There is a sense of cautious optimism in the market compared with 12 months ago, as markets respond to what appears to be more economic stability in the UK. Throughout 2023 the M&A landscape was blighted by worsening economic sentiment, geopolitical uncertainty, stubbornly high interest rates and complex debt markets. Deal volumes were substantially down compared with the highs of 2021 and 2022 (although interestingly showed a slight uptick when compared with 2018 or 2019).

As we move into 2024 there are signs the market is picking up and the authors are seeing more business owners exploring exit options and timing.

Elongated Process Timing

Target companies were subject to much higher scrutiny through diligence and signs of weaker trading. This often resulted in process timetables stalling, or even in transactions being aborted.

Bolt-ons As a Lower-Risk Option

Of deals completed in 2023, a much higher proportion were bolt-ons to existing private equity platforms. These deals offered investors the opportunity to create value but with a lower risk profile to new platform deals.

Valuation Gap Between Buyers and Sellers

Coming off the M&A highs of 2021 and 2022, sellers often came to market with high price expectations. Worsening economic sentiment, complex debt markets and often weakening trading performance meant buyers could not justify maintaining premium valuations leading to unbridgeable gaps that further slowed deal completions.

It is possible to conduct business in the UK either by simply establishing a commercial presence (which is likely to require registration as a branch and the filing of accounts), or by establishing a UK legal entity such as a limited company or a limited liability partnership.

If an entrepreneur or business intends to conduct substantial operations in the UK, it is typical to establish a separate legal entity. This allows the business to ring-fence the assets and liabilities of its UK operations, to raise finance and grant security specific to the UK operations, and (if desired) to partner with other equity investors in the UK business.

The most common type of entity used by start-ups in the UK is the private limited company. This offers the advantage of limited liability for the shareholders and the ring-fencing benefits outlined in 2.1 Establishing a New Company, without the additional governance, minimum capital, and capital maintenance requirements which are imposed on public limited companies.

However, the choice of entity will depend on the specific circumstances of the business, such as the sector, number of owners or the desired tax treatment. For example, in some sectors like professional services, a partnership is a more common business form.

In the UK, early-stage financing for start-ups can come from a variety of sources including grants, “friends and family” or angel investors, family offices, early-stage venture capital funds, government-sponsored funds and crowdfunding.

The documentation involved will vary depending on the source of the funding. For example, if the funding is to come from a venture capital investor or angel investor, the documentation will typically include a Term Sheet, Investment Agreement (which may be a Convertible Loan, a SAFE, an Advance Subscription Agreement, or a Subscription Agreement) and a Shareholders’ Agreement.

In the UK, funding for start-ups and scale-ups is typically provided by growth-focused private venture capital firms. There is a mature VC market in the UK and promising businesses are generally able to obtain expressions of interest from potential investors. The VC firms active in the UK are both domestic and foreign.

The British Venture Capital Association (BVCA) has developed a set of model documents that are commonly used by venture capital firms and start-ups in the UK. These documents include a Subscription Agreement, Shareholders’ Agreement and Articles of Association.

UK businesses will typically stay in the same corporate form throughout their period of private ownership.

If a UK business is established as a private limited company or a limited liability partnership and wishes to have securities admitted to trading on a capital market, it will need to first re-register as a public limited company (or incorporate a new parent company as a public limited company).

A UK public limited company is subject to additional governance, minimum capital, and capital maintenance rules, in addition to the requirements of the relevant securities regulator and stock exchange.

The decision between an IPO, a sale, or a dual track process depends in part on the sector in which the business operates.

For example, some businesses in the UK life sciences sector have pursued a listing on the basis that it can be more challenging for private equity to value pre-revenue life sciences businesses.

UK technology businesses have often considered a US IPO on Nasdaq, given the high liquidity and strong valuations which have been available on that market. Conversely, businesses in other sectors have tended to prefer a sale process given the relative speed of execution and lighter regulatory/publicity requirements. Dual-track processes are common where an IPO is a realistic outcome for the business in question.

In May 2023, the UK’s securities regulatory (the Financial Conduct Authority) launched a public consultation on the simplification and de-regulation of the UK’s listing regime. The proposed changes include the removal of some requirements for shareholder approval for significant transactions, the replacement of the financial track record eligibility requirements with a disclosure-based regime, and a significant de-regulation in relation to dual share classes. The objective of the proposed changes is to improve the attractiveness of the UK as a listing venue.

Historically, UK-headquartered companies pursued a listing on the UK’s stock market. This remains the case, although many technology companies have considered an overseas listing (particularly on Nasdaq). This is for a variety of reasons, including the regulatory burden, liquidity, and tax implications. It remains to be seen to what extent the outcomes of the FCA’s consultation will persuade more businesses to list in the UK.

The impact of choosing to list on a foreign exchange will depend on the rules of the non-UK exchange. As noted, it is not unusual for UK companies to pursue an overseas listing.

The year 2023 definitely saw an increase in bilateral negotiations or tight auction processes where sellers favoured certainty and speed of execution. This was particularly true for owners looking to carve out non-core assets. Notwithstanding this, wider auctions still played a role in process strategy depending on the characteristics of the asset and desire of shareholders to prioritise price discovery.

It is common to structure an exit either as the sale of the entire company, or the sale of a controlling interest. The outcome will depend on the valuation achieved in the sale process, and also on the length of time for which the VCs have held their investment in the company: some early-stage investors need to hold their investment for a minimum period of time in order to preserve valuable tax reliefs. Conversely, VCs which have held their investments for a significant period will typically want to sell out in order to return capital to their LPs.

This depends on the type of buyer and the nature of the target (and its sellers).

PE buyers typically use a combination of cash and loan notes, with the selling management rolling over a significant proportion of their proceeds into equity in the BidCo as a future performance incentive. Corporate buyers may pay all cash or a combination of cash and publicly traded equity. Recommended public takeovers/mergers are often all-equity transactions.

On a sale, all shareholders will be expected to give warranties as to their capacity and title to the shares that they are selling.

Founder shareholders and selling management will be expected to give a set of business and tax warranties in relation to the business and its activities. These warranties will be subject to certain limitations, including a total liability cap and time limits for bringing claims.

Financial investors such as VCs will usually only give the title/capacity warranties.

Warranty and indemnity (W&I) insurance is common for transactions in the UK. The policies are usually written in the name of the buyer, although the cost of the premium is a matter for negotiation. A W&I policy covers most claims under the business and tax warranties, although the policies are subject to important exclusions – for example, any known risks will be excluded, as will some latent issues like environmental contamination and transfer pricing, and issues which the buyer has not fully diligenced itself.

The use of an escrow or holdback is becoming increasingly uncommon in the UK due to the popularity of W&I insurance. Buyers may seek to hold back funds in relation to indemnities for specific risks identified in the business through due diligence (which are known risks, which are not typically covered by W&I insurance).

Spin-offs are becoming increasingly common in the UK, particularly given the recent challenges in the equity markets and the resulting need to generate cash (including as a means of supporting shareholder value).

In the UK, spin-offs can be structured as a tax-free transaction at the corporate and shareholder level. The key requirements include (but are not limited to) that the spin-off:

• must be a genuine commercial transaction;
• must not have a main purpose of avoiding tax; and
• must receive shareholder approval.

Spin-offs can be tax free if the applicable statutory conditions are met. These may differ depending upon the desired transaction structure and therefore must be considered on a case-by-case basis.

A spin-off can be immediately followed by a business combination. The key requirements are that:

• the spin-off and business combination must be part of a single plan (although this is more of a practical necessity rather than a formal requirement from a UK tax perspective);
• the spin-off must be completed prior to the business combination;
• the business combination must not be used to avoid tax; and
• the business combination must be approved by the shareholders of the company.

In the UK, a spin-off can take between 3 and 12 months but the timings vary depending on the transaction and the number of questions asked by HMRC. The parties would need to obtain clearance from the tax authority and this can typically take up to three months.

The implications of stake-building in a UK public company are complex. Potential bidders should consider them very carefully in the context of overall deal timing and strategy.

Although the acquisition of a pre-offer stake may allow a bidder to purchase shares in the target at a lower (ie, pre-announcement) price, the pre-built stake will not count towards the 90% “squeeze-out” threshold – which makes it mathematically harder to acquire 100% control of the target.

Stake-building may, depending on timing, also have an impact on the terms of the subsequent offer by imposing a minimum level of consideration, being the highest price paid by the bidder for the target’s shares within a specified period before the offer.

Under the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules (DTR 5), a person is required to notify an issuer if the percentage of voting rights they hold in the issuer reaches, exceeds or falls below 3% or any whole percentage point above 3%.

If the target publicly names (or is required to name) the bidder is subject to a 28 day “put up or shut up” deadline within which it must announce a firm intention to make an offer, or confirm publicly that it does not intend to make an offer.

Potential bidders should also carefully consider the UK’s rules on insider dealing and market abuse.

The mandatory offer threshold in the UK is 30% or more of the voting rights (or an increase in voting rights, if the bidder already has 30% or more).

In the UK, the typical transaction structures for the acquisition of a public company are a takeover offer or a scheme of arrangement.

A takeover offer is a contractual offer by the bidder to the target company’s shareholders.

A scheme of arrangement is a court-approved procedure which, if approved by the requisite majority of the target’s shareholders, binds all of the target’s shareholders. The requisite majority is a majority in number representing 75% in value of the members of each “class” of the target’s shareholders.

Given that the minimum acceptance condition for an offer is 50% plus one share, whereas the approval threshold for a scheme is a majority in number representing 75%, an offer is typically an easier means of acquiring majority control of a target. However, given that the “squeeze-out” threshold in the UK is 90% (not counting any stake-built shares), a scheme is normally an easier means of acquiring 100% control.

A scheme of arrangement is a process which is run by the target, so a hostile scheme is difficult to achieve in practice. Accordingly, schemes are typically only used on recommended takeovers.

A true “merger” of two companies is not possible under UK company law. When a transaction is described as a merger, it is usually referring to an all-equity acquisition by one of the aforementioned structures.

A bidder is able to offer cash consideration, securities or both.

The majority of recent deals have been all-cash, but the transaction structure will depend on a range of factors, including the performance of the target and the financial resources of the bidder.

The Takeover Code imposes requirements on the categories of conditions which can be included in a takeover offer, and on the circumstances in which they can be invoked.

A takeover is typically conditional on matters including:

• the level of acceptances (which cannot be less than 50% plus one share);
• regulatory matters such as approval from a financial or other relevant sector regulator, or merger control clearances; and
• protective conditions related to the financial condition of the target business, such as a “no material adverse change” condition.

A bidder can only invoke regulatory or protective conditions with the consent of the UK’s Takeover Panel, and only in narrowly-defined circumstances.

A UK takeover does not typically involve a transaction agreement. The bidder will publish an offer document addressed to the target’s shareholders and, on a scheme of arrangement (which, as noted, will normally be a recommended transaction), the target will send a Scheme Document to its shareholders and ask the court to convene a meeting at which the target’s shareholders will vote on the scheme.

The consent of the UK Takeover Panel is required for the target to enter into commitments to the bidder, such as an inducement fee or break fee. The Takeover Panel will not normally grant consent, except in limited circumstances such as where the bidder is a “white knight”, where an auction is being run for the target, or where the target is in serious financial distress.

It is not customary for any contractual representations, warranties or indemnities to be given on a UK public takeover.

For a contractual takeover offer in the UK, the holders of shares representing more than 50% of the target company’s voting share capital must approve the offer in order for the offer to be unconditional as to acceptances.

Where a takeover is structured as a scheme of arrangement, the proposed arrangement will require the approval of shareholders who constitute a majority in number of each class of shareholders voting on the proposal and who also represent the holders of shares carrying at least 75% in number of those shares which are voted.

For a contractual takeover offer in the UK, the bidder can compulsorily acquire the shares of any shareholders who have not accepter the offer for their shares, if the bidder has acquired at least 90% of the shares to which the offer relates and 90% of the voting rights of the target company. These thresholds will not take into account any shares previously held by the bidder.

Where a takeover is structured as a scheme of arrangement, and the scheme has become effective following approval by the court, the acquirer will acquire the shares of all shareholders.

It is the buyer itself which is the bidder and which makes the offer.

Where the offer is for cash or includes an element of cash, the bidder’s financial adviser is required to provide a “cash confirmation” to the effect that the bidder has sufficient funds to satisfy the offer in full. The bidder’s financial adviser will take its own legal advice in relation to the cash confirmation process, to ensure that it has conducted appropriate diligence on the bidder’s financial position.

The Takeover Code does not permit the offer being conditional on the bidder obtaining financing, except in exceptional circumstances.

Under the Takeover Code, there is a general prohibition on the target entering into any “offer-related arrangements” with the bidder when an offer is reasonably in contemplation or during an offer period. This does not cover confidentiality commitments or non-solicit provisions.

The general prohibition extends to break fees except where:

• a target company has announced that it is seeking bidders by means of a formal sale process;
• where a hostile bid has already been made, the target can agree a break fee with a preferred bidder; and
• where the target is in serious financial distress.

If a bidder cannot obtain 100% ownership of a target, the bidder’s governance rights will depend on its holding of the target’s voting shares and on whether the target remains listed.

For example, a holding of more than 50% of the target’s voting rights allows a shareholder to replace the company’s board of directors as a matter of company law. However, if the target remains listed, the bidder would need to sign a “Relationship Agreement” which will proscribe the level of control available to the shareholder.

At 75%, the bidder is able to change the target company’s constitution and delist the target. This removes the requirement for a Relationship Agreement. However, the bidder (and the target’s new board) will need to take account of the interests of the minority shareholders, which have a degree of minority protection under UK company law.

The bidder may seek irrevocable undertakings from major shareholders of the target and any directors who hold shares to accept the takeover offer even if a higher offer emerges.

The Takeover Code provides strict guidelines related to approaching any individual shareholder of the target company, and the Panel should be consulted in advance.

An offer does not itself need to be pre-approved by the Takeover Panel or the relevant stock exchange. However, the Panel’s consent may be required for certain aspects of the proposed bid and so communication will normally be required with the Panel. A copy of the offer document along with a checklist confirming compliance with the Code must be sent to the Panel prior to it being published.

The timetable for any offer is subject to the timing requirements prescribed by the Takeover Code. Where a competing offer is announced, and both offers are proceeding by way of contractual takeover, the two bids will be subject to the same timetable. In these circumstances, either bidder may elect to shorten the timetable for its own offer by making an acceleration statement and setting an earlier date by which all conditions must be satisfied and the offer becomes unconditional.

In the UK, the takeover offer can be extended if it cannot be completed because regulatory/antitrust approvals are not obtained prior to the expiry of the offer period. The terms of the extension will be set by the acquirer, but they must be reasonable and agreed with the Panel.

In the UK, setting up and starting to operate a new company in certain sections of the technology industry is subject to specific regulations. The regulatory bodies involved and the time it takes to obtain the necessary permits and approvals will vary depending on the specific sector. Some of the sectors which are subject to regulation are:

• Financial services – any company that engages in regulated activities in the UK must be authorised by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA). The FCA and the PRA regulate a wide range of financial services including banking, insurance and investment advice and management.
• Telecommunications – companies that provide telecommunication services in the UK must be licensed by Ofcom, the regulator for the UK communications industry.

The process of obtaining authorisation or gaining the appropriate licence from these bodies can take a number of months.

The primary regulator for public M&A transactions in the UK is the Takeover Panel. The Takeover Panel is an independent body whose main functions are to issue and administer the Takeover Code and to supervise and regulate takeovers and other matters to which the Code applies.

A public offer will also require interaction with the Financial Conduct Authority, including in relation to the protection and disclosure of price sensitive information, the disclosure of any stake-building or other acquisitions of shares in the target, the approval and publication of any public offer documentation, and in relation to the de-listing of the target.

The principal legislation in relation to foreign direct investment in the UK is the National Security and Investment Act 2021 (NSIA). The NSIA, which came into force on 4 January 2022, created a mandatory and suspensory regime for transactions in particular sectors. The regime is investor agnostic (UK investors can trigger the regime as well as non-UK investors) and the regime has extra-territorial reach if there is sufficient nexus to the UK.

There are 17 specified sectors. These are set out in the National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021. In relation to technology, the regulations cover, amongst others, sectors including artificial intelligence, cryptographic authentication, and certain software and other technologies.

Even if a transaction is outside one of the 17 specified sectors, a filing may still be advisable (but not mandatory) if there is a potential risk to the UK’s national security.

Particular sectors are subject to sector-specific regulation of M&A activity.

The UK places controls on trade in certain types of strategic goods, software and technology. These include:

• most items that have been specially designed or modified for military use and their components;
• dual-use items – that is, goods, software, technology, documents and diagrams that can be used for civil or military purposes, and some of their components;
• goods that could be used for capital punishment, torture or other cruel, inhumane or degrading treatment or punishment;
• non-military firearms; and
• radioactive sources.

The key primary legislation governing export controls is the Export Control Act 2002 (ECA 2002), which sets out the powers to impose all types of export controls. The powers in the ECA 2002 have been used to make two key sets of regulations imposing export controls:

• Export Control Order 2008 (SI 2008/3231) (ECO 2008). The ECO 2008 imposes different types of export controls in relation to military and dual-use items and also contains rules on licensing and provides for offences, enforcement and penalties for export control breaches.
• Export of Radioactive Sources (Control) Order 2006 (SI 2006/1846) (ERS(C)O 2006). The ERS(C)O 2006 sets out specific export controls in relation to radioactive sources.

In addition to the domestic legislation above, the UK has also retained direct EU legislation imposing export controls.

The current UK merger control regime was introduced by the Enterprise Act 2002. There is no requirement to notify a merger in advance for clearance, but the fact that a merger has not been notified to the CMA does not mean that the CMA will not review it. The CMA often investigates mergers on its own initiative or following a complaint from a third party. The CMA will have jurisdiction over a transaction if:

• the UK turnover associated with the enterprise which is being acquired exceeds GBP70 million (the “turnover test”); or
• as a result of the merger, a share of 25% or more in the supply or consumption of goods or services of a particular description in the UK (or in a substantial part of the UK) is created or enhanced (the “share of supply test”).

In the UK, acquirers will be primarily concerned with the following labour law regulations:

• The Transfer of Undertakings Protection of Employment Regulations 2006 (TUPE) – at a high level, TUPE protects the employment rights of employees when a business is transferred from one owner to another. TUPE applies to all employees who are employed by the transferor business at the time of the transfer. Information and consultation requirements with a recognised Trade Union or appointed employee representatives also apply.
• Employment Rights Act 1996, Working Time Regulations 1998, Equality Act 2010 and various additional legislation – sets out the employment rights of employees in the UK, including the  Section 1 right to particulars of employment, right to national minimum wage, right to paid leave and the right not to be unfairly dismissed or discriminated on the grounds of a protected characteristic, amongst other things.

A works council is not required in the UK, however, some industries will have recognised Trade Unions.

The UK does not operate any currency control regulation and there is no requirement for central bank approval for a M&A transaction.

The implementation of the NSIA has had a significant impact on UK M&A. The NSIA aims to safeguard national security by providing the UK government with powers to scrutinise and intervene in a broad range of transactions – not only M&A deals but also minority investments, acquisitions of assets, and business reorganisations. For any business operating in the relevant sectors of the economy, care will need to be taken to ensure the requirements of the NSIA are properly considered. The penalty for failing to do so is severe – the underlying transaction will be considered void.

In terms of recent transactions, Microsoft announced the acquisition of Activision Blizzard on 13 October 2023, for USD68.7 billion in an all-cash transaction. The CMA blocked the deal on merger control grounds, and only permitted the deal to proceed on appeal. This followed Microsoft’s agreement to licence the cloud streaming rights outside the European Economic Area for all of Activision’s games to Ubisoft Entertainment, a rival games publisher.

The main constraints on the level of due diligence carried out are:

• the importance of keeping the bid confidential – this will limit the number of people who can get involved and speed is important which generally leads to due diligence being carried out at a higher level than on private sales; and
• the Takeover Code provides that the target company will be required to provide any bone fide bidder with the same due diligence information that has been provided to any other bidders – and this will include a hostile bidder.

There are a number of overlapping laws and regulations which govern the use of personal data in the UK, which may prevent a company from sharing certain information with third parties. The list includes the following:

• UK General Data Protection Regulation 2020;
• Data Protection Act 2018;
• Data Protection (Charges and Information) Regulations 2018;
• Privacy and Electronic Communications (EC Directive) Regulations 2003; and
• Common Law Duty of Confidence.

The UK privacy Law is also supplemented by a range of guidance from the Information Commissioner’s Office (ICO) and other parties.

A public announcement will need to be made:

• when the bidder has notified the board of directors of the target company of its firm intention to make an offer;
• when an acquisition of an interest in shares gives rise to an obligation to make a mandatory bid;
• when, following an approach by a potential bidder to the target board, the target has become subject to rumour and speculation or there is an untoward movement in its share price; and
• when, after a potential bidder first actively considers an offer but before an approach, the target is the subject of rumour and speculation or there is an untoward movement in the target share price and there are reasonable grounds for concluding that it is the activity of the potential bidder which has led to the situation.

A prospectus must be issued whenever there is either an offer of transferable securities to the public in the UK or a request for the admission to trading of transferable securities on a UK regulated market. This is subject to limited exemptions.

Where a bidder is a UK-incorporated company and its shares are admitted to trading on a UK regulated market or on AIM or AQSE Growth Market, it will need to provide:

• details of a website address where audited consolidated accounts for the last two financial years have been published;
• in the case of a stock-for-stock transaction, a description of any known significant change in its financial or trading position which has occurred since the end of the last financial period for which audited accounts have been published; and
• it will also need to provide a summary of the effect of the offer upon its earnings, assets and liabilities.

Where the bidder is other than a company referred to above, it will need to provide such other information at the Panel shall determine.

Parties are required to file copies of the transaction documents with the Takeover Panel and the Financial Conduct Authority, depending on the structure of the transaction.

The directors are required to meet their general duties of directors under the Companies Act 2006.

There are seven general directors’ duties, as follows:

• duty to act within powers;
• duty to promote the success of the company;
• duty to exercise independent judgement;
• duty to exercise reasonable care, skill and diligence;
• duty to avoid conflicts of interest and duty;
• duty not to accept benefits from third parties; and
• duty to declare interests in proposed transactions or arrangements with the company.

These duties are owed to the company of which they are a director. In certain circumstances, shareholders may bring a “derivative claim” against a director on behalf of the company for breach of these duties.

The Takeover Code sets out a number of further responsibilities for the directors in respect of the conduct of offers including an obligation to ensure equal and fair treatment of all shareholders and an obligation to obtain competent independent advice.

The directors should also have regard to the company’s obligations in respect of laws governing market abuse and insider dealing.

It is common for boards of directors to establish special or ad hoc committees in business combinations. These committees are often composed of independent directors who do not have any conflicts of interest. The purpose of these committees is to provide independent oversight of the business combination and to ensure that the interests of all shareholders are protected.

The board of directors must give a recommendation at to the action that the shareholders should take in respect of an offer.

The board may be able to negotiate with the bidder prior to receipt of a formal offer but will at all times need to have due regard to their directors’ duties as well as ensuring compliance with the requirements of the Takeover Code. This includes the requirement for them to act in the interests of the target as a whole and not deny the shareholders the opportunity to decide on the merits of the bid.

A board may consider defence strategies in the fact of a hostile bid but again will be constrained by the restriction on it from taking any action that may result in the frustration of any offer.

On a takeover, the directors are obliged to seek independent advice as to whether the financial terms of the offer are fair and reasonable and must make the substance of that advice known to shareholders.

It is common for directors also to receive independent legal and accounting advice.