Technology M&A 2022

Last Updated October 27, 2021

UK

Law and Practice

Authors



Preiskel & Co LLP is a law firm based in the City of London. It specialises in UK and international corporate, commercial, competition law and regulatory matters, with a particular focus on technology, media, and telecommunications. The firm is independently recognised as a leader in the telecommunications, media and technology sectors, and possesses significant expertise across a range of other sectors including gaming, leisure and lifestyle retail. Its specialist team of lawyers is truly international, with many of them qualified in multiple jurisdictions. This international mind-set has proved a considerable advantage to many clients, as the firm advises on matters across Europe, and other continents, as well as on issues concerning outer space and the virtual world. Tech clients span many sectors including fintech, adtech, biotech, life sciences and foodtech. Typically, such clients (companies and their founders) would be supported throughout their journey from start-up, through the various fundraisings to exit and thereafter on to their next venture.

The tech M&A market in the UK is very hot, with a very high level of activity for all stages of tech companies. This seems to be to a large extent part of global trend fuelled by the pandemic which has led to accelerated uptake of digital services and increased valuations more generally across the sector. It is hard, however, to accurately compare activity against other countries.

The key observable trends are increasing size of fundraising at each stage of development, increased valuations, and a high level of exits.

It is typical for new start-up companies to be incorporated in the UK. There are instances where entrepreneurs are advised to incorporate in another jurisdiction but the UK generally is a favourable jurisdiction for new start-up companies.

A private company limited by shares is the most common type of entity that entrepreneurs are typically advised to incorporate in the UK. A private company is very quick and easy to incorporate in the UK (with a turnaround incorporation time of no longer than 48 hours). This type of entity also offers sufficient flexibility to entrepreneurs to structure the company in a form that is attractive to potential investors.

Pre-seed stage funding for start-up companies usually ranges from friends and family investors and family offices to government grants or government-backed funding schemes (such as Start-up Loans), and more recently crowdfunding is seeing increasing popularity among start-ups. Seed stage investments range from angel investors (local or foreign investors) to VCs.

The source of the venture capital varies depending on the sector and business involved. For example, health care and biotechnology start-ups have had VCs spanning from USA and the UK whilst tech start-ups typically source from UK-based VCs.

The BVCA (British Private Equity and Venture Capital Association) is the industry body that has developed and maintains standard documentation for venture capital documentation which is widely used in the UK for venture capital-backed funding.

It is not common for start-ups to be asked to change jurisdiction by a VC. It is, however, occasionally the case that companies change jurisdiction at later stages, in particular when preparing for an IPO/pre-exit.

While investors always have exit at the forefront of their minds, the precise strategy may evolve during the life of the company. The early stage seed financing documents as well as seed series financing documentation therefore tend to cater for IPO, trade sales and secondary buy-outs, as it is very hard to gauge the best possible liquidity event early on.

English companies have a natural tendency to first look to list on either AIM (the junior market) or on the London Stock Exchange. However, certain local listings in the last 12 months have been viewed as failures and, therefore, there is a view that a NASDAQ listing would be better for certain types of tech companies, especially those that are still loss-making.

The authors are not aware of any reason why the choice of listing would make a significant difference.

A sale of a company run as an auction process or a sale directly with a chosen buyer are, in this firm’s experience, equally common. That said, an auction process may not be suitable for all businesses.

For example, if the business is structurally complicated or if the market sector is limited, the costs associated with an auction process may not be worthwhile. External factors such as regulatory or competition issues, third-party consents that would protract the timescale may also undermine the key benefit of an auction process; ie, speed. Standardised documentation prepared for an auction process also may not be suitable where a business has these complexities.

The current trend is for the sale of the entire company rather than selling a controlling interest with VCs staying on as shareholders. Typically, VCs tend to have a co-sale right, where if the founders exit, the VCs have an equivalent right to exit rather than staying on as shareholders in the company.

Most transactions in UK for a sale of the entire company have cash consideration. It is also quite common to see a combination of cash, consideration in shares and consideration in the form of loan notes. Purely stock-for-stock transactions are prevalent but rare.

All selling shareholders are required to provide representations and warranties on title to shares and capacity to enter into the transaction. This is the extent of the representations and warranties provided by VCs as well. Beyond this, the rest of the warranties (business warranties, tax, employee liabilities, compliance and regulatory) are given either by the target or by the founders and the target or a limited set of business warranties by the founders and the rest by the target.

Escrow/holdback is quite common for these purposes. Though, in transactions that have an earn-out component, some purchasers are able to negotiate for the holdback to be merely on the earn-out consideration rather than a holdback from the initial closing consideration.

Representations and warranty insurance is often seen, though it is more common where the sale is as an auction process.

Spin-offs are more commonly seen occurring with the large, listed US tech companies (eg, Dell and VMware and IBM and IBM Services). Whilst it does happen within the UK, there is not the same base of listed technology companies. While spin-offs within private companies have been witnessed, it is hard to ascertain how common it is.

The main drivers are one of a combination of:

  • separating faster growing/higher valued business units from other business units;
  • eliminating a perceived conglomeration discount;
  • facilitating future M&A activity, the separated entity might be better able to conduct M&A.

A tax-free spin-off can be possible in the UK. However, the issues are generally complex and must satisfy many legal and regulatory requirements. Accordingly, this is a matter that needs to be explored with relevant advisors based on the actual circumstances.

We are not aware of particular restrictions with carrying a business combination immediately after a spin-off. Clearly, disclosure requirements at the time of the spin-off would need to be carefully complied with as would disclosure requirements to the UK tax authorities (HMRC) in relation to the spin-off.

Generally, a tax ruling would be required for a tax-free spin-off. The timing is harder to predict which seems to be due to pandemic-related issues.

It is not customary to acquire a stake in a public company prior to making an offer but it is often seen. It is important to note that there are restrictions connected with stakebuilding (eg, pre-offer stakebuilding and effects on the terms of future/current offer). These are found in Rule 6/8f of the City Code on Takeovers and Mergers (Takeover Code).

As per DTR 5 in the Disclosure Guidance and Transparency Rules sourcebook, a notification must be made to the target if:

  • a person has a holding of 3% or more of the target’s total voting rights and capital in issue; and/or
  • their holding changes to reach, exceed or fall below every 1% above the 3%

Note that this requirement is regardless of whether this is in the context of a stakebuilding or not.

As to timing, this notification must be made without delay as soon as the shareholding exceeds or goes below the threshold.

DTR 5 states that a person must notify but does not specify the contents of the notification. (DTR 5.1 Notification of the acquisition or disposal of major shareholdings – FCA Handbook)

A potential bidder must either announce a firm intention to make an offer or that it does not intend to make an offer by no later than 5pm on the 28th day following the date of the announcement on which the potential bidder is fist identified (the “put up or shut up requirement”) (Rule 2.7, Takeover Code).

A mandatory offer threshold is prevalent in the UK under the Takeover Code. If a shareholder or a party acting in concert holds 30% or more of the voting rights of a company, it must offer to buy the remaining shares on terms as good as its most recent purchases (Rule 5 and 9.1, Takeover Code).

Whether a bid will be recommended or not, together with whether a competing offer emerges, is a key factor in determining the form and structure of a takeover. A recommended offer to acquire all of the securities of a company with no intervening competing offer or material regulatory clearance conditions is usually the most straightforward form of takeover with the shortest timetable. A scheme of arrangement or an offer are the two typical transaction structures for a public company acquisition.

In 2020, the majority of the offers were structured as schemes rather than standard offers.

Consideration for public company acquisitions are typically structured in a mixture of cash and shares (sometimes loan notes).

The UK regime does not seek to regulate the price, or the type of consideration offered on a takeover bid – this is a commercial decision for the bidder and target. However, target shareholders will often expect a premium to paid over and above the market price of the target’s shares. Note that in a hostile bid scenario, the offeror would judge the price of the target with the help of financial advisers.

In some circumstances (Rule 6 and 11, Takeover Code) when an offeror/a person in concert has purchased shares during a certain period before/during the offer period, the offer to the holders of shares cannot be on less favourable terms (ie, cannot be for a lesser amount).

It is typical to use contingent value rights to bridge value gaps between the parties in transactions with high valuation uncertainty.

Takeover Conditions

The typical takeover offer conditions are as follows.

  • Acceptance condition: for a contractual takeover offer to succeed, it must be formally accepted by shareholders who hold shares representing more than 50% of the voting shares in the target (Rule 10, Takeover Code); however, this condition is often set at 90% of the voting shares so that the bidder can use the process of compulsory acquisition (see 6.8 Squeeze-Out Mechanisms for further information) and is not faced with unsupportive and non-cooperating shareholders upon takeover.
  • Long-stop date (Rule 12, Takeover Code): the offer announcement must include that the offer will lapse/be withdrawn on a specific date if insufficient acceptances have been received; or (with the constant of the Panel on Takeovers and Mergers (Takeover Panel)), a condition or pre-condition relating to an official authorisation/regulatory clearance has not been satisfied or waived.
  • Regulatory approval condition.
  • Listing condition: if the offeror is offering shares in itself as consideration, it may need to list them so a condition is entered that the offer is subject to those shares being admitted to listing and trading.
  • Material adverse change (MAC) condition: this allows the offeror to withdraw offer if any event occurs that constitutes a MAC (subject to Rule 13.5, Takeover Code).
  • Negative conditions such as there not being any litigation on the offeror/target.
  • A payment of a certain amount into the pension scheme (cf, one of the pre-conditions in Lord Rothermere’s buyout of the Daily Mail).

Indeed, there are restrictions for conditions. Invoking pre-conditions and conditions is subject to the Takeover Panel’s consent (excluding the acceptance and the long-stop date conditions) (Rule 13.5, Takeover Code).

Tender Offer Conditions (Appendix 3.3, Takeover Code)

These may not be subject to any pre-condition or condition other than the minimum acceptance condition (see 6.7 Minimum Acceptance Conditions). Therefore, they cannot be made conditional on competition clearances, shareholder approval, any form of financing condition or no MAC event.

Tender offer requirements include that the offer must be for cash only and that they must be advertised in two UK national newspapers.

The advert must include the name of the acquirer, the broker (or other agent) and the target, maximum number of shares or proportion of voting capital offered for; the fixed or maximum price offered, the number and percentage of shares the acquirer is interested in; the closing day and time of the tender; the arrangements for delivery and settlement; a statement that if tenders totalling less than 1% of the voting rights of the company are received, the tender offer will be void; and a statement that subject to that, a shareholder’s tender will be irrevocable (Appendix 5, Takeover Code).

When an offer is made (Rule 24, Takeover Code), it is just the offer document that is prepared (and any other offer-relevant documents should be sent to shareholders for their full information (Rule 26, Takeover Code)) and then in return, the target shareholder can either ignore it or send back an acceptance form. Therefore, no additional “transaction agreement” is prepared.

The bidder is often advised to undertake due diligence on the target because warranty protection in favour of the bidder is not available.

Tender offers must be conditional on the receipt of tenders equalling at least 1% of the voting rights of the company (Appendix 3.3, Takeover Code). An offeror may seek to make a tender offer conditional on a higher minimum acceptance condition although this may not be higher than 5% unless approved in advance by the Takeover Panel (this is typically only seen in competitive situations where the Takeover Panel sees low risk of it being used as price discovery). The reason for this restriction is intended to discourage offerors from using a tender offer as a method of testing market reaction to a given price in advance of a full takeover offer.

Once 90% by value of the shares subject to an offer and associated voting rights are acquired, the bidder may be able to acquire (“squeeze out”) the remaining shares from the minority/dissentient shareholders if they do not want to sell (Section 979, Companies Act 2006).

Please note that in the case of a scheme of arrangement, once it has been approved by the necessary majority of target shareholders and by the court, it will bind 100% of the target company’s share capital regardless of whether they are dissenting or not.

Where an offer is for cash, or includes cash, the financial adviser of the bidder has to confirm in the formal offer announcement and the offer document that the bidder has sufficient funds to satisfy in full the acceptance of the offer (a “cash confirmation”) (Rule 2.7(a) and 24.8, Takeover Code). Where the bidder does not intend to finance the offer from existing cash resources, a facility providing certain funds will need to be available before the formal offer announcement is made.

If the offer is funded by a bank lending arrangement, the bidder must have a legally binding loan agreement in place before an offer is firmly announced.

Certain deal protection mechanisms such as break fees (because they may deter potential bidders from submitting competing bids), exclusivity and non-solicitation agreements in favour of bidders are now largely prohibited (Rule 21.2, Takeover Code).

Defensive measures by the target are also prohibited, such as issuing shares or rights over shares, agreeing material acquisitions and disposals, and entering into contracts outside of the ordinary course of business. In addition, directors of the target company are prevented from taking steps to defend their company from (or “frustrate”) a takeover bid for their company unless they first seek shareholder consent or consent of those parties potentially interested in bidding for the target company. In the context of a hostile/unsolicited bid, target directors are sometimes limited to making persuasive arguments to their shareholders (and also to relevant regulators, if material regulatory consents are required) as to why the takeover bid should not be permitted to succeed.

However, there are still two key deal protection measures in favour of the bidder that are available, which are “irrevocable undertakings” (see 6.12 Irrevocable Commitments for further information) and/or stakebuilding.

Due to the preferred use of schemes of arrangements and the bidder usually increasing the condition of acceptance to 90%, no such rights exist in the UK

It is a common undertaking to include shareholder commitments in a public takeover. They are usually “hard” meaning that they will remain binding even in the event of a higher competing offer (ie, there is usually no “out” for the principal shareholder if a better offer is made). However, in rare circumstances, the irrevocable commitment could be structured in a “soft” or “semi-hard” nature whereby a higher offer could render the commitment to be no longer binding.

The Takeover Code governs the timetable of tender offers, which is controlled by the Takeover Panel (ie, not the regulator/stock exchange) and, as such, no approval is needed by a securities regulator or the stock exchange prior to launch.

A takeover offer can indeed be extended beyond the 60-day period for a number of reasons. For example, if an official authorisation or regulatory clearance has not been satisfied or waived by 5pm on the second day prior to the 39th day of the offer period, the UK Takeover Panel will suspend the offer timetable:

  • at the joint request of the acquirer and target company; or
  • at the request of either the acquirer or the target company, provided that at least one of the outstanding conditions relates to a material official authorisation or regulatory clearance (Rule 31.4, Takeover Code).

It is unlikely for the parties to obtain regulatory approvals after announcing but prior to launching an offer because it is one of the typical conditions of an offer document – see 6.5 Common Conditions for a Takeover Offer/Tender Offer.

Setting up a company in the UK is relatively quick and straight forward. However, in certain sectors of the technology industry, depending on the nature of the business, additional approvals and licences may need to be obtained such as from the Financial Conduct Authority (FCA) and the Payment Systems Regulator (a subsidiary of the FCA and the independent economic regulator for the payment systems industry in the UK).

The FCA is the UK’s primary securities market regulator.

The UK does not have a mandatory foreign direct investment (FDI) regime but the government can intervene in deals that meet the relevant thresholds under the Enterprise Act, 2002 and now the new National Security and Investment Act 2021 (see 7.4 National Security Review/Export Control).

For example, the UK government intervened in two deals (even though backed by Western investors) in the satellite and defence sectors. Whilst both deals were approved, these examples – Inmarsat and Cobham – provide an insight into the likely approach of the UK, and suggest that deals by non-Western investors may be particularly liable to scrutiny, which means a purchaser's identity is likely to be an increasingly important factor when assessing execution risk.

The National Security and Investment Act 2021, which will come into force on 4 January 2022, gives the UK government the power to review and intervene in business transactions (including asset acquisitions) that could give rise to risks to UK’s national security. The Act provides for a significant change in the UK’s approach towards the screening of inward investments.

An overseas entity that carries out research and development in the UK or has an office in the UK from which it carries on activities would likely be within the scope of the new rules.

A mandatory notification regime is proposed for transactions in core sectors that pose the greatest risks from a national security perspective, such as advanced technology, defence, aerospace, transport, energy, data infrastructure, engineering biology, critical government suppliers, nuclear and communications. This is in line with the legislation in comparable jurisdictions such as the USA and Australia, where mandatory notifications requirements for foreign investors to seek approval to acquire a direct interest are in place.

Existing EU export control legislation was retained in UK law and applies to UK. Controlled items that currently move licence-free to the EU, such as dual-use items will require licences to move between GB and the EU.

There are four key questions, parties need to consider regarding merger control filings in the UK.

The first is the typical antitrust merger regime. This is a voluntary regime, so filing is not mandatory, but the regulator has wide powers to unwind transactions after they have closed, so parties which are near or above the thresholds do run a considerable risk if they do not file.

There are two alternative threshold tests for regulatory review of the merger. The first is the turnover test – this is met where the target company to have a UK turnover of GBP70 million or higher. The second is the share of supply test – this is met where as a result of the merger, a share of 25% or more in the supply or purchase of particular goods or services in the UK or a substantial part thereof is created.

In addition to the above, the second consideration is whether the merging parties operate in one or more of the following sectors:

  • military and dual use;
  • multi-purpose computing hardware;
  • quantum technology;
  • artificial intelligence;
  • cryptographic authentication technology; and
  • advanced materials.

If the merger relates to these sectors, the threshold tests are lower, such that the turnover test is met when the target company UK turnover exceeds GBP1 million, and the share of supply test is met where the target has an existing share of supply of particular goods or services in the UK of 25% or more (with no requirement for the merger to add an increment).

The third consideration is whether the transaction will fall within the scope of the National Security and Investment Act 2021, which will introduce a mandatory filing requirement for investment and mergers in 17 sectors related to national security. This enters into force on 4 January 2022, but does have some retrospective effect (see 7.4 National Security Review/Export Control and 8.1 Significant Court Decisions or Legal Developments).

The fourth consideration is whether the transaction might face review due to any other public interest ground, such as the need to protect media plurality.

The structure of the acquisition is relevant to determine the labour law regulations that are applicable.

If the acquisition is by way of a share sale, the employees of the target are automatically transferred as part of the acquisition and the target remains as the employer. There is no statutory obligation to inform or consult employees. There is also no need to obtain employee consent.

But where the sale of a business takes place by way of an asset purchase, this would fall within the scope of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), which involves a change in the employer of the seller’s employees. Special protections are afforded to the seller’s employees under the TUPE legislation and additional obligations are imposed on both buyer and seller. This includes both the seller and buyer informing and potentially consulting with employee representatives.

Exchange controls, also known as currency controls, were abolished in the UK in 1979.

The National Security and Investment Bill

One key legal development is the National Security and Investment Bill 2019-21 being introduced to the House of Commons which will come into force on 4 January 2022. The Bill will establish a new statutory regime for government scrutiny of, and intervention in, investments for the purposes of protecting national security. The Bill will enable the Secretary of State to "call in" statutorily defined acquisitions of control over qualifying entities and assets (trigger events) to undertake a national security assessment (whether or not they have been notified to the government). Proposed acquirers of shares or voting rights in companies and other entities operating in sensitive sectors of the economy will be required to notify to and obtain approval from the Secretary of State before completing their acquisition.

Standard Representations and Warranties

Representations and warranties and limitation of liability on warranty claims are standard deal protection clauses in a share purchase agreement (SPA) for both buyers and sellers. In light of these standard representations and warranties, two significant legal decisions have recently been made.

Duty to mitigate in Sellers Limitations

The High Court found that the sellers of the shares in an energy company were liable for breach of various warranties in the share purchase agreement governing the transaction and awarded damages of GBP11 million based on the diminution in value of the acquired shares. The court also found that a clause in the SPA importing a duty for the buyer to mitigate its loss did not set a standard of conduct that was any higher than the threshold imposed under the common law doctrine of mitigation of loss. (Equitix EEEF Biomass 2 Ltd v Fox [2021] EWHC 2531 (TCC))

Disapplication of limitations on warranty claims for negligent non-disclosure

The Court of Appeal has considered whether the sellers under an agreement (SPA) for the sale of shares in a letting agency (target) could rely on information provided to the buyer outside the disclosure letter to defeat the engagement of a clause which disapplied the contractual limitations on the sellers' liability for breach of warranty claims if there had been negligent non-disclosure.

The buyer contended that there had been negligent non-disclosure because the relevant restrictions in a relevant commercial contract was not mentioned in the disclosure letter. The sellers contended that they could rely upon disclosures made outside the disclosure letter, and as the buyer was made aware of the platforms' terms before entering into the SPA, it could not argue there had been a non-disclosure.

The Appeal was dismissed and the Court of Appeal unanimously upheld the judge's finding that clause 6.2 was not confined to disclosure through the disclosure letter. Its reasons included that (i) there was no reference to the disclosure letter in clause 6.2 and, given that it was referred to elsewhere in the SPA, it was to be inferred that the absence of the reference in clause 6.2 was intentional, and (ii) there was no sense in asking whether there was negligent non-disclosure by reference to the disclosure letter if in fact there had been disclosure in another communication, given that the purpose of the disclosure letter was to limit the scope of the warranties for the sellers' benefit, whereas the purpose of clause 6.2 was to provide an exception to the limitations on liability for the buyer's benefit.

Under the Companies Act 2006 (CA 2006) and the Takeover Code (Code), certain information must be provided by a target on request. However, in a hostile bid any such request would be likely to alert the target that an offer may be imminent. However, some information may be made available to bidders before an announcement such as a request for the share register of the target under Section 116(2) of the CA 2006, and the register in electronic form for the bidder's receiving agents. Immediately following announcement of the offer, details and addresses, electronic addresses and elections of the target shareholders also become available.

Under the Code requirements, information given to one bidder must be given to all other potential bidders on request, a target will tend to limit information provision initially, and only disclose more commercially sensitive information (on a staggered basis) closer to announcement. There are no restrictions as to the conditions that a target may wish to impose on a bidder, or potential bidder, before it agrees to hand over information (unless the target has had to provide information to the bidder, or potential bidder, pursuant to an obligation to provide equal information to rival bidders in a competitive situation (Rule 21.3). However, this obligation to provide information equally will usually only apply where the existence of the bidder, or potential bidder, to whom information has been given has been publicly announced or where the rival bidder or potential bidder requesting information has been informed authoritatively of the existence of the other potential bidder.

The UK data protection regime is in line with the GDPR legal framework. Therefore, the restrictions about personal data processing would be fairly standard, and manageable, provided the parties follow the GDPR requirements.

Typical legal due diligence of a technology would not require the analysis of substantial amounts of personal data (if any) as the due diligence would focus on general regulatory compliance and on the review of key documentation.

Furthermore, it is common to find in data controllers’ UK privacy notices a notice to data subjects that their information may be shared with potential buyers for the purpose of acquisitions, etc, albeit any potential personal data sharing between the seller and the buyers would need to be GDPR-compliant.

Finally, the advisors of the seller and the buyer would be bound by strict confidentiality provisions with defined permitted purposes (ie, to carry out the due diligence).

The conduct of takeovers and mergers of UK public companies (and, in certain cases, private companies) is regulated by the Takeover Code.

The announcement of a firm intention to make an offer (commonly referred to as a "Rule 2.7 announcement") is a significant event and will commit the bidder to proceed with the offer and to post its offer documentation within 28 days. An announcement will be required:

  • when a firm intention to make an offer has been communicated to the target board by or on behalf of a bidder;
  • when an acquisition of an interest in shares gives rise to an obligation to make a mandatory bid under Rule 9 of the Takeover Code;
  • when, following an approach by or on behalf of a potential bidder to the target board, the target company is the subject of rumour and speculation or there is an untoward movement in its share price;
  • when, after a potential bidder first actively considers an offer but before an approach has been made to the target board, the target company is the subject of rumour and speculation or there is an untoward movement in the target company’s share price and there are reasonable grounds for concluding that it is the potential bidder’s actions (whether through inadequate security or otherwise) which have led to the situation; and
  • if negotiations or discussions in connection with a possible offer are about to be extended to include more than a very restricted number of people (other than those who need to know in the parties concerned and their immediate advisers).

The potential bidder is responsible for making any announcement. Once an approach has been made to the target, the target is then responsible for making any announcement.

There are two main triggers for a prospectus requirement in the UK in accordance with the UK Prospectus Regulations and the Financial Services and Markets Act 2000 (FSMA):

  • a public offer trigger (offer of securities to the public in the UK); and
  • the regulated market trigger (admission of securities to trading on a regulated market situated or operating in the UK).

There are exemptions that apply to both triggers.

  • Where shares are issued in substitution for shares of the same class – this exemption applies if there is no increase in issued share capital and, for the regulated market trigger, if shares of the same class are already admitted to trading on the same regulated market.
  • Takeover exemption: the exemption applies where equity securities are offered in connection with a takeover by means of an exchange offer, provided a document (an exemption document) is made available to the public containing information describing the transaction and its impact on the issuer; there are additional conditions that need to be met for this exemption to apply (Article 1(4)(f) and 1(5)(e), UK Prospectus Regulation). In addition, the following condition must be satisfied:
    1. business combination exemption: where securities are offered, allotted or to be allotted in connection with a merger or division, subject to the condition that a document containing information describing the transaction and its impact on the issuer is published, the exemption only applies to equity securities in respect of which the transaction is not considered to be a reverse transaction within the meaning of paragraph B19 of IFRS 3 and a few additional conditions are satisfied.

Where an offer is for cash, or includes cash, the financial adviser to the bidder will have to confirm in the formal offer announcement and the offer document that the bidder has sufficient funds to satisfy in full the acceptance of the offer. This is typically referred to as the “cash confirmation” exercise.

Furthermore, the offer document must contain, inter alia:

  • the nature of its business and its financial and trading prospects;
  • details of the website address where its audited consolidated accounts for the last two financial years have been published and a statement that the accounts have been incorporated into the offer document by reference to that website in accordance with Rule 24.15;
  • details of the website address where any preliminary statement of annual results, half-yearly financial report or interim financial information published since the date of its last published audited accounts have been published and a statement that any such statement, report or information has been incorporated into the offer document by reference to that website in accordance with Rule 24.15; and
  • a statement of the effect of full acceptance of the offer upon its earnings and assets and liabilities.

Financial statements need to be prepared either under IFRS or UK GAAP as long as the consistency rule within a group is maintained.

Copies of documents related to the takeover offer should be made available to shareholders, persons with information rights and employee representatives (Rule 30.3 and 30.4. of the Takeover Code).

Directors' duties and obligations arise from statute (CA 2006), from the common law and the rules contained in the Code.

Under the Code, the board as a whole must ensure that proper arrangements are in place to enable it to monitor the takeover effectively.

  • Section 1(a), Appendix 3: the full board is provided promptly with copies of all documents and announcements which relate to the offer.
  • Section 1(a), Appendix 3: the full board is provided promptly with details of all dealings in relevant securities by their company or any persons acting in concert with it and details of any agreements entered into by their company in the context of the offer which do not relate to routine administrative matters.
  • Section 1(c), Appendix 3: the opinions of advisers are available to the target or bidder board.
  • Appendix 3: where any director is concerned about the propriety of any action as far as the Code is concerned, the director should ensure that the Takeover Panel is consulted.

Paragraph 3 of the general principles of the Code states that “The board of an offeree company must act in the interests of the company as a whole and must not deny the holders of securities the opportunity to decide on the merits of the bid.”

In addition to the usual committees under the UK Corporate Governance Code, the board may also establish an ad hoc committee in the context of an acquisition or merger.

In an event of a conflict of interest in the offeror’s board, the Takeover Code states that the board must obtain competent independent advice (Rule 3.2 of the Code). Therefore, an ad hoc committee is not common in this context in the UK.

The board oversees the negotiation process and offers input on all aspects of a proposed transaction. Despite their efforts to act in the best interest of shareholders and the company, it is not uncommon to see shareholders challenge a board's recommendation in an M&A transaction. Buyers should familiarise themselves with the profile of a target's shareholders, paying particular attention to those with large holdings and who are known to take an activist stance with regards to the company's direction.

The board of the offeree company must often obtain independent advice as to whether the financial terms of any offer are fair and reasonable and the substance of such advice must be made known to its shareholders or when the offer being made is a reverse takeover or when the directors are faced with a conflict of interest. The substance of such advice must be made known to its shareholders.

The bidder will usually need to appoint the following advisors:

  • investment bank for financial advice;
  • broker to manage the acquisition of the shares in the target company;
  • law firm to advise on legal aspects and prepare the documentation; and
  • public relations adviser to advise on and coordinate public communications.

Other advisors may also be needed (eg, a tax advisor).

Fairness opinions are issued 99% of the time when there is a public company being sold but are not prevalent for equity or debt deals.

Preiskel & Co

4 King's Bench Walk
Temple, London
EC4Y 7DL
UK

+44 0 207 332 5640

info@preiskel.com www.preiskel.com
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Preiskel & Co LLP is a law firm based in the City of London. It specialises in UK and international corporate, commercial, competition law and regulatory matters, with a particular focus on technology, media, and telecommunications. The firm is independently recognised as a leader in the telecommunications, media and technology sectors, and possesses significant expertise across a range of other sectors including gaming, leisure and lifestyle retail. Its specialist team of lawyers is truly international, with many of them qualified in multiple jurisdictions. This international mind-set has proved a considerable advantage to many clients, as the firm advises on matters across Europe, and other continents, as well as on issues concerning outer space and the virtual world. Tech clients span many sectors including fintech, adtech, biotech, life sciences and foodtech. Typically, such clients (companies and their founders) would be supported throughout their journey from start-up, through the various fundraisings to exit and thereafter on to their next venture.

The Boom in Global M&A

There is a boom in global mergers and acquisitions, according to Reuters.

That there is a boom accords with the authors of this chapter’s experience. We are seeing unprecedented levels of activity in M&A, where our work covers both national and international transactions, often with no direct connection with the United Kingdom.

That there is this boom may seem counter-intuitive, especially in the time of COVID-19 and Brexit, and so it demands an explanation. This article sets out some potential causes and features of the boom, drawing from the authors’ work, as well as news sources. As a conclusion, a warning of one possible implication is also offered.

Explaining the Boom

The boom does not have just one cause. There have instead been five factors coming together to increase the transactional activity in the tech M&A sector.

Demand

There are soaring valuations and high amounts for fundraising. One effect of increasing valuations – and of fundraising amounts – is a greater perceived need to expand businesses faster – and M&A can be a quick means for such expansion. Buy-out firms are using built-up record levels of cash (private equity firms are reputed to have nearly USD2 trillion in dry powder and there is a similar amount of cash on the balance sheets of the S&P 500 according to Reuters). There is a strong demand from private equity throughout the tech ecosystem. Likewise, venture capital continues to flow into organisations focused on remote meeting and collaboration software, telehealth, med and biotech, digital payment solutions, educational tech, and cybersecurity.

Supply

Matched with the increase in demand coming from valuations and fundraising, there seems to also be a perceived increased ease of exit, including using IPOs. It seems there is a concern that imminent tax rises because of the COVID-19 debt mountain are encouraging sellers to exit now before fiscal policy changes for corporations and capital gains tax on founders and other individual shareholders.

Culture

The winner-takes-all approach in certain markets encourages larger rather than smaller acquisitions. Companies also seem to be using M&A both in strategic offensive and defensive manners, in the latter case so as to protect themselves from their own acquisition or potentially successful attacks on their market share.

Business need

Purchasers in the technology sector often require significant scale-ups for certain types of services, and so are buying-in more capability than usual.

The global economy

The global economy is still in a period of low interest rates and soaring stock prices. There is also the bounce-back effect of a world that perceives itself as pulling out of the pandemic. Regardless of any other factors, these economic factors would tend to encourage increased M&A activity.

What Next? Will the M&A Boom Continue through 2022?

Heading into 2022, the USA is likely to be a significant driver for the continued growth in M&A globally.

According to JP Morgan, contributing factors for this enhanced US-led M&A growth include political certainty in the USA following the elections, the USA having overcome the worst of the pandemic, meaning confidence levels in board rooms are extremely high. Furthermore there are special-purpose acquisition companies (SPACS) in the USA with over USD65 billion in equity looking for M&A (increasingly outside of the USA) and it appears that US companies more generally are now increasingly looking to overseas M&A opportunities and consolidation.

The combination of both scale and technology have become paramount for almost every major company so incumbents are likely to be buying technology disruptors in their industry.

Furthermore, listed companies are seeing increasing activist shareholder engagement both by activists and institutional investors becoming more outspoken and demanding ever increasing growth. This has meant that heading into 2022, it is reasonable to expect that growth in M&A will not just be a nice add-on for listed companies but an important part of their value story.

M&A in Subsets of the Tech Sector

With many funds being established to invest in ESG projects as well as the large industrial multinationals coming under pressure from a climate perspective, increasing investment in ESG-related projects are being seen. Typically, these projects require significant funding at early stages.

For example, Mark Carney, the former Governor of the Bank of England is the architect of the Glasgow Financial Alliance for Net Zero (Gfanz), a group of financial companies with assets of USD90 trillion dedicated to achieving the 2050 “net zero” target. The idea is to invest in companies that have new ideas and technologies to help reach net zero and the scale of such investment will likely lead to increased M&A activity.

Partly linked to the focus on ESG, concerns related to security of food supply (sometimes linked to the pandemic or Brexit) have led to a focus on foodtech acquisitions.

The pandemic seems to have to have brought an increased focus and investment in biotech companies with the UK taking advantage of its excellent academic base and successful clusters of existing companies. Investment has been strong across the sector from diagnostics to development of new treatments and medicines.

The UK fintech sector did not seem to suffer from Brexit as many feared it would. Instead the sector continues to flourish and this year saw Wise and Revolut continue to raise capital at multi-billion valuations. The success of the best-known brands helps market confidence more generally and investment has continued to pour into the sector.

As a subset of tech M&A, the authors are also witnessing acquisition of companies holding patent portfolios as both a defensive and offensive strategy.

The cost to a business of being sued for patent infringement typically runs into the many millions of US dollars, which could be catastrophic for some of the rapidly growing tech companies.

Accordingly, the well-advised ones, will have a tailored patent strategy which will often involve the purchase of companies with useful patents.

Diversity and Inclusion in M&A

According to a Deloitte report, commitment to diversity and inclusion is becoming a widely accepted core value across all companies, and it will be increasingly important to consider this aspect of culture when companies look at acquisitions.

It is therefore not a surprise that 72% of all respondents to the Deloitte report noted that the diverse makeup of the target organisation is important or very important to their company’s M&A target selection process.

Conclusion, and a Warning

Booms tend to come to an end. This current boom may perhaps be a structural change in the M&A markets and, as set out above, the conditions in the USA seem to point to the current high activity lasting into 2022 and perhaps beyond.

But wise heads in the tech sector should always be prepared for the M&A markets to change, perhaps suddenly, and so they ought not to structure their transactions only on rosy, best case scenarios.

Experienced lawyers with industry expertise are always required to ensure that their clients’ interests are protected whether the boom continues, or if it comes to an end.

Preiskel & Co

4 King's Bench Walk
Temple, London
EC4Y 7DL
UK

+44 0 207 332 5640

info@preiskel.com www.preiskel.com
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Law and Practice

Authors



Preiskel & Co LLP is a law firm based in the City of London. It specialises in UK and international corporate, commercial, competition law and regulatory matters, with a particular focus on technology, media, and telecommunications. The firm is independently recognised as a leader in the telecommunications, media and technology sectors, and possesses significant expertise across a range of other sectors including gaming, leisure and lifestyle retail. Its specialist team of lawyers is truly international, with many of them qualified in multiple jurisdictions. This international mind-set has proved a considerable advantage to many clients, as the firm advises on matters across Europe, and other continents, as well as on issues concerning outer space and the virtual world. Tech clients span many sectors including fintech, adtech, biotech, life sciences and foodtech. Typically, such clients (companies and their founders) would be supported throughout their journey from start-up, through the various fundraisings to exit and thereafter on to their next venture.

Trends and Development

Authors



Preiskel & Co LLP is a law firm based in the City of London. It specialises in UK and international corporate, commercial, competition law and regulatory matters, with a particular focus on technology, media, and telecommunications. The firm is independently recognised as a leader in the telecommunications, media and technology sectors, and possesses significant expertise across a range of other sectors including gaming, leisure and lifestyle retail. Its specialist team of lawyers is truly international, with many of them qualified in multiple jurisdictions. This international mind-set has proved a considerable advantage to many clients, as the firm advises on matters across Europe, and other continents, as well as on issues concerning outer space and the virtual world. Tech clients span many sectors including fintech, adtech, biotech, life sciences and foodtech. Typically, such clients (companies and their founders) would be supported throughout their journey from start-up, through the various fundraisings to exit and thereafter on to their next venture.

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