There are no restrictions on foreign ownership of UK businesses. If the acquiring business already has a presence in the UK it may be necessary to notify the Competition and Markets Authority under the Competition and Merger Control rules, depending on the market share of each party involved.
When acquiring a UK business the buyer should, as one of the first steps, consider the structure, the tax consequences and how the acquisition is to be financed.
Tax will be a major consideration for the sellers in a transaction. Whether the seller is an individual or a company will determine what sort of tax treatment is available. Individuals are entitled to Entrepreneurs Relief on any capital gains made on a sale of shares, bringing the effective rate of capital gains tax to 10%, subject to certain conditions being satisfied. If the seller is a company then it may be entitled to Substantial Shareholding Exemption in respect of its gains or losses. Therefore, the seller may also want an input into the structure of the deal. A buyer however, will need to pay Stamp Duty on a purchase of shares at 0.5% of the purchase price including any possible earnout or deferred consideration. If assets are bought then different tax issues arise in particular where assets were previously transferred intra-group.
Although tax considerations are important, one must be sure not to let the tax tail wag the commercial dog.
Due diligence for a buyer is essential whether or not any debt funding is involved. Having knowledge of what is being bought is important as the old saying goes...“Caveat Emptor” - Buyer Beware.
A buyer may want to investigate the business, its market, its competitors, suppliers, customers, debtors, stock, turnover, sales, prospects, audited statutory accounts, management accounts, products/services, contracts, licences, employment, intellectual property, IT, real estate, pension, and tax. What you find in your due diligence exercise may influence the structure of whether you are buying assets or the shares and the end price payable.
In the early stages a buyer will do its own internal due diligence. Once the heads of agreement are signed legal and financial professionals will be instructed to look at the business information in detail.
The seller will want the buyer to enter into a confidentiality agreement/non-disclosure agreement to keep the information it releases confidential. From a buyer’s point of view the seller would need to enter into an exclusivity agreement to ensure that the seller only deals with the buyer until a specified period during which definitive agreements are signed or the deal ends.
The confidentiality and exclusivity provisions can be contained in separate agreements but are usually contained in the heads of agreement, which set out the commercial terms of the deal. The heads of agreement or heads of terms are not intended to be legally binding, except for the provisions of confidentiality and exclusivity. The heads will also be a guide and timetable to complete the other documents.
The main document that will set out the deal will be the sale and purchase agreement. In a share purchase it is known as the share purchase agreement and it will set out in detail the deal and the legal obligations of the parties.
In the UK the buyer has protection from the existing liabilities of the target company by asking the seller to give warranties and indemnities. Indemnities are used for specific liabilities rather than general liabilities. Indemnities are an obligation to pay all losses if the event provided for takes place.
Warranties are statements made by the seller which if proven to be untrue will give the buyer a claim for damages for any loss resulting from this untrue statement. Warranties are given on each area of the business from shares, customers, accounts, real estate, environmental and tax.
The one area where the seller must give an indemnity is tax. It is known as a tax indemnity or tax covenant, where the seller will pay for tax, which results during the ownership by the sellers, whether before or after completion.
Sellers will be very reluctant to give indemnities unless there is a specific liability. Indemnities are treated differently in the UK than in the US.
The warranties will then be qualified by the seller by way of disclosure in a disclosure letter setting out existing liabilities of the target that the seller knows about. Warranties also provide a means through which the buyer can elicit information about the target company.
When a foreign company buys a UK asset it may be necessary for the buyer to give a legal opinion. This may be required to confirm the status and authority of the buyer to make the relevant purchase. The buyer may need to instruct solicitors in its jurisdiction to ensure a legal opinion is available.
Any buyer needs to be aware of the extensive protection offered to employees under UK law and therefore needs to think carefully about his intentions for the business it is acquiring and the people employed there.
Merger-Control and any FCA Regulatory Provisions will only apply to larger companies and not to small or medium sized enterprises.
Get the right professional team together in the UK who can help you get your deal done in a cost effective manner. This will include brokers, accountants, solicitors, corporate financiers and banks.
Do not try to rush. Think things through and take measured steps. On average a deal can take at a minimum 6-7 weeks from signing heads of agreement to close.
The above is a brief outline of the issues a buyer needs to think about. If you would like further information about acquiring a UK business or any other matter regarding your business, please contact Deepa Darji in our London Office email firstname.lastname@example.org