Roddy Martin and Antonia Kirkby, Herbert Smith
As we look ahead in 2019, after a strong year in 2018, the
M&A environment is less certain due to the political
uncertainty around Brexit and the associated possibility of an
economic slowdown. However, there are several factors that
indicate we may see continued M&A activity, including the
weakness of the pound which should continue to attract bidders
to UK targets. We also expect end-of-cycle factors to lead to
boards offloading non-core assets and increased pressure from
M&A activity in 2018 continued to be strong in the UK.
While the number of deals was broadly the same as the previous
year, we saw in particular a good number of mega deals, with
more public transactions over £1 billion (approximately
$1.29 billion) in 2018 than 2017.
We did however see a slowdown in the second half of 2018,
perhaps as a result of Brexit and the associated uncertainty it
has given rise to.
US buyers were the top acquirers of UK targets in 2018.
Asian buyers are also refocusing on Europe, as the US becomes a
harder place for international buyers to conduct M&A.
The strongest sectors for M&A activity were TMT, real
estate, financial services, infrastructure and healthcare.
Both public and private M&A are highly
active in the UK.
For public M&A, the UK Takeover Code provides a
well-established regime which, with a lack of associated
litigation, means that conducting a recommended takeover of a
UK target can be relatively straightforward.
The private M&A market is also well developed and having
English law as the governing law, with the stability and
certainty it brings, means that again the UK is a relatively
easy place to conduct an M&A transaction.
The availability of cheap debt has helped drive M&A
activity, as has the need for companies to evolve and adapt to
rapidly changing technology in order to remain competitive in
As well as corporates pursuing full buyouts, we have seen a
rise in "corporate venturing", where companies take a stake in
Auctions remain prevalent and we expect that to
An interesting trend has been an increase in the number of
interlopers on M&A deals, where longer transaction
timetables are giving third parties more opportunity to emerge
with a competing bid for the target or a supervening bid for
Investors' influence on M&A activity has been on the
rise for some time, driven by activist investors who may
agitate for a board to undertake a transaction (for example
Whitbread's decision to demerge Costa Coffee) or intervene in a
transaction that has been announced, either to block it or to
try and force the buyer to pay a higher price for a target,
known as "bumpitrage". We expect the influence of activists to
continue in 2019.
Private equity (PE) is an important contributor to M&A,
both directly and indirectly, with its regular participation in
auction processes, but there was reduced UK activity on the
part of some of the largest PE houses in 2018.
The most high profile deal of 2018 was the takeover of Sky
by Comcast following a protracted process which began in 2016,
when 21st Century Fox announced a recommended offer for Sky.
The Fox transaction was referred for further investigation on
the grounds of media plurality and this is indicative of the UK
Government's increasing willingness to intervene in M&A on
public interest grounds. Comcast then announced a competing
offer and agreed to give post-offer undertakings in connection
with the acquisition to reduce the risk of political
intervention in its acquisition. The competing offers were
ultimately resolved by a rarely-used auction process under the
Another high profile deal was the hostile offer for GKN by
Melrose. This was the first hostile offer for a FTSE 100
company since the takeover of Cadbury by Kraft in 2010. As on
the Sky deal, Melrose agreed to give post-offer undertakings to
address political concerns about the deal and this is something
we may see more of as buyers seek to minimise the risk of
political intervention in a transaction.
LEGISLATION AND POLICY CHANGES
The City Code on Takeovers and Mergers (the Takeover Code),
which is administered by the Panel on Takeovers and Mergers,
governs public M&A in the UK. It applies where there is an
acquisition or consolidation of control of a UK public company
which is admitted to a UK market or has its place of central
management in the UK.
For listed companies, the Market Abuse Regulation and the
Listing Rules may also be relevant, in particular the
provisions in Chapters 10 and 11 of the Listing Rules which may
require premium listed companies to obtain shareholder approval
for a transaction.
Parties will have to consider the merger control regime
under the EU Merger Regulation and the Enterprise Act.
Aside from merger control regimes, there is no legislation
or regulatory body that underpins private M&A –
the key legal framework will be provided by contract law, with
the underpinning principle being caveat emptor or
buyer beware. The buyer will only be afforded protections which
are written into the agreement.
The Companies Act 2006 applies to all UK incorporated
companies and they and their advisers should consider any
relevant provisions. For example, on public M&A, it sets
out the regimes for a scheme of arrangement and for squeezing
out minority shareholders following a contractual takeover
Recent changes in law
We have seen an increasing trend towards greater
intervention by regulators and the Government in transactions
that raise competition or public interest concerns.
The Government has lowered the threshold at which it can
intervene in transactions in certain sectors, namely military
products, quantum technology and computing hardware. The
thresholds were lowered in June 2018 and the Government has
already used the powers to intervene in the acquisition of
Northern Aerospace by Gardener Aerospace in July 2018. These
lower thresholds and the Government's willingness to intervene
are likely to lead to longer transaction timetables and parties
considering whether to give undertakings to try and address any
Regulatory changes under discussion
The key development likely to impact M&A is Brexit.
However, aside from specific issues such as the regime for
merger control, the legal framework for M&A is not expected
to change significantly.
The Government is consulting on proposed new powers to
intervene in deals on the grounds of national security. The
proposed new rules are extremely far reaching and would
represent a significant increase in the Government's powers,
potentially capturing any transaction or investment,
irrespective of sector, size or market share.
With regards to any common misconceptions about UK practice,
the UK Takeover Panel and the Takeover Code are often
misunderstood by international buyers. Compliance with the Code
is not optional and the Panel is a very proactive regulator who
should, and expects to be, consulted about issues that arise on
It is also unusual to use a true "merger" in the UK where
two companies become one. It is more common for one company to
acquire the shares in another company (even where it is
described as a merger), or for a newly incorporated to acquire
the two companies which are to "merge".
Frequently overlooked areas
Early planning in relation to anti-trust and, if applicable,
public interest intervention is key.
Parties should focus their due diligence on areas which may
carry with them reputational risk, such as GDPR compliance,
cyber-security and anti-bribery and corruption.
On public M&A, parties should also understand that they
will be held to what they say, be it in an announcement, an
interview or in the media.
A bidder can choose one of two methods to acquire a listed
The first is a contractual takeover offer, where the bidder
makes an offer to the target shareholders to acquire their
shares. Its offer will only be successful if the requisite
number of shareholders accept the offer – under the
Takeover Code, at least 50% of the target shares must be
accepted to the offer.
The second method is to use a scheme of arrangement which is
a court-sanctioned procedure. A scheme must be approved by
shareholders, with at least 75% in value and a majority in
number of those voting passing the relevant resolution. If
approved, and the court does not consider the scheme to be
unfair, the court will order that all the shares in the target
be transferred to the bidder.
The speed with which control can be obtained will be
determined in part by the structure used. If the bidder uses a
scheme, it may be able to gain full control of the company
within 26 days of the publication of the shareholder
documentation. Alternatively, on a contractual offer a bidder
may obtain majority control more quickly than on a scheme, but
it is likely to take longer to acquire 100% control as it will
have to use the squeeze-out procedure under the Companies Act
to acquire the shares held by any shareholders who do not
accept the offer.
Because a scheme process is run by the target it is hard to
use a scheme for a hostile bid. A scheme may also be less
attractive in a competitive situation.
Conditions for a public takeover
As well as the acceptance condition of between 50% and 90%
for an offer, or the requisite shareholder approval being
obtained on a scheme, as the case may be, a takeover will
usually have conditions relating to merger control clearance,
any other requisite regulatory or other clearance, including
obtaining the approval of the bidder's shareholders (if
required), plus a series of business-related conditions.
However the Panel will not permit a condition to be invoked
unless it is of material significance to the buyer.
The Code prohibits "offer-related arrangements", that is
agreements between the bidder and target which impose
obligations on the target. This prohibition extends to break
fees, and so they are only permitted in the limited
circumstances set out in the Takeover Code, for example
following a formal sale process (akin to an auction process
where a company puts itself up for sale).
It has become more common however to see reverse break fees,
where the bidder agrees to pay a target a fee if the
transaction fails due to, for example, the bidder not
recommending the offer to its shareholders.
When it comes to consideration mechanisms in private
transactions, approximately half of share purchase agreements
use a locked-box mechanism for consideration adjustment. It is
generally perceived as being more favourable to the seller as
it limits the scope for adjustment of the consideration
post-completion. The bargaining power of the parties may
therefore be a factor in determining which adjustment mechanism
is used. Completion accounts may also be used for more complex
valuation situations. We are also increasingly seeing a hybrid
of the two being used.
Earn outs are more commonly used where key individual
sellers are remaining as directors or employees of the
An escrow may be used either where some additional
consideration may be payable (for example if the net asset
value is above a certain level) or where the buyer wants to
retain part of the purchase price, in case it has any claims
against the seller.
Warranty and indemnity insurance continues to increase in
popularity as it becomes cheaper and the cover provided more
extensive. PE houses in particular like to use it on disposals
and it can be a useful tool to facilitate a transaction which
has an unusual element to it.
Conditions for a private takeover
The key conditions will likely relate to any merger control
/ regulatory consents required for the transaction. The parties
will want to keep the conditions to the minimum. If the
agreement is conditional, the parties will have to consider
whether the warranties should be repeated at completion, and
whether the buyer should be entitled to walk away if there is a
material change between signing and completion. The buyer is
also likely to want to impose restrictions on what a seller can
do with the business in the period between signing and
Foreign governing law
Share purchase agreements in the UK are almost universally
governed by English law and subject to the jurisdiction of the
English courts. English law is often used for transactions with
no nexus to the UK because it is viewed as a stable and
The exit environment
We are seeing very competitive auctions for good assets but,
where the assets are less attractive, the auction process may
be more protracted with, in some cases, no buyer emerging at
the end of it. The IPO market has become quieter but companies
continue to run dual track processes for some assets, where a
sale process is run alongside an IPO process to establish which
is the preferable option. PE houses remain very active in the
UK and this is expected to continue as they have cash to spend.
We may see some reassessment of asset values as the M&A
boom calms down.
Continued uncertainty over Brexit, together with the
associated possibility of an economic slowdown, may continue to
have a negative effect on UK equity markets, which are an
important reference point for corporate valuations and an
important source of acquisition currency for corporates.
However, the conditions for continued M&A activity are
in place. Corporates with strong balance sheets seeking
rationalisation and growth, private equity houses with dry
powder to invest and the availability of cheap debt –
as well as corporates keen to counter the threat of disruption
in their business, including as a result of Brexit –
should all fuel activity in 2019.
End-of-cycle factors may also lead boards to seek to
off-load non-core assets.
Partner, Herbert Smith Freehills
London, United Kingdom
T: + 44 20 7466 2255
F: + 44 20 7098 5255
Roddy Martin has considerable experience of advising
on cross-border M&A deals, both inbound and
outbound, notably those involving newly-industrialised
economies, particularly India and China, with a focus
on public takeovers, schemes of arrangement, sell-side
and buy-side private auctions and bi-laterals,
joint-ventures, buyouts, minority participations and
management equity pieces.
Roddy is also client relationship partner for a
number of FTSE companies and international
conglomerates. He is a senior member of the firm's
Roddy's experience includes advising TUI Travel on
its £5.2 billion merger with TUI AG, PA
Consulting Group on the controlling investment by
scheme of arrangement from The Carlyle Group, valuing
PA at $1 billion, Reliance Communications on its
proposed $1.6 billion sale of its telecom towers
business to Brookfield Infrastructure and United
Spirits on its £430 million disposal by auction
sale of Whyte & Mackay to Emperador.
Professional support lawyer, Herbert Smith
London, United Kingdom
T: +44 20 7466 2700
F: + 44 20 7098 5255
Antonia Kirkby practised as a transaction lawyer
specialising in corporate finance and mergers and
acquisitions before becoming a professional support
lawyer at Herbert Smith Freehills. Her focus is
providing the firm's lawyers with technical advice on
company law and M&A issues and analysing new law
Antonia was secretary to the City of London Law
Society Company Law Sub-Committee and to the
Sub-Committee's Joint Working Party on Takeovers for a
number of years, which involved considering and
lobbying on a wide range of company law issues,
including changes to the Listing Rules and Takeover
Code. She continues to contribute to the Takeovers
Working Party and respond on proposed changes to
legislation and regulation.
She has written a number of articles and contributes
to a number of books, particularly on public M&A,
market abuse and the listing regime.