Following the UK's vote to leave the European Union, we consider the potential impact on M&A activity and the potential implications for M&A transactions.
In the immediate aftermath of the vote, M&A activity, particularly in specific sectors, was immediately impacted with some deals being delayed or cancelled. Other sectors have remained buoyant and we see many reasons to remain confident in the UK M&A market generally. There may well continue to be a slow down or delay in M&A activity as parties, including funders, assess the impact of the Brexit vote. The longer term outlook will depend on getting greater clarity on the ultimate Brexit terms (which may impact on some sectors more than others), investor confidence and market conditions, including the effect on Sterling which may create opportunities for overseas acquirers.
Potential impact on M&A deal implementation
Until the Brexit negotiations are concluded, the legal framework for M&A transactions will remain the same. However, we may see overseas buyers trying to obtain general economic material adverse change protection when there may be a reasonably long period between signing and closing to counteract major events or market reactions such as currency fluctuations.
The post Brexit framework will depend on the ultimate Brexit terms, but we outline our current expectations below.
The overall legal framework is likely to remain broadly the same, both for domestic and cross border transactions. English contract law is often chosen to govern international M&A transactions. Whilst English contract law is unlikely to change post Brexit (as it is largely unaffected by EU regulation), we may see EU parties less willing to use it.
Depending on the ultimate Brexit implementation terms, there may be changes to those detailed aspects of an M&A transaction which are directly impacted by EU regulation. For example:
- Merger clearances - proposed acquisitions which currently meet the EU Merger Regulation thresholds benefit from the EU's "one stop shop" clearance process, avoiding the need for clearances in multiple EU member states. Post Brexit, both UK and EU notifications are likely to be required, with additional time and costs burdens.
- Personal data - changes to the current EU regime on the use of personal data may impact on how employee and other due diligence is undertaken, making it more burdensome.
- Employee protections - assets sales may be affected if the current protections afforded to employees on business sales are changed, although a wholesale repeal of these is unlikely.
- Dispute resolution - with possible changes to the enforceability of English judgements in EU member states and vice versa (requiring separate recognition of judgments prior to enforcement), we may see a greater use of arbitration.
Except for merger clearances (see above), we anticipate that the public takeover regime in the UK will remain largely unchanged. While the UK Takeover Code gives effect to the EU Takeovers Directive, the takeover regime in the UK was established in substantially its current form prior to such directive. Consequently, substantive changes to the UK Takeover Code are unlikely.
If the form of Brexit results in the UK no longer being part of the European Economic Area ("EEA"), takeovers which are subject to two regimes (eg a UK company listed on a market in the EEA) will no longer benefit from the current shared jurisdiction rules which apply to EEA member states, and will instead be subject to two separate sets of takeover regulations.
Cross border mergers
There is currently an EU framework to facilitate cross border mergers between UK companies and companies from other EEA states. This would not currently be available post Brexit if the UK becomes a non EEA state, but may be addressed in the Brexit negotiations.
- If you are proposing to buy or sell a business, you will need to consider the wider implications of Brexit on the target business and its value. Those businesses which operate in heavily regulated sectors may be more significantly impacted.
- The effect of Brexit on Sterling may create opportunities for overseas acquirers for certain companies, although those with Sterling earnings streams may see an adverse impact on valuation.
- As the timetable for Brexit becomes clearer, parties will need to consider the impact on transactions which could bridge key Brexit dates.
For a more detailed analysis of the issues, please contact the authors or your usual DLA Piper contact.