Atlantic crossing: How US acquirers are reshaping dealmaking in Europe

Pricing mechanics and risk allocation

European sellers, especially in auctions, often prefer locked-box pricing, where parties set the price using an agreed historical balance sheet date – the so-called, locked-box date. The seller will undertake that, other than disclosed and pre-agreed sums, there has been no "leakage" in value from the target to the seller from the locked box date to completion and will be obliged to repay any leaked sums. The buyer then takes the risk and reward of the target's performance from the locked box date to closing. This provides greater price certainty and typically favours sellers in competitive processes, a marked contrast to US-style completion account adjustments that remain common in US deals.

Warranties, indemnities and insurance

Extensive warranties (akin to US representations and warranties) are standard in the UK and familiar across Europe, though civil law countries may rely more on shorter forms.

The US norm for indemnification and dollar for dollar recovery is market standard in jurisdictions such as France, Italy and Spain, but in jurisdictions such as the UK and the Netherlands, recovery will depend on how the overall value of the target has been affected.

"Sandbagging" expectations differ too: buyer-friendly pro-sandbagging clauses that would allow a buyer to bring a claim notwithstanding its prior knowledge can be unenforceable or resisted. Anti-sandbagging language, preventing the buyer from pursuing recovery for matters within its knowledge is common.

Warranty and indemnity (W&I) insurance (R&W, in US parlance) is widely used, especially in deals involving private equity and/or investor sellers. Seller escrows are less common in Europe than in the US.

Process and formalities

European deals often feature greater formality around closing compared with US deals. Several civil law countries require notarial signings. In the UK, deeds, which involve a more prescriptive signing mechanic, are common.

In some jurisdictions, as in the US, use of paying agents to manage the funds flow is common. For example, in the Netherlands, this is commonly handled by a third party notary account. In other jurisdictions, such as the UK, paying agents and direct payments are becoming more common but previously the market norm was for funds flows to be handled between legal advisers.

Regulatory controls

Aside from the deal terms, there are some other common issues that can arise in European corporate dealmaking which are not always a feature in the US.

Many European jurisdictions, including Belgium, France, Germany and Italy, have mandatory notification/approval requirements for anti-trust reasons if the deal meets domestic thresholds. Other jurisdictions, such as the UK, maintain a voluntary notification system, though notification is recommended if thresholds are met. In addition to domestic rules, there is a mandatory EU-wide merger control regime.

Nearly all European jurisdictions – including the UK, Germany and France - have US CFIUS-style controls on foreign investments into and acquisitions of domestic companies and/or assets on national security grounds. These controls operate differently in different jurisdictions; in the EU there is an EU-wide minimum standard and reporting requirement. In the UK, mandatory notification and pre-clearance is required for acquisitions of even minority stakes in companies operating in broad range of sensitive sectors.

Where anti-trust or foreign investment/national security controls are relevant, this will need to be factored into the deal timetable and transaction risk analysis.

Works councils and information/consultation rules can affect timetables in Germany, France and the Netherlands, even for share deals. For asset deals, under so-called TUPE rules, which apply in many European jurisdictions, employees working in the target business will transfer automatically to the buyer and a consultation process must be undertaken with them. US acquirers and investors must factor these stakeholder engagement requirements into deal planning and confidentiality strategies.