UK will overnight become a ‘third country’ from an EU perspective. This blog looks at the effect of Brexit on private M&A transactions—i.e. transactions involving the sale and purchase of shares or the business/assets of a private limited company or unlisted public limited company pursuant to either a share purchase agreement (SPA) or an asset purchase agreement (APA).
Due Diligence
A buyer will want to carry out due diligence to gather information about the target company or business it is seeking to acquire. As part of this due diligence exercise, the buyer will want to consider Brexit risks, both in the short-term and the longer-term, to decide whether or not to proceed with the acquisition based on those risks, liabilities and value identified through this due diligence exercise.
In conducting Brexit due diligence, certain targets will have more exposure to Brexit-related risks than others as from the IP completion day, such as businesses that are particularly reliant on personnel or supplies of goods and services from the EU, or those reliant on the regulatory passporting of their services into the EU. Where risks are identified, the buyer will need to mitigate such risks through drafting the terms using specific Brexit warranty wording or specific Brexit-related indemnity wording.
Specific areas the buyer will want to focus on are:
Cross-Border Transactions
This would be a transaction where at least one of the parties (the seller, buyer and/or target) is a UK entity and one of the parties is an EU entity. Any review will involve gaining an appreciation of how a business, such as a target based in the UK with operations in the EU, would make the transition to the post-IP completion day world and what risks that this would entail. Matters requiring review would include material contracts relating to the target, its intellectual property portfolio, its HR policies, and its regulatory landscape. Reviewing these and other key legal areas of the target’s operations could allow the buyer to gain valuable insights into the target’s business operations.
Geographical Structure and Potential for Business Interruption
Impact factors could include:
- Tariffs being imposed—for example, on goods coming from the EU to a UK-based target or from the UK to an EU-based target — see my previous blog explaining this.
- Enhanced border checks and border security arrangements including additional restrictions, as well as paperwork and approval processes leading to delays in the receipt of goods.
Regulatory Approvals and Registrations
The target, depending on sector, may be subject to a complicated regulatory regime following IP completion day, such as the financial and media sectors. EU membership has afforded a passport approach to regulatory approval, whereby approval in one Member State permits operation in other EU Member States. This may no longer be the case following IP completion day because a UK target that operates in the financial services sector across the EU may cease to benefit after IP completion day from an EU passport, which allows it to continue to operate its business across the EU. Depending on what is agreed between the UK and the EU in any Future Relationship Agreement, it may be necessary to take local advice in relation to any new regulatory requirements. A buyer may insist that such new regulatory requirements are put in place before any acquisition of the target completes by imposing a procurement obligation on the seller in the SPA/APA requiring such approvals to be in place prior to completion.
Licences and Consents
Where the target is UK-based and has operations in the EU or vice versa, a buyer will want to establish whether it will continue to benefit from EU-wide approval schemes, or through such EU-wide approval schemes from UK-based schemes. For example, a target may—pre-IP completion day—benefit from reciprocal arrangements agreed between the EU and the rest of the world, for example on licences and permissions allowing a UK-based target to carry out operations in certain non-EU countries.
It will be necessary to establish if the target will cease to benefit from these arrangements, and if so, to ensure that arrangements have or will be put in place to address the potential loss of such permissions. This may occur by including a procurement obligation in the SPA/APA for the seller to ensure this occurs as a pre-completion condition to the buyer’s purchase of the target.
Intellectual Property Rights
The buyer should consider whether the target has any intellectual property rights (IPR) registrations which have been made at EU level but, which will, post-IP completion day, need to be made at both the EU and UK level. All pan-EU IPR could cease to apply in the UK. The UK government may allow such EU IPR to continue to apply in the UK or may provide for conversion into domestic rights or provide that reapplication is requited. An IPR audit should include a review of licensing agreements and an assessment of whether such agreements will be affected by any re-registration of EU-registered IPR in the UK. A buyer will want to confirm that the target is the sole and exclusive owner of the IPR and that is not limited or subject to any encumbrances, has the appropriate licences for any third party IPR, and all such IPR can be used by the buyer.
Potential for Termination of Material Contracts
The buyer should review the terms of the contracts entered into by the target. In particular, the material contracts should be reviewed to ensure that the end of the implementation period will not:
- Trigger a ‘Material Adverse Change’ clause, such as a clause which allows one, both or all of the parties to terminate a contract or to not fulfil certain obligations if the circumstances that are relevant to the contract have changed dramatically
- Trigger a ‘Force Majeure’ clause (a clause which excuses a party from its contractual obligations on the occurrence of a disruptive event outside that party’s control), or
- Constitute a Frustrating Event, (generally an event which could not have been foreseen by the parties at the time entering the contract)
Even where an express provision has not been included in a target’s material contract, a material adverse change or even frustration may still occur. For instance, a UK target or one of its group entities is no longer capable of being authorised to perform its business or to provide certain ser-vices within the EU. It will therefore be important to review such material contracts to assess the potential impact of the end of the implementation period. The case of Canary Wharf (BP4) T1 Ltd and other companies v European Medicines Agency [2019] EWHC 335 (Ch) provides an example of the difficulties of arguing that a contract may have been frustrated because of Brexit.
Please continue to follow our blog for more Brexit updates from U.K. Managing Partner, Sandip Patel. If you have any questions, please reach out.
