Summary guide to....UK- vs. US-style sale and purchase agreements
Summary guide to....UK- vs. US-style sale and purchase agreements
Legal Update No. 375, 3 August 2012
In the context of the sale and purchase of a private company, there are some notable differences in the usual market approach of a “UK-style” versus “US-style” share sale and purchase agreement (SPA).
The buyer’s first draft of a typical US-style SPA is generally regarded as being more buyer friendly than an English law SPA. US lawyers acting for the buyer are more likely to send a one-sided first draft of the SPA (including one-sided boilerplate provisions) in the expectation that it will be heavily negotiated.
By contrast, English lawyers tend to send a first draft reflecting current market practice, in the expectation that negotiations will be more limited and focused on key points and the boilerplate will undergo minimal changes.
English SPAs are usually drafted in language closer to plain English and are shorter and easier to read than US-style SPAs, which are usually longer and wordier.
In the case of a “US law” governed contract, this will actually be governed by the laws of one of the 50 States. The laws of the State of New York are most frequently chosen and New York law has provisions that encourage parties to select it even when neither the parties nor the contract has any connection to New York. Similarly, most “UK law” contracts for international deals will, in fact, be governed by the laws of England and Wales (or, less often, the laws of Scotland or N. Ireland).
Since the Rome II European Union Regulation regarding conflict of laws, parties selecting English contract law can also choose English law as the law governing non-contractual obligations. Under New York law, the analysis of what law governs tort (rather than contractual) claims can reach a different result even when the parties have selected New York law as the governing law.
Representations and warranties
New York law SPAs use the term “representations and warranties” interchangeably (with some lawyers preferring to eliminate the reference to “warranties”) and there is no difference in their legal interpretation and effect. However, under English law, the two concepts are very different, with different measures of loss and the potential remedy of rescission for pre-contractual misrepresentations.
In US market practice, caps for warranty claims tend to be lower than in English practice. It is not unusual to see a cap of 100% of consideration in English SPAs, whereas in US practice, 20% of consideration (or even less in the case of a private equity seller) would be more typical. This, along with shorter warranty periods and more frequent use of deductibles, is the trade-off for the US style's more extensive warranties.
Scope of warranties
New York law SPAs typically have more extensive warranties, including no material adverse change (MAC), accuracy of representations and disclosures, and sometimes a so-called “10b-5” representation (named after a provision of US securities regulations) from the seller that, in effect, the representations, warranties and disclosures do not contain any untrue or misleading statement and do not misleadingly omit any material fact.
Whilst “no MAC” and warranties as to accuracy and completeness of information are sometimes included in English law SPAs, they are normally regarded by a seller as too wide and subjective. Instead, the buyer is normally asked to construct its warranties in such a way as to positively cover all the confirmations and assurances that it requires.
Bring down of warranties at closing
In US-style documentation, warranties are typically repeated or “brought down” at closing, and frequently the seller is required to deliver certificates for this purpose. In English practice, even when warranties are repeated at completion, this is done without the use of certificates.
Completion of the SPA, i.e. the point at which the shares are transferred to the buyer and (usually) the purchase price is paid, is known in English legal terminology as “completion”, but in US legal terminology as “closing”. However, they are one and the same thing.
Typical US market practice is for disclosures against warranties to be specific, linked to particular warranties and set out in detailed disclosure schedules to the agreement. General disclosures are rarely accepted.
English law SPAs will normally allow the seller to submit a disclosure letter against the warranties on signing. This will contain both general and specific disclosures. Although it is potentially dangerous for the buyer, the seller will sometimes also be permitted to make a general disclosure of the contents of a data room of due diligence documents.
Damages for breach of warranty in US law SPAs are usually expressed to be calculated on an indemnity basis against the full amount required to rectify the defect, with no need to demonstrate a link between the breach and the value of the target company, though principles of remoteness, causation and (usually) mitigation will apply.
By contrast, most English law SPAs do not usually calculate damages on an indemnity basis, other than for specifically agreed circumstances. The buyer is therefore required to prove that it has suffered a quantifiable loss (in a share acquisition, a diminution in the value of the shares) as a result of the breach and must mitigate its loss.
US-style SPAs will often require the seller to indemnify the buyer for any undisclosed liabilities (whether for tax or otherwise). The economic effect of this is to make the acquisition much more akin to a direct sale and purchase of the underlying business and assets and not of the shares of the target company.
English law SPAs tend not to include such a provision, with the buyer instead relying on the warranties and any specifically negotiated indemnities (such as for tax).
In cases where the seller's post-closing exposure is not covered by a guarantor, US practice tends to favour more elaborate post-closing arrangements (e.g. holdbacks, earn outs, escrow arrangements), frequently linked to specific potential liabilities, in addition to a “locked box” or completion accounts adjustment mechanism. By contrast, English SPAs are more likely to rely only on the locked box or completion accounts, with adjustments focussed on key value drivers (cash, debt, working capital).
Law and practice in the US recognise longer non-compete covenants for sellers (up to 10 years depending on the jurisdiction). Restrictive covenants tend to be much shorter in the UK (and throughout the EU), with 3 years likely to be the maximum duration up to which seller non-competes may be enforced. If the transaction is a mere sale of assets (without the sale of goodwill), its is likely that a shorter non-compete period of only up to 2 years would be enforceable.
English law SPAs are sometimes executed as “deeds”. These are special legal instruments which do not require consideration and have a 12 year limitation period under English law (as opposed to 6 years for ordinary contracts). By contrast, New York and other US jurisdictions do not recognise deeds for use as commercial contracts.
Good faith and fair dealing
In all 50 States of the US, SPAs are subject to implied covenants of good faith and fair dealing. There are no such implied duties under English law, although recent court practice suggests that an express obligation to negotiate in good faith may create an enforceable right and that a party must act honestly and not be unreasonable when exercising its discretion under approval rights.
Signing and dating formalities
US practice has a relaxed attitude to signings (including virtual signings), with pre-signed signature pages frequently being distributed well in advance of documents being finalised. Parties to a US contract can also specify, within reason, any “as of” date for their contractual relationship to begin, regardless of the date when the agreement is actually signed (e.g. if the parties want the deal to take effect from 1 January but documents are not finalised until 5 January, the SPA can be dated “as of” 1 January).
By contrast, English law requires signings, particularly virtual signings, to be more secure in terms of confirming the precise version of the agreement to which signatures are attached, and English lawyers have developed relevant procedures for compliance. Also, back-dating an agreement is treated as fraud in England and, with certain limited exceptions, an agreement must be dated with the date when all parties have signed.
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