With regulatory constraints currently making it challenging to get capital out of China, the Pound Sterling continuing to suffer Brexit-related weakness and the NZ$ having softened against the Greenback, we expect North American investors may be more acquisitive in New Zealand in the next 12 months. This article highlights some of the deal terms that North American buyers would consider market practice in their home jurisdictions and that they may seek to impose on New Zealand sellers. It draws from the findings of the DLA Piper 'Global M&A Intelligence Report 2017' (Report). For New Zealand sellers, understanding the North American approach to M&A transactions can make for smoother negotiations and deal execution.
Locked box versus completion accounts
In recent times, locked box pricing mechanisms have become a common feature of the European M&A market and they are gaining popularity worldwide, including in New Zealand. However, this is not yet the case in the US. Our Report confirms that completion accounts remain the market standard in the US, with locked box mechanisms used very rarely.
While North American buyers may resist locked box mechanisms due to unfamiliarity, New Zealand sellers should bear in mind one of the great advantages of locked box deals: reducing the prospect of post-completion disputes on adjustment mechanisms. As North Americans are considered more litigious by some (rightly or wrongly), locked box mechanisms should be given serious consideration by New Zealand sellers.
Stronger gap protections
In deals where there is a gap between signing and completion, buyers commonly seek protection by negotiating certain circumstances in which they will not be required to complete. The most common 'gap protections' are for material adverse changes (MAC) occurring to the target, or a material breach of the warranties occurring, prior to completion. In addition, some buyers may seek a right to terminate if the conduct rules (a set of rules prescribing how the target is to be operated between signing and completion) are breached.
Our Report reveals that North American buyers are more accustomed to obtaining gap protections. In North America, 63% of surveyed deals contained a MAC termination right, 62% contained a termination right for breach of warranty and 58% contained a termination right for breach of conduct rules. These percentages are significantly lower in the rest of the world, including in New Zealand.
In our experience in New Zealand, the inclusion of a MAC clause depends on the parties' respective negotiating strength and other macro and deal specific matters. It is less common for a buyer to be able to terminate for a material breach of warranty or conduct rules. New Zealand market practice tends to require a buyer to complete, notwithstanding a material warranty or conduct rules breach, leaving the buyer with a claim for contractual breach.
Tighter warranty caps
Financial caps on warranty claims usually comprise an overall financial cap, a 'de minimis' (or small claims exclusion) and an aggregate (or 'basket') threshold. Such financial caps are another area where North American market practice differs from the rest of the world.
From our Report:
- 60% of deals surveyed globally capped the sellers' liability under commercial warranties (as distinct from fundamental and tax warranties) at 40% or less of the purchase price. However, in North America we saw significantly lower caps for commercial warranties with 82% of deals having caps of 20% of the purchase price or less.
- Only 46% of North American deals had a 'de minimis' threshold, compared to more than 60% of Australasian deals. In New Zealand, a 'de minimis' provision is market standard. In deals where a 'de minimis' threshold was agreed, in North America it was typically set at less than 0.05% of the purchase price, while in New Zealand and Australia it was more commonly set between 0.1-0.2% of the purchase price.
- Over 85% of all deals globally (including North America) included a 'basket' or aggregate claims threshold, being the amount that all qualifying claims in aggregate must exceed before they can be brought against the seller. However, the type of 'basket' differed by jurisdiction. In North America, the aggregate claims threshold was fairly evenly split between a 'trigger' or 'first $ basket' approach (where the buyer can claim back to the first dollar, once the basket threshold is crossed) and an excess approach (where the buyer can claim only above such excess). In New Zealand however, the 'trigger' or 'first $ basket' approach is market standard.
Approach to disclosure
Our Report affirms that North American market practice differs from New Zealand with regard to the extent to which matters disclosed by the seller limits the buyer's ability to bring warranty claims. Disclosure of the entire data room was accepted by buyers in only 5% of surveyed North American deals. This differs greatly from the rest of the world, with 69% of deals in Asia Pac accepting general disclosure of the data room materials. The market standard in New Zealand is that buyers will accept disclosure of the entire data room, but will agree a concept of 'fair disclosure'.
Security at completion for buyer's claims
If negotiating with a North American buyer, it is quite likely that they will seek some form of security for claims, for example by way of an escrow or hold back amount. Our Report reveals that it is standard practice to do so in US deals, whereas security for claims was seen in less than 25% of deals in other jurisdictions (usually only where there were deal specific liability issues or obvious recovery risks). Again, this likely reflects the more litigious nature of North American corporates and should also be considered by New Zealand sellers in the context of negotiations around caps on warranty claims. Warranty and indemnity insurance can be used to get past such an impasse.
W&I insurance used to bridge jurisdictional gaps
North American buyers have always sought to impose their own market practice when transacting in New Zealand, with varying degrees of success. When it comes to the different approaches to warranties and indemnities, warranty and indemnity (W&I) insurance is starting to be used in an innovative way to bridge the gap. W&I insurers are being asked to underwrite W&I packages for deals involving New Zealand assets, governed by New Zealand law, but transacted on US market terms. Some underwriters have been willing to write such policies, although with higher premiums than New Zealand parties are used to. It is worth noting that W&I premiums in the US are typically in the region of 3% of the amount insured, whereas in New Zealand we enjoy premiums of between 1% to 1.5% of the amount insured. New Zealand sellers that are uncomfortable transacting on North American market terms should consider W&I insurance as a means to bridge the gap between the differing jurisdictional approaches. For more on W&I, please see our earlier publication here.
DLA Piper, with offices in more than 30 countries around the world, including 34 in the US and Canada, has unrivalled access to North American market intel and deal trends. When combined with our general M&A experience and expertise, we are exceedingly well placed to advise on New Zealand transactions involving a North American party.
For more information or to discuss any point in greater detail, please contact any of our lawyers below.