Powerful evidence of a recent shift towards more buyer-friendly contract provisions has been provided for the first time by a survey of nearly 500 non-public M&A transactions from 2007 and 2008 carried out by CMS member firms. This trend is likely to be more pronounced during 2009 as buyers demand – and likely obtain – better acquisition terms. Important differences of approach between the UK and continental Europe are also highlighted by the survey.
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Powerful evidence of a recent shift towards more buyer-friendly contract provisions has been provided for the first time by a survey of nearly 500 non-public M&A transactions from 2007 and 2008 carried out by CMS member firms. This trend is likely to have become more pronounced during 2009 as buyers demand – and likely obtain – better acquisition terms. Important differences of approach between the UK and continental Europe are also highlighted by the survey.
Key Findings
- Cap On Warranty Claims. Unsurprisingly, in a buyer's market, liability caps on warranty claims have recently been increasing. However, the cap was still less than 50% of the purchase price in around half the deals done in 2007-8, and in about a third of deals it was 25% or less. In most cases, the cap applied to all warranties but buyers managed to carve out title and tax warranties in about a third and a fifth of the time respectively across Europe. In the UK, the aggregate cap was set at the purchase price in just over 40% of deals compared with about 20% of the deals across Europe.
- Time Limit For Warranty Claims. In the UK, two-thirds of deals had a general time limit for warranty claims of 18 months or less; but elsewhere in Europe the opposite was true with most deals containing a time limit of 18 months or more. There was also evidence that buyers across the whole region were managing to negotiate slightly longer limitation periods – 31% of deals in the second half of 2008 compared to 19% in the second half of 2007 contained time limits for warranty claims exceeding 24 months. About half the time, tax warranties were carved out and warranties about other matters, such as title, were excluded in about a third of the deals.
- Earn-Outs. The use of earn-outs mechanisms (i.e. where the purchase price is dependent on the future performance of the target business) was relatively even in both the UK and Europe as a whole, with 14% of deals in the UK containing such provisions compared with 12% across Europe. However, in the current market, earn-outs are becoming more popular – of all deals with a purchase price adjustment mechanism, deals containing earn-outs as the basis for price adjustment increased from 9% in the first half of 2008 to 15% in the second half of 2008.
- MAC Clauses. Unlike the US, where about three-quarters of deals allow the buyer to terminate for a MAC, MAC clauses were still relatively rare in the UK (approximately 20% of conditional deals). Even elsewhere in Europe, where a gap is more common, MAC clauses were used in just over a quarter of all conditional deals. In a buyer's market, MAC clauses are likely to be sought more often – in 2008, the use of MAC clauses nearly doubled from 11% of deals in the first half of 2008 to 21% of deals in the second half of 2008. However, notwithstanding this, resistance from sellers will no doubt continue to be strong.
- Price Adjustment Mechanisms. In the UK, two-thirds of deals included a completion accounts or other similar price adjustment mechanism, usually based on levels of debt, cash, net assets or working capital or a combination of these. Deals elsewhere in Europe included such price adjustment mechanisms only about half the time. As mentioned above, earn-outs (usually based on EBIT or EBITDA) were less frequently used – 12% of the time in Europe and 14% of the time in the UK – although there were signs of their popularity increasing towards the end of 2008.
- Time When Warranties Were Given. In the vast majority of UK deals, warranties (often extensive) were given at exchange, but only rarely were they repeated at or "brought down" to completion. In at least a third of deals in Italy, Spain, the Benelux countries and the CEE region, warranties were given at exchange and repeated at completion (with no further right to qualify them by disclosing matters that had arisen between exchange and completion). In the US, warranties are brought down to completion in nearly all cases.
- Conditions To Completion. In most UK deals (approximately 60%), there were no conditions and exchange and completion occurred simultaneously. However, the majority of continental deals included conditions such as competition clearance, regulatory or shareholder approval.
- Security For Claims. About 40% of the UK deals included a retention account or other mechanism to provide the buyer with security for warranty and other claims. So far this pattern does not appear to have been substantially affected by the economic downturn.
- Duration Of Non-Compete Covenants. In UK deals, non-compete covenants by the seller were usually restricted to 1-2 years; however, in about a fifth of cases, the non-compete period exceeded two and a half years.
Survey Details
The survey was carried out by the CMS member firms across Europe, and looked at 494 M&A transactions in which a CMS member firm was involved. The transactions related to non-listed public and private companies across Europe: none of the transaction documents are publicly available.
A full analysis of the survey results is available in hard copy from one of the authors below or from your usual Corporate contact at CMS Cameron McKenna.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 27/07/2009.
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