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USA - What Trump's re-election might mean for US M&A
Due in part to the recent strength of the US dollar, coupled with the continuing attractiveness of the UK technology sector and a perceived return to a business-friendly environment with the recent change in UK government, the UK should remain an attractive marketplace for US acquirers. However, it remains to be seen how the return of Donald Trump as President of the United States will impact the global economy and, in particular, M&A deal flow between the US and the UK.
President-elect Trump won the recent US election on a protectionist economic platform, vowing to impose a 60 per cent tariff on all imports from China and tariffs of up to 20 per cent on goods from the rest of the world. Economists have warned that Trump’s economic policies will imperil global prosperity and could exacerbate inflation.
On the other hand, Trump’s election could stimulate growth in M&A deal flow as a result of lowered corporate taxes, coupled with deregulation and oversight. Reduced regulatory burdens in financial services could potentially boost the banking sector and enhance M&A activity there. Less stringent requirements in pharmaceuticals and biotech could help those industries by prompting accelerated drug approvals. And cryptocurrencies and blockchain may see favourable treatment from a Trump administration and Republican Congress, while the broader tech sector and AI policy may benefit from a reduced level of federal scrutiny.
However, certain other sectors might face increased risks under Trump’s policies. In particular, the clean energy sector could suffer if clean-energy tax credits are rolled back. The electric vehicle industry and related infrastructure might also see less federal support, negatively impacting growth in this sector unless Elon Musk’s’ influence prevails.
And some areas are likely to see bipartisan support. For example, policies supporting the development and reshoring of the semiconductor industry as well as broader national security concerns such as defence spending and cybersecurity are expected to remain robust driven by ongoing geopolitical tensions.
As transatlantic merger and acquisition activity has become increasingly common, historic differences between UK and US practice are diminishing, but a clear divide remains between M&A process and deal practice in the UK and the US, ranging from regulatory matters to vocabulary. In the US, buyers generally expect stronger protections from sellers, including more extensive conditions to completion, broader warranty coverage and a greater ability to walk away from a transaction if issues are detected or underlying market fundamentals change during the period between exchange and completion. Key elements can be lost in translation.
Some of these key differences include the following:
Key Differences
Deal Certainty
US purchase agreements typically contain more conditions to a buyer’s obligation to complete the transaction than those in the UK. Regulatory approvals and financing conditions, allowing the buyer to withdraw from the deal if it has failed to obtain the necessary financing, are common in US purchase agreements, which are often structured with a split signing and completion. MAC, or material adverse change, clauses are also typical in US purchase agreements with a split signing and completion and allow the buyer to withdraw from the deal if the target company suffers a significant and negative change affecting its business between signing and completion.
Deal Structure
US buyers often put forth an asset sale structure in an initial heads of terms (or letter of intent) presented to a UK target. In an asset sale, the buyer acquires selected assets and liabilities from the target, and any unpurchased assets or liabilities remain with the target. This is in contrast to a share sale structure where the buyer purchases all of the share capital of the target from its shareholders, thereby also acquiring all of the target’s assets, liabilities and obligations. As asset sales can be disadvantageous to UK-based sellers and can have complex implications from a tax and accounting standpoint, the initial structuring proposal from a US buyer is something to keep an eye on in order to seek out appropriate tax and legal advice before agreeing terms.
Pricing Mechanisms and Adjustments
A purchase price adjustment mechanism based on completion accounts remains the most common approach for US buyers, and sellers are often required to deposit a portion of the purchase price into an escrow account as security for their obligation to pay any “true-up” on the purchase price. Earnouts and rollover equity are also common features in deals with US buyers. With an earnout, the sellers can earn additional consideration based on the financial performance of the target over a period of time following completion, and provisions designed to protect the target’s ability to meet the selected financial targets by limiting actions the buyer can take with respect to the target’s business during the earnout period will be the subject of negotiation. With rollover equity, the buyer will issue shares or LLC units in the buyer as a portion of the deal consideration, which leads to the need for “reverse due diligence” on the buyer to try to assess the value of the rollover equity and to identify any red flags for the sellers in making an “investment” in the buyer.
Sellers’ Liability
Sellers’ liability, including the level of warranty protection given and the limitations on liability for breach by the sellers, are usually heavily negotiated in US and UK transactions alike. However, the risk allocation under the warranties tends to favour the buyer in US purchase agreements and the sellers in UK agreements, as described below.
Warranty Coverage
The warranty coverage provided is generally broader in the US than in the UK. Warranties in the US will typically be less qualified by materiality thresholds and the sellers’ knowledge, especially in relation to undisclosed liabilities which are often specifically picked up in broad “sweeper warranties”. As well, US buyers will often insist on “materiality scrapes” whereby materiality is disregarded in determining liability for warranty breaches.
Disclosures
The approach to disclosures differs as well. The US convention is for the buyer to allow specific disclosures only in respect of each warranty, and the approach is more restrictive. General disclosures that qualify all of the warranties and use of a “disclosure bundle” are not common in deals with a US buyer. As a result, UK sellers need to be especially vigilant in their disclosures to a US buyer and be sure to disclose specifically. Even so, a US buyer may push for the ability to make a breach of warranty claim even with prior knowledge of the breach under “sandbagging” clauses that are also heavily negotiated.
Indemnities and Insurance
While in the UK seller indemnities are reserved for particular identified areas of risk, and remedies for a breach of warranty will be limited to a contractual claim for damages, US purchase agreements typically include provisions indemnifying the buyer against any breaches of the representations and warranties, and sellers are often required to deposit a portion of the purchase price into an escrow account as a source of recovery for indemnification claims. Whether the escrow will be the exclusive source of recovery for indemnification claims is subject to negotiation, as are liability caps and de minimis recovery thresholds, and liability caps can differ for breaches of “fundamental” representations and warranties around things like title and capacity to enter into the deal as opposed to fact-specific representations and warranties about the target and its historical business operations. W&I insurance (R&W insurance in US parlance) is used in both UK and US transactions and will tend to follow the damage or indemnity basis of the underlying deal, but premiums and retentions are typically higher on US policies.
These are only some of the key differences in process and deal practice in the UK and the US and MBM, with its dedicated team of US lawyers working alongside their UK colleagues, is uniquely positioned to assist on these transactions.
