The last 12 months have seen deal volumes decrease but deal sizes increase, with a trend towards more complex, higher-value transactions. This is illustrated by the continued increase in the number of “carve-out” transactions. While these have traditionally been seen as technically challenging, with greater potential operational risks, both corporate sellers and private equity (PE) purchasers have embraced the complexity in a drive to unlock hidden value. This has been fuelled by corporates increasingly looking to focus on core strengths, particularly in the face of the greater regulatory burden on highly diversified groups. PE purchasers have been prepared to spend the time and energy to acquire these new assets, which have not been to market before and have strong value creation potential after not necessarily being a key priority within their previous corporate group.

Geopolitical developments and AI have both significantly shaped recent sector activity. Defence and aerospace have been the focus of intense interest and investment as a direct result of world events. At the other end of the spectrum, transactions in the technology and software sectors have gone into reverse as the future impact of AI is assessed, with the full impact over a potential five to seven-year hold period for an asset being challenging to gauge and current profit levels and cash flows being significantly overshadowed as a result.

Carried Interest

The UK’s new carried interest regime took effect from 6 April 2026. The legislation recasts the carried interest tax rules as a new income tax charge (rather than as a capital gain). The changes potentially affect the relevant tax rate (which is increased compared with capital gains rates but may be lower than the highest income tax rates, with the exact rate dependent on a fund’s weighted average holding period for its assets), territorial scope and compliance, and therefore require careful consideration. While the scope of the changes is likely to capture work performed by a PE executive for a PE fund, “sweet equity” granted to management in a portfolio company (see 8. Management Incentives) is likely to fall outside the new regime.

Employment Law

The UK Employment Rights Act 2025 was passed at the end of 2025. Under the Act, with effect from 1 January 2027, the qualifying period for an employee to gain unfair dismissal rights will be reduced from two years to six months. In addition, the statutory cap on the compensatory award for unfair dismissal (currently 12 months’ pay or approximately GBP120,000, whichever is the lower) will be removed. From a PE perspective, there are concerns that the removal of the cap could have unintended consequences where an individual at a portfolio company is rewarded through equity-based and exit-linked means rather than solely a cash salary and bonus (see 8. Management Incentives).

UK Merger Control

The UK’s competition regulator is the Competition and Markets Authority (CMA) and is responsible, among other things, for investigating M&A transactions that may impact competition.

The UK merger regime is voluntary. Parties are not required to notify a merger, even if the CMA’s jurisdiction is triggered. However, the CMA tracks merger activity to monitor whether unnotified transactions may give rise to potential concerns. If a transaction meets the relevant thresholds and the parties do not notify, the CMA may launch its own investigation and has extensive powers to impose stringent interim hold-separate orders as well as a range of final remedies, including ultimately to unwind the transaction. As a result, PE buyers may choose to voluntarily notify a proposed acquisition and make CMA approval a condition to completion.

The CMA has jurisdiction to investigate a merger where any of the following jurisdictional tests are satisfied:

• The turnover test: The value of the turnover in the UK of the enterprise being taken over exceeds GBP100 million.
• The share of supply test: The merger results in an aggregate market share of 25% or more in the UK or in a substantial part of it, or the enterprise being taken over has a 25% or more share of supply of goods or services in the UK before the merger and at least one of the merging enterprises has a UK turnover of more than GBP10 million.
• The hybrid test (or acquirer-focused threshold): At least one of the merging parties has an existing share of supply of 33% in the UK or in a substantial part of it, the total value of the turnover in the UK of that party exceeds GBP350 million, and the other party has a “UK nexus” (broadly defined to be satisfied where the party has any activity, legal entity, or supply of goods or services in the UK).

The hybrid test was introduced at the start of 2025 by the Digital Markets, Competition and Consumers Act 2024 (DMCCA) to enable the CMA to, among other things, review mergers that remove potential competition from a market (eg, “killer acquisitions”, where an entity is acquired before it can develop to become a competitor). The test is described as “acquirer-focused”, as transactions where the target meets the GBP350 million UK turnover component of the hybrid test would also meet the standard turnover test threshold of GBP100 million (ie, the first jurisdictional test above). It has brought a greater proportion of PE transactions at least within the scope of the UK merger control rules.

The DMCCA also introduced a mandatory notification regime in respect of companies designated as having “strategic market status” in respect of specific digital activities.

The CMA is increasingly concerned with and investigating roll-up acquisitions and their potential impact on consumers. Following a previous focus on veterinary groups, the CMA has most recently been looking at the provision of early years education and childcare services.

UK Foreign Direct Investment (FDI)

Under the UK’s National Security and Investments Act, there is a mandatory obligation to notify the Investment Security Unit (ISU) of a proposed acquisition or consolidation of control (which includes acquiring more than 25%, more than 50%, or 75% or more of shares/voting rights) of an entity that performs activities in any of 17 sensitive sectors (including defence, energy, critical suppliers to government, and data infrastructure).

If a transaction is a “notifiable acquisition”, it cannot complete until clearance is obtained. Completing a notifiable transaction without approval is an offence and will mean the acquisition is void.

Even if an entity is not operating in a sensitive sector, an acquisition can be “called in” for assessment if the Secretary of Statereasonably suspects it has given, or may give, rise to a risk to national security, with the risk of call-in higher where an entity’s activities are closely linked to one or more of the sensitive sectors. The UK Government may then clear the acquisition or, if necessary and proportionate, impose conditions, block it or unwind it completely. As a result, a voluntary notification to clear the acquisition in advance may be prudent depending on the activities that the target undertakes.

In addition to evaluating the sectors involved, the ISU also considers the identity of the proposed acquirer. For PE firms, the presence of sovereign wealth funds as significant limited partner (LP) investors in the acquiring fund may lead to increased scrutiny of an M&A deal, particularly if those investors originate from countries considered to pose a higher national security risk to the UK. Where an acquisition is being made by a consortium of PE investors, careful assessment will need to be made as to whether any of the co-investors poses a heightened risk from a national security perspective and how to appropriately allocate (as between themselves) the risk of mitigations.

EU Foreign Subsidies Regulation (FSR)

Even though the UK is no longer part of the EU, transactions with a UK nexus may separately also have an EU nexus and come within, among other things, the scope of the EU Merger Regulation or, more recently, the FSR. The FSR applies to UK sponsors acquiring EU-based targets that generate EU turnover of at least EUR500 million where the acquirer and the target together received aggregate foreign financial contributions (ie, subsidies from a non-EU government, public authority or public entity) of more than EUR50 million in the preceding three years. Relevant transactions are required to be notified to the European Commission and cannot be implemented until they are approved. The regime has introduced additional diligence and timetable considerations for PE purchasers with sovereign-backed capital or subsidised portfolio entities. FSR approval is increasingly treated as a closing condition alongside merger control and FDI approval.

In the UK, a PE buyer will usually commission a legal due diligence review. The review will typically focus on potential risks and identifying issues, with findings delivered through a so-called “exceptions-only red flag report”, rather than attempting to provide a complete written summary of the target’s arrangements.

One indirect consequence of warranty and indemnity (W&I) insurance becoming the default position for protection and recourse in UK PE transactions is that it has reinforced the continued importance of “buy side” legal due diligence. The large majority of W&I insurers will not offer insurance unless they are comfortable that sufficient independent legal due diligence has been undertaken. Similarly, finance providers will generally be unwilling to lend unless they are satisfied with the findings of the buyer’s legal due diligence or they have conducted their own review.

The legal due diligence process itself will revolve around a virtual data room which the seller will either pre-populate itself with relevant documents or upload documents to in response to a due diligence request list from the potential buyer. This will often be augmented by a Q&A process and potentially also management presentations. Key areas of focus will depend heavily on the nature of the target’s business, but the object will be:

• to identify issues which have a potential financial impact, such as terms which could be triggered in material contracts or liability to contribute to historic pension schemes;
• to identify sources of potential official or criminal sanction and reputational damage, such as business practices which breach anti-bribery and corruption or sanctions legislation or known investigations by regulators;
• to identify factors which could prevent the transaction from completing or cause a significant delay, such as necessary antitrust or FDI consents;
• to identify matters which could prevent the target from carrying on its business as usual, such as necessary licences and authorisations or services provided by the seller group or other third parties; and
• to verify ownership of key assets.

Vendor due diligence has become common or market for competitive auction processes. PE sellers will often commission a legal fact-book rather than a traditional due diligence report. A fact-book, as its name suggests, is more factual in nature and is less likely to take a stance on potential legal risks or suggest potential solutions. It will be prepared with the intention of it being provided to all bidders on a non-reliance basis, although, depending on circumstances, it is not uncommon for reliance to then be extended to the successful bidder that acquires the target. In any event, bidders are still expected to conduct their own buy-side diligence (in particular if they progress in the auction process).

The rationale behind conducting and then making vendor due diligence available is that it gives a PE seller greater control over the transaction process and timing. Vendor due diligence can streamline the sale process by reducing the time bidders spend on buy-side diligence, limiting the scope and number of questions raised by bidders, and reducing disruption caused to management and the business. It also:

• gives the PE seller an early indication of value-critical issues which may require “fixing” outside the glare of a live auction sale process; and
• helps to control the narrative of how key due diligence issues are presented to bidders and maintain bidder focus on key issues (as the seller sees them).

It is particularly helpful for complex transactions such as carve-outs involving multiple jurisdictions, where bidders need visibility over pre-completion reorganisation steps.

The mechanics and structure of a UK acquisition depend on whether the shares in the UK target which are being acquired are listed on a securities exchange or not.

“Public to private” transactions (where the UK target is listed) are discussed in more detail in 7. Takeovers. In brief, where the target board of directors is supportive of the transaction, it is most commonly implemented by means of a court-approved scheme of arrangement. The alternative is a takeover offer to all shareholders, often referred to as a “contractual offer”.

Otherwise, acquisitions of UK target companies are implemented by way of a sale and purchase agreement (SPA). The SPA will provide for, among other things, the acquisition by the purchaser (“Bidco”) from the seller(s) of the relevant shares in the target. Following completion of the acquisition, Bidco and the target remain separate entities. This is the case regardless of whether the sale process is structured as an auction sale or is purely the result of bilateral negotiations between the buyer and the seller(s). In the case of an auction sale, one of the documents which the seller will provide to potential bidders is a draft SPA (known as the “auction draft SPA”). Bidders will then be asked to provide any comments on the auction draft SPA as part of their proposal.

PE transactions are typically structured using an “investment stack” of newly incorporated special purpose vehicles. This usually consists of:

• a top holding company (“Topco”);
• an intermediate holding company (“Midco”) which, depending on the funding structure for the transaction, may be included as the borrower under any mezzanine debt; and
• a purchase vehicle (“Bidco”) which will acquire the shares in the target and may also be the borrower under any senior facilities.

The exact nature of the entities in the stack will depend on what is required in the particular circumstances to ensure efficient tax structuring, accommodate the proposed financing, limit the fund’s liability and ultimately allow for an efficient exit.

It is Bidco which enters into the acquisition documentation, not the PE fund, helping to ring-fence the fund’s risk by maintaining separation from the fund’s capital and separation between individual deals.

PE transactions are normally financed in part through equity funding from the PE fund and in part through third-party borrowings.

As regards the equity-funded portion of the purchase price, the PE fund will typically provide an equity commitment letter (ECL) to Bidco at signing. Under the ECL, the PE fund will commit to fund Bidco a specified sum (being the equity portion of the purchase price) at completion, subject to the satisfaction of the conditions precedent in the SPA. The commitment in the ECL is generally given to Bidco but with the seller(s) having the ability to enforce the rights of Bidco.

Bidco will also provide evidence to the seller(s) that it has sufficient debt commitments to cover any debt portion of the purchase price. This is usually in the form of a debt commitment letter from the relevant lenders (attaching an agreed term sheet), provided alongside a facility agreement, usually in interim form, in order to ensure a “fundable bid” with extremely limited conditionality. The financing will typically be on a “certain funds” basis, ie, where there is no material adverse change (MAC)/market conditionality, where the only outstanding documentary conditions to drawdown are those fully within the bidder’s control and where “major undertakings” apply only to the Newcos set up by the PE sponsor for the purpose of the bid and not to the target group.

The past 12 months have seen intense competition between the syndicated markets and private credit funds to finance bids, so some top-tier PE sponsors may delay their acceptance of the lenders’ commitment and retain the flexibility to switch from one proposed debt structure to another after a bid has been submitted.

Acquisitions involving a consortium of PE sponsors are not uncommon in the UK – in particular, as you would expect, for higher-value transactions. While more complicated, a consortium acquisition can allow a PE fund to acquire a substantive interest in an attractive asset without being exposed to the full value of the asset.

However, the co-investment does not need to be from another PE fund. It can be directly from investors in the fund, with LPs in the fund making the acquisition being given the opportunity to invest alongside the sponsor. Any such co-investments will normally be through a separately structured co-investment vehicle which invests alongside the sponsor and will be a passive investment. This not only provides the PE fund with shared investment risk, increased access to investor capital and investor relations benefits; it also provides LPs with a larger stake in an investment of interest without as much of the diligence and other transaction burdens which would typically have to be navigated if they were looking to invest on their own.

It is not common for a PE fund to invest alongside a corporate or strategic investor. A corporate or strategic investor will normally be looking to hold and integrate an asset whereas a PE fund will ultimately want to exit.

PE sellers typically prefer a locked-box consideration mechanism. It is viewed as providing more price certainty than a completion accounts mechanism. In addition, the point at which economic risk passes to the purchaser is much earlier, and a locked-box mechanism does not require potentially contentious and lengthy adjustments post-completion which then delay the PE sellers’ ability to distribute the sale proceeds. Locked-box mechanisms are particularly prevalent in auction processes where factors which might otherwise tip a seller towards completion accounts such as buyer leverage, the difficulty in putting a perimeter around the sale assets to then be able to prepare the locked-box accounts for them, and lack of time to prepare and diligence those accounts are less likely to be an issue (given the preparation and planning that goes into the auction process).

Separately, earn-outs continue to be a common feature of PE transactions, in particular where the PE fund is the acquirer. Earn-outs not only assist in bridging potential valuation gaps and derisking transactions for the purchaser but also provide an upside for the seller if the business does perform as predicted. They also provide another avenue for protection under the warranties. Any claims brought under the warranties can potentially be set off against future payments under the earn-out.

Where the target is profit-making, then an equity ticker is commonly added to the locked-box equity price from the date of the locked-box accounts until completion. This is to reflect cash profits generated by the target during this period, which would otherwise be to the benefit of the purchaser. It is also not dissimilar to what the position would in theory be under a completion accounts mechanism, as these profits would form part of the target’s cash at completion and the price would be adjusted accordingly.

To protect against cash being taken out of the target during this period, the seller will agree to indemnify the purchaser for value transferred to the seller or its related parties (“leakage”) between the locked-box date and completion, with certain “permitted leakage” exceptions. Any leakage is usually deducted from the purchase price at completion on a pound-for-pound basis. If it is repaid later, then interest may sometimes also be charged on any such leakage.

The SPA will not normally include a specific dispute resolution mechanism where a locked-box mechanism is used. If, however, the SPA contains a completion accounts price adjustment, then as part of this it will also include a mechanism for resolution of:

• any disputes regarding the completion accounts; and
• the resulting price adjustments,

by an independent expert accountant.

The SPA will require one of the parties to prepare draft completion accounts within a specified time frame following completion. The other party will then have a specified period to review them and raise any objections. The SPA will set out a process for the parties to then attempt to settle any points of disagreement. This may include a threshold such that, once the aggregate value of the disputed items falls below that threshold, the accounts are taken as agreed. If this process is not successful, then there will be a mechanism for either party to refer the disputed items for resolution by an independent expert accountant (together with terms as to who is to pay the expert’s fees depending on the results of the expert’s determination).

PE transactions will normally only be subject to the bare minimum of conditions precedent. These will typically be restricted to any required regulatory approvals and any required shareholder approvals. MAC conditions are not common in UK transactions, potentially at least in part as a result of the high bar the courts set and the specificity of drafting the courts require before they can be enforced. Similarly, change-of-control or other desirable (but not mandatory) third-party consents are not generally included as conditions precedent unless the relevant contracts are critical to the target’s business and it is not otherwise possible to obtain consent prior to signing.

Whether a PE purchaser will agree to a “hell or high water” undertaking in respect of a regulatory condition, committing the purchaser to do anything and everything necessary to satisfy that condition no matter what (including agreeing to any divestment or other remedy required by the relevant authority), depends upon the situation. The perceived risk (and to what extent there are overlapping assets), whether there are competitive bid dynamics and what precedent the undertaking sets are all factors for consideration. It is potentially more likely in relation to merger control processes of which the purchaser has past experience, and the market more generally has a good understanding of how the relevant authority is likely to behave. FDI conditions, on the other hand, are generally seen as less predictable, as they have less of a track record and are more politically sensitive. As a result, it is less common to have such an undertaking in respect of an FDI condition. If, nevertheless, the “hell or high water” undertaking expands to FDI conditions, it is becoming increasingly common for parties to agree that these conditions will be “customary” in nature, which may be further specified.

It should also be flagged that there are multiple variations of a “hell or high water” undertaking. The conditions can be strictly limited to the target, or if the obligation extends to the PE purchaser, these could be limited to the fund carrying out the transaction (excluding the remainder of the PE structure). In addition, the “hell or high water” undertaking could apply only with respect to behavioural conditions (excluding the possibility for any divestitures).

Break fees payable by a PE purchaser in favour of a seller are not common, with a PE purchaser being conscious in general of wasted costs in relation to a transaction which does not proceed.

Where the SPA has conditions to completion, it will specify a so-called “long-stop date”. If the conditions are not satisfied (or where applicable, waived) by that date, then the SPA will provide that it terminates as a matter of course or that one or both of the parties will have the right to terminate (subject to them having complied with any obligation imposed on them under the agreement in relation to attempting to procure the satisfaction of that condition). The length of the long-stop date is dependent on the nature of the conditions and the anticipated time it will take to satisfy them, in particular given the increased complexity of some regulatory regimes and the extensions which some regulators will add to previously anticipated timelines.

A PE seller will be focused on achieving a clean exit. A PE seller needs to be free to return the sale proceeds to its LP investors without fear of claw-back. This drives a PE seller’s approach in relation to risk allocation in a transaction. In addition, unlike a trade seller, which will retain its core businesses and associated personnel, a PE seller is not well placed to deal with follow-up issues or claims arising in relation to the time of its ownership of the target. As a result, in line with market practice, PE sellers will generally bear very little risk outside of core title and capacity warranties.

As mentioned in 6.8 Allocation of Risk, PE sellers will generally only give title and capacity warranties relating to their ownership of the shares and their ability to enter into the SPA. As these are “fundamental warranties”, liability for breach will typically be capped at 100% of the consideration received by the seller, without any de minimis or thresholds, and the time limit for bringing a claim will typically be set at six years from completion. If it is a locked-box transaction, then, apart from the “leakage” covenant, a PE seller will seek to resist providing any other contractual protection to the purchaser.

Where the management team are also selling shareholders (or will become party to management incentive arrangements going forwards), they will typically be expected to give a full set of business warranties relating to the target. These warranties are often not included in the SPA but in a separate management warranty deed. Management’s liability under these warranties will be capped at a level which in the context of the transaction will provide the purchaser with very little or, if the cap is GBP1, no protection. However, the warranties provide a vehicle for, and will be backed by, a W&I insurance policy. Liability under management warranties is typically limited in time to two years, but in reality, the more important time frame is what is agreed with the W&I insurer in relation to the W&I policy. The management warranties and the W&I policy will be subject to exclusions for matters which are disclosed against the warranties. These disclosures will include a set of specific disclosures in a disclosure letter (which is another driver for management being required to give the warranties as this then elicits information in the form of the disclosures), together with the contents of the data room prepared in connection with a transaction.

W&I insurance has become almost ubiquitous in transactions with a PE seller as a result of: (i) the mismatch between the warranty package which the PE seller and any management shareholders are prepared to give and the level of protection which a purchaser will be looking for; and (ii) the understandable reluctance of any purchaser to bring a claim post-completion against the very management team which it wants to drive the target business going forwards.

In an auction process, the PE seller may line up buy-side W&I insurance in advance (referred to as a “stapled policy”) which the preferred bidder can then step into. This gives the seller control and visibility over the W&I process and, just as importantly, avoids multiple bidders approaching the market at once trying to source cover.

Given their need to distribute proceeds back to LP investors as quickly as possible, PE sellers will almost always seek to avoid any part of the consideration being held in escrow.

Litigation in respect of SPAs most commonly revolves around:

• any earn-out mechanism, including as to the drafting of its terms, the application of the metrics by which any additional payment is calculated, and whether the purchaser has operated the business in the manner provided for in the mechanism; and
• the warranties, including as to the limitations of liability in relation to those warranties and whether the purchaser comes within an exception to those limitations.

Public-to-privates involving PE-backed bidders have become a common feature of the UK takeover landscape, often with multiple PE-backed bidders showing at least initial interest in the same target.

The key role of the target board when faced with an approach from a PE-backed bidder is, as in any takeover offer, to decide whether to recommend the offer to target shareholders. The Takeover Code (“Code”) requires the target board to obtain independent advice as to whether the financial terms of any offer are fair and reasonable and must ensure that the substance of the advice is made known to target shareholders. Most bidders are keen to secure the target board’s recommendation. It is only possible to structure the offer as a court-sanctioned scheme of arrangement (rather than a contractual offer) if the target board supports the offer. Outside of a competitive bid situation, PE-backed bidders will generally only proceed to announce a formal offer if it is recommended as, among other things, they will be relying on (and are investing in) the existing management team.

In this regard, one area which you would anticipate having greater significance than in a takeover by a competitor or other trade bidder is the retention and future incentivisation of target management. However, the effect of requirements in the Code regarding the disclosure of, and in certain cases approvals required for, any such proposed arrangements is that the issue is typically only discussed with target management following completion of the offer.

If the parties will need to obtain regulatory clearances in connection with the transaction or the target management and employees hold options or other rights to acquire target shares (in respect of which there is a discretionary element), then it is common for the bidder and target to enter into a “co-operation agreement” setting out, among other things, how these matters will be handled.

Before any approach or offer for a target listed on the London Stock Exchange becomes public, the requirement to make material shareholder disclosures in relation to that issuer are governed by the FCA’s Disclosure Guidance and Transparency Rules (DTRs). Under the DTRs, a shareholder is required to notify the listed company (which in turn must issue an announcement) if the percentage of voting rights it holds (or holds or is deemed to hold through direct or indirect holdings of financial instruments) goes through or falls back below certain thresholds. For UK issuers, the notifiable thresholds are 3%, 4%, 5%, 6% and each 1% threshold thereafter. For non-UK issuers, they are 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%.

Once an “offer period” commences in relation to an issuer (which will normally be when the first announcement is made of an offer or possible offer), the Code imposes additional, more stringent disclosure requirements. Among other things, these require the bidder and also any party with an interest in more than 1% of the target’s shares to make what is termed an “opening position disclosure” as to their holdings in the target and to disclose any dealings in the target’s shares during the course of the offer period.

The Code requires an offer to be made when a person acquires an interest in shares in a listed company (or other company subject to the Code) which, when aggregated with any shares held by persons “acting in concert” with it, carry 30% or more of the voting rights of a company. Such an offer is termed a “mandatory offer”. A mandatory offer is also required if a person, or any person acting in concert with it, increases its share interests, where the person and its concert parties held between 30% and 50% of the company’s voting rights before the acquisition.

Under the Code, certain categories of persons are presumed to be acting in concert with each other unless the contrary is shown. These include:

• a company with any entity it is controlled by or which is under the same control as it, such as portfolio companies with a PE bidder where the bidder has a controlling interest in the portfolio companies; and
• an entity which directly or indirectly has a 30% or more interest in another, such as an LP in a PE fund where the LP’s interest in the fund is 30% or more.

PE-backed bidders that have been involved in a number of takeover situations may have a generally agreed position with the Takeover Panel on the scope of their concert parties.

One means for PE-backed bidders to attempt to minimise some of the issues relating to concert parties is to send their concert parties a “stop notice” once there has been a public announcement about a potential offer. A stop notice is a request for relevant concert parties to stop dealing in the relevant shares and provide details of any existing holdings.

Most takeover offers by PE-backed bidders are structured as cash-only bids, although there has been an increase in also offering, as a partial alternative, the option to elect for unlisted securities in one or more of the bidder vehicles (otherwise referred to as “stub equity”). In part, this has been driven by a rise in the number of “founder” target shareholders that wish to retain an ongoing economic exposure in the target.

Care must be taken in relation to any acquisition of shares in the target in advance of or outside of any offer, as this can impact the terms on which the offer must be made and the form of consideration which must be offered. Among other things, if the bidder or any of its concert parties acquires shares in the target during the “offer period” or in the three months prior to the start of the offer period, this will result in the offer price having to be at least equal to the highest price paid for the shares. Similarly, if the bidder or its concert parties acquire shares equivalent to 10% or more of the target’s issued shares during the offer period or in the 12 months before the start of the offer period for cash consideration, then the offer must be in cash (or have a cash alternative) and the offer price must be at least equal to the highest price paid for any of the shares.

Takeover offers (other than mandatory offers (see 7.3 Mandatory Offer Thresholds), where conditions are normally limited solely to a 50% acceptance condition) are generally subject to a range of conditions. However, unlike in a private M&A transaction, including a condition to an offer does not mean that the bidder can necessarily rely on that condition to terminate the offer if it is not satisfied.

The Takeover Panel has specified that the conditions in a typical offer can be broken down into six broad categories: (i) conditions relating to the acceptance or approval of the offer by target shareholders or the court; (ii) conditions giving effect to certain requirements of law or the target’s articles; (iii) conditions in relation to long-stop dates and, in schemes, so-called “mini long-stop dates” by which the shareholders meeting and court hearings must be held; (iv) bespoke conditions relating to the occurrence of a specified event; (v) conditions relating to the obtaining of an official authorisation or regulatory clearance; and (vi) other conditions, principally general protective conditions (such as a MAC). A bidder must obtain the consent of the Panel to invoke any condition which falls within categories (iv), (v) or (vi), and the Panel will normally only give such consent if the circumstances in question “are of material significance to the bidder in the context of the offer”, which is a very high bar to clear.

Where the offer includes cash consideration, the bidder’s financial adviser is required to give what is referred to as a “cash confirmation”. This is a confirmation by the financial adviser in the offer documentation that the bidder has sufficient resources to satisfy full acceptance of the offer. The offer can only be conditional on any form of financing if the bidder proposes to finance part of the cash consideration by an issue of new securities.

The Code prohibits the target from agreeing a break fee except where it has announced a formal sale process, or where another bidder has announced a hostile offer and the target wishes to agree a break fee with a competing bidder. The Code also prohibits other deal protection measures (“offer-related arrangements”) such as matching rights.

Traditionally, if a takeover was implemented by means of a contractual offer, the bidder would set the acceptance condition at 90% of the shares to which the offer relates (while maintaining the right to waive this threshold). This is the hurdle past which a bidder can trigger the compulsory acquisition mechanism under the UK Companies Act to “squeeze out” any non-accepting shareholders. However, almost all takeovers which are recommended by the target board are now structured as a court-approved scheme of arrangement (at least initially with the option to subsequently switch). Mainly, this is because a scheme only requires 75% by value (and 50% by number) of voting shareholders to vote in favour to be approved and bind all shareholders. If the scheme is approved by target shareholders and sanctioned by the court, then the bidder acquires 100% of the target’s shares. As a result, contractual offers are now used more in situations where having a lower acceptance level may be an advantage, such as a competitive bid situation or where a bidder believes it is struggling to obtain the votes to approve a scheme.

Regardless of whether the acceptance condition is set at 90% of shares subject to the offer and then waived, or set at a lower level from the start, a key threshold for any bidder, and in particular a PE bidder, will be whether the acceptances mean that the bidder will then hold at least 75% of the shares in the target. The bidder will need to control 75% of the shares to be certain of being able to pass the shareholder resolutions required to delist the target and then re-register it as a private company, which will be necessary if a bidder’s financing arrangements require the target group to provide security in support of the borrowings.

One thing a bidder can do as a form of deal protection mechanism is seek irrevocable commitments from the target board and from key shareholders. Institutional shareholders are normally only approached in a short time frame (24–48 hours) immediately before the formal announcement of the offer. Among other things, this is because:

• such shareholders will not want to be “wall crossed” and unable to trade for any significant period prior to an announcement; and
• such shareholders will be taken into account for the Takeover Panel’s “Rule of Six” (which, in order to preserve confidentiality, restricts the persons a bidder can discuss a proposed offer with, other than its professional advisers, to six). As a result, depending on the number of shareholders to be approached, Panel dispensation may be required, and this is more likely to be given closer to the time of a formal offer announcement.

Irrevocable commitments provided by the target board are typically “hard” undertakings; ie, they continue to be binding even if a higher competing offer is announced. Commitments given by institutional investors will often cease to be binding if a higher competing offer is made (“soft”) or, more commonly, if a competing offer is made a certain percentage above the original bidder’s offer price (“semihard”). Where the commitment is semihard, it is common for the original bidder to have the right to improve its offer so that it is at least as favourable or exceeds the value of the competing offer, in which case the irrevocable commitment will remain in force.

It is common for a PE purchaser to offer equity incentivisation to a portfolio company’s management. This not only aligns the management team’s interests with those of the fund but is also more tax beneficial than a straight performance-based cash bonus. Management will typically hold between 10% and 20% of the ordinary shares in the entity in which management’s participation is structured.

A PE purchaser will typically fund Bidco by subscribing for a combination of ordinary shares and fixed-return instruments (preference shares or loan notes), collectively referred to as the “institutional strip”. Management will be invited to subscribe for ordinary shares (often a separate class of ordinary shares), which will typically be structured so that the unrestricted market value of the shares (ie, the value of the shares as if they were not subject to a transfer or other restrictions) at the time of subscription is as low as possible. This is the price at which management will subscribe for the shares (leading to it being referred to as “sweet equity”) and which should maximise the chance of a value upside for management on an exit while simultaneously achieving the most beneficial tax treatment. In some management incentive plans (MIPs), the sweet equity shares may include a performance-based ratchet mechanism entitling management to a greater share of the exit proceeds in certain circumstances.

Equity issued to management under a MIP is normally subject to both vesting and leaver provisions. If a manager leaves prior to an exit, their shares will be subject to a call option in favour of the company and/or the PE investor. The amount the shares are acquired for under the call option will depend on whether the manager is classified as:

• a “good leaver”, eg, a manager who retires at mandatory retirement age and receives fair market value for all of their sweet equity;
• a “bad leaver”, eg, a manager who is terminated for cause (or, in some cases, resigns) and receives the lower of cost and fair market value for all of their shares; or
• an “intermediate leaver”, eg, a manager who is terminated other than for cause, or who resigns.

Vesting is relevant for this last category of intermediate leavers, as they will typically receive fair market value for those of their MIP shares which have vested, and the lower of cost and fair market value for the rest of their MIP shares. The MIP shares will generally vest on an annual basis over four or five years. On an exit, all remaining MIP shares will vest. The shareholders’ agreement with management will contain provisions relating to the determination of fair market value and also the timing of payment for a leaver’s shares.

At the end of 2025, the UK Government consulted on options for the reform of non-compete clauses in employment contracts as part of its aim of reducing barriers to competition and delivering a dynamic labour market. In response, the CMA advocated a total ban where an employee’s income is below a certain salary threshold, with a statutory limit on the length of any non-compete for employees above that threshold. What steps the UK Government may or may not take is still to be seen.

As it is, a manager is likely to be subject to multiple overlapping non-compete provisions anyway, arising not just in their employment agreement but also in:

• the SPA in respect of the acquisition of the target by the PE purchaser – if the manager is a selling shareholder; and
• the investment agreement or shareholders’ agreement governing the manager’s equity interests in Bidco.

Any non-compete provision must not go further than is reasonable (in terms of duration, activities covered and geographical reach) to protect the PE purchaser’s legitimate interest in the goodwill of the target; otherwise, it runs the risk of being unenforceable. What is considered reasonable in the context of an individual in their capacity as a shareholder differs from what is reasonable in their capacity as an employee and their ability to work. Non-compete provisions in a shareholders’ agreement typically last for in the region of 12–24 months, beginning either on termination of employment or on the date of repurchase of management’s shares, whereas in an employment agreement they would typically be shorter.

As well as non-compete provisions, each of these agreements will also include non-solicitation undertakings. Again, these typically last for a period of 12–24 months, beginning either on termination of employment or on the date of repurchase of management’s shares.

Management protections are normally focused on their economic position, and management will not normally have veto rights over the operation of the business and other strategic decisions. As part of these measures, management will typically have pre-emption rights to allow them to subscribe for new shares alongside the PE fund to avoid dilution, the issue then obviously being whether they have the financial resources to commit further funds in this way.

A PE fund will look to ensure that it has the ability to control the material business decisions of any portfolio company it acquires. Whether it chooses to exercise that control is a separate question, but it will want the ability to step in if required.

The constitutional documents for the portfolio company (or its holding company) will typically give the PE fund the right to appoint a board majority and/or be able to control the board through weighted voting rights. The PE fund may not always take up all of its board seats but will have a presence on the board to ensure oversight (in addition to its standing information rights).

In addition to its ability to control the board, the PE fund will be given contractual veto rights in the investment agreement or shareholders’ agreement entered into with management shareholders. These will set out an often quite lengthy list of reserved matters which cannot be undertaken without the PE fund’s approval.

Management will also be required under the investment agreement or shareholders’ agreement to produce regular financial and event-driven reports for the PE fund as well as being under an obligation to respond to ad hoc requests for information.

A portfolio company which is established as an English limited liability company is just that. It has a separate personality and a separate legal identity from its shareholders. The liability of its shareholders for its losses is limited to the share capital they have invested in it. Only in exceptional circumstances (in essence only where a person is under an existing legal obligation which they deliberately frustrate by interposing a company under their control) will the English courts “pierce the corporate veil” and look beyond the separate personality of a company to fix the liabilities of that company on its shareholders.

The English courts have, however, held that in certain cases a parent company may assume a duty of care towards persons harmed by a subsidiary’s actions. This does not require the corporate personality of the subsidiary to be “pierced”. The existence of a duty of care by the parent company is a question of fact, determined by the degree of the parent company’s intervention in, and assumption of responsibility for, the subsidiary’s operations. A parent company may assume a duty of care in relation to the activities of a subsidiary where it controls, supervises and advises management, such as by establishing “group-wide” policies or standards regarding certain matters and taking responsibility for compliance with them (or where it holds itself out as having done so). The cases to date have largely involved class actions brought by persons affected by the actions of overseas subsidiaries of international mining and resources companies. However, parent companies more generally need to give due thought to the control they are assuming over their subsidiaries, ie, whether they limit their daily intervention to minimise the risk of a duty of care arising and any question of liability, or exercise oversight in order to avoid issues arising in the first place.

The volatility in markets over the last 12 months has not made it an attractive period for funds to exit prime investments. This, combined with an ongoing mismatch more generally in perceived value between potential sellers that invested at the peak of the market five years ago and current potential buyers, has meant that a sale to a so-called “continuation fund” continues to be heavily utilised as a form of exit. A continuation fund is a fund established by the same PE sponsor with the sale providing the option of an exit for those LPs who choose not to roll over their investment into the new fund. Such a mechanism provides an exit even for continuation funds themselves, with the first continuation vehicles starting to roll over portfolio companies again to a second continuation vehicle in so-called “CV squared” transactions.

“Dual track” sale processes, where a sale process and an IPO are run in parallel, have been less common in recent years, in keeping with the depressed level of IPOs more generally. However, this is beginning to change, with dual-track processes beginning to become slightly more common, even if the IPO route ultimately is not chosen as the preferred option.

Drag and tag rights are a feature of almost all PE structures. Drag rights are typically triggered by a sale of at least 50% (or an agreed higher threshold) of the shares in the portfolio company, such that a controlling PE shareholder has the ability to drag all other shareholders pro rata in a transaction where it sells a majority of the shares in the portfolio company to a third party. This ensures that the PE sponsor has control over an exit, although in practice the drag right itself is rarely relied on.

Tag rights provide corresponding protection for minority shareholders. The terms of the tag rights will often mirror those of the PE shareholder’s drag rights, such that if the selling PE shareholder elects not to drag the minority shareholders, those shareholders will instead have the ability to tag along. Where there can be more negotiation is over whether the sale is to a continuation fund or other related fund and whether this is sufficient to trigger the tag-along rights.

On an exit by way of an IPO, a PE seller will typically agree to a 180-day lock-up period during which it cannot sell any additional shares which did not already form part of the shares being offered as part of the IPO (subject to certain customary exemptions). A longer lock-up period will normally apply to management, typically 12 months. However, for senior management and executive directors, this can be extended further, such as a 12-month lock-up in respect of 50% of their shares and a 24-month lock-up in respect of the other 50%.

It is an eligibility requirement for listing that the listed company must be capable of carrying on its business independently from its shareholders. It is no longer a separate requirement that a major shareholder which holds more than 30% of the shares in the company must, as a matter of course, enter into a relationship agreement with the listed company under which it gives undertakings as to how it will exercise its voting rights. However, parties may still choose to enter into a relationship agreement where a PE seller will continue to hold a stake which is of a size which could call the independence of the listed company into question or to give effect to an arrangement that the PE seller will continue to have the right to nominate a specified number of directors for so long as its shareholding remains above an agreed level.