The impact of Brexit on private M&A will principally be to add complexity, most notably in relation to competition clearances and due diligence as a result of parallel but no doubt diverging regimes in some areas. Of course, the EU-UK Trade and Cooperation Agreement of 30 December 2020 resolves the immediate uncertainty and may improve the momentum of deal-making, but there remains considerable uncertainty over what the UK Government's longer term post-Brexit strategy is and which areas of UK law they will look to "de-Europeanise" first.
However, while it may not be possible to ascertain the full impact of Brexit on a potential target business (in the UK and further afield), there are certainly some practical considerations which buyers and their advisers can and should bear in mind when contemplating, negotiating and documenting M&A transactions.
We highlight below some of the key areas for consideration during a buyer's due diligence process which will help ascertain the degree of a target's exposure to Brexit-related risks. We also consider Brexit-related issues that may be relevant to the negotiation of commercial terms on an M&A transaction and subsequent documentation.
Brexit due diligence
Contingency planning for Brexit should be viewed as an important part of the due diligence process on M&A transactions, although its significance will vary depending on the nature and footprint of the target business' operations as well as those of its customers and suppliers. However, as a general guide, a buyer's due diligence should focus on the state of readiness of the target company in key areas likely to be affected by Brexit. For example, consider:
- Geographic structure and potential for business interruption: dependence on EU markets for customers or supplies and the strategic, financial and practical impact of additional tariffs, border checks/border red tape and/or diminished market access on those trading relationships;
- Potential loss of recognition of limited liability: UK incorporated companies operating in certain states which follow the "real seat" principle of incorporation may not have their limited liability recognised, which may result in personal liability of shareholders – this is true of Germany and Austria.
- Passporting/licensing: reliance on any EU passporting or licensing rights allowing supply across the EU from the UK (or vice versa);
- Key contracts: potential for termination as a result of MAC or similar conditions and impact on EU-wide contracts;
- Staffing: dependence on employees who are EU nationals and position of UK staff based in the EU, pending clarification of their immigration status;
- EU funding: any reliance on, or benefit from, EU funding or other EU advantages;
- Governing law and dispute resolution: governing law and dispute resolution mechanisms in contracts, particularly where there are overseas parties (for more on this see below);
- IP rights: dependence on EU-wide intellectual property rights, such as EU trade mark registrations, Community design right registrations, unregistered Community design rights, or database rights, held by the target company; and
- Data Protection: the target company's material personal data flows, identifying any personal data flowing into the target company from the EU/EEA which might be at risk as a result of Brexit,
and whether appropriate measures have been taken by the target business to minimise exposure to Brexit-related risks and ensure the effective operation of the business in a post-Brexit world. We can provide standard wording for due diligence questions on Brexit should you need it and, where issues are identified, we can explore contingency planning strategies. As noted above, some target businesses will have more exposure to Brexit risks than others, for example, if they are particularly reliant on labour or supplies of goods or services from the EU, or on regulatory passporting into the EU, and in those cases, we can provide a more in-depth analysis and DD report if required.
Issues to consider when negotiating and documenting a transaction
Merger clearance: As alluded to above, obtaining merger clearances for certain transactions may become more complex and onerous (see Competition section).
Brexit-proofing M&A documents: M&A contracts concluded prior to Brexit may have warranties, covenants and other terms which are intended to survive Brexit. Where there is flexibility to amend terms, parties may now wish to bring them in line with the post-Brexit legal landscape post-Brexit. In relation to M&A contract being entered from this point on, it will be important to carefully consider specific statutory and regulatory references to ensure that they correctly reflect the post-Brexit legal landscape (this will be particularly relevant in relation to legislative references in warranties).
Deal timing: Given there is still much uncertainty, transactions may take longer to sign due Brexit-related due diligence and contingency planning of the target business; this will need to be taken into account when signing/closing date is time sensitive and when calculating projected IRR.
Governing law and dispute resolution: If the transaction involves r.EU-based parties or assets, and in particular if any judgment which may be obtained in respect of it is likely to need to be enforced throughout the r.EU, consider carefully which governing law and dispute resolution mechanism to include in the M&A documents. Following the end of the transition period, English jurisdiction clauses will no longer automatically be respected in the r.EU in the way that they were previously, and English court judgments will no longer automatically be enforceable in r.EU states. For more on this, see the Disputes section.