Ah, the UK and the US: two countries separated by a common language. And that’s definitely the case with share purchases where there are some subtle – and some fundamental – differences in the way the two jurisdictions approach the acquisition of a company.
Representations or warranties?
In US transactions, the statements about the target will be characterised as ‘representations and warranties’, with the two terms being used inter-changeably without affecting the remedies available to the buyer should one of those statements turn out to be false.
In the UK, whether a statement is classed as a representation or a warranty will affect the possible remedies available to the buyer for breach of that statement. Breach of a warranty will give rise to a simple claim for contractual damages. If the untrue statement is a representation, however, the buyer may be able to set the contract aside or claim tortious damages which could result in a higher sum being recovered by the buyer. Whilst UK buyers may want to preserve these potential remedies, most well advised sellers will insist on references to representations being removed and the agreement expressly stating that the buyer’s only remedy for breach is contractual damages.
The warranties on both UK and US deals will generally cover the same key areas of the target’s business but typically US buyers expect to receive greater warranty cover including both protection against undisclosed liabilities and material adverse changes in the target as well as confirmation of the accuracy of all warranties and disclosures. Such wide warranties would be strongly resisted on UK deals.
Quantification of loss
On US deals, the buyer will expect to be indemnified on a $ for $ basis in respect of any breach of the representations and warranties. This means the buyer will be able to recover the full amount required to rectify the breach, regardless of whether or not it resulted in a reduction in the value of the shares acquired.
In the UK, however, it is rare for warranties to be given on an indemnity basis. Instead, on a claim for contractual damages the buyer will have to show that as a result of the breach of warranty the value of the shares acquired has been reduced. Only reasonably foreseeable losses will be recoverable and the buyer will be under a duty to mitigate its loss.
On both US and UK deals the seller’s liability under the agreement will be limited by various express provisions. In particular:
- A cap on the seller’s total liability. In the UK, this is generally set at 100% of the purchase price although smaller caps can sometimes be agreed. In the US, however, much smaller caps are the norm, often as low as 20%
- A threshold (or ‘de minimis’) level. Whilst these are linked to deal values in both jurisdictions, in the UK they are structured as ‘tipping baskets’ so, once the agreed threshold is reached, the seller is liable for the whole amount not merely the excess over the threshold. In the US, ‘deductibles’ are more common with the seller only being liable for the excess over the agreed hurdle
- A time limitation. In the UK, two years or two audit cycles has become the market standard. Time periods in the US are often shorter at around 12 months or one audit cycle.
The lower cap and shorter time limit on US transactions are the trade-off for the more extensive warranty cover given to US buyers.
UK warranties will be qualified by a separate disclosure letter containing both general disclosures of publicly available information and specific disclosures cross-referenced to the warranties. Typically, all the disclosures will qualify all the warranties, regardless of which specific warranty they are disclosed against.
In contrast, US disclosures are contained in a schedule to the agreement rather than a separate letter. General disclosures are rarely accepted and the specific disclosures only operate to qualify those warranties to which they expressly cross-refer.
UK deals are generally structured so the deal and business risk passes to the buyer at exchange (or ‘signing’) and therefore conditions in agreements are usually limited to legal or regulatory matters. Extensive conditions, particularly subjective ones within the control of the buyer, are rare.
In contrast, on US deals risk typically doesn’t transfer until completion (or ‘closing’) and therefore agreements often contain more significant conditions. These may include finance conditions, so the buyer can withdraw from the transaction if it fails to raise the necessary finance, ‘MAC clauses’ to protect the buyer against any material adverse change in the target’s performance and a ‘bringing down’ of the representations and warranties, with the seller being required to reconfirm the accuracy of those statements at completion.
There is a general perception that UK law and custom favours sellers (with risk passing on exchange, more limited warranties and wider disclosures) whereas the US favours buyers (with risk not passing until completion, more extensive warranties and limited disclosures). Which approach is adopted on each transaction will be affected by a number of factors including which law is to govern the agreement, the facts and circumstances of each deal, the bargaining strengths of the parties and the attitude of their lawyers.
Perhaps unsurprisingly, given the influence the US has over many areas of our lives, we’re beginning to see some of the standard positions on US deals creep into UK transactions. ‘Completions’ are increasingly referred to as ‘Closings’; caps on liability are beginning to come down from the standard 100% and there is more resistance to the general disclosure of documents without specific reference to them in the disclosure letter. Whether the UK can continue to resist these influences from across the pond remains to be seen.