Out-Law Guide 4 min. read
06 Jun 2018, 3:29 pm
This guide was last updated in June 2018
There are similarities and some significant differences in the company law regimes of Ireland and the UK, and the same is true of the practices and approaches surrounding M&A. A casual observer may look at an Irish share purchase agreement (SPA) and a UK SPA and consider them both to be virtually identical in form. However there are differences in the practical application of the rules that bidders and professional advisers should know about when negotiating deals.
A common pricing mechanism in the UK is a locked box mechanism, where the purchase price of a target company is fixed based upon a set of accounts predating completion and with provision built-in to the SPA to guard against unapproved cash leakage from the date of such accounts. This is less common in Ireland, where there is a strong preference for completion accounts to be drawn up testing a target company's value on the completion date. Each method has pros and cons.
A locked box mechanism has become increasingly attractive in the UK, particularly where there is private equity involvement, because it offers price certainty to both sides, is a simpler mechanism to document and avoids a potentially costly negotiation over price after the deal closes. However, if there is a significant gap between the last set of statutory-standard accounts and completion, a buyer may prefer to test the value of the target at completion rather than rely on outdated financial data.
Locked box mechanisms are becoming more prevalent in Ireland and there are also examples of hybrid-locked box/completion accounts deals in Ireland and the UK, but there should be little surprise if an Irish bidder pushes for a completion accounts mechanism.
In the UK completion accounts using a mechanism testing net debt and working capital, or a 'cash-free, debt-free' deal, have become more popular than a net asset value testing mechanism. Net asset value testing mechanisms remain popular in Ireland, but cash-free, debt-free mechanisms are also increasingly common.
Limitations on a seller's liability are broadly the same in Ireland and the UK. Depending on the circumstances, the seller's maximum liability for warranty claims will often be limited to the amount of the purchase price paid by the buyer in both countries, albeit in competitive auction processes the cap can be lower. The time limit on bringing tax warranty or tax indemnity claims is often seven years in the UK and five years in Ireland, though there may be reasons for different time limits in the relevant context.
Restrictive covenants are designed to prohibit a seller's ability to compete with the company they have just sold for a set period, including their ability to engage that company's employees and customers. They are a common feature in both Irish and UK deals, though there are perceived differences in the time limits applied, with Irish courts tending to be more conservative. Although time limits are open to negotiation depending on the facts, in Ireland it is generally thought that restrictive covenants any longer than two years would not be enforceable if challenged in a court. In the UK, restrictive covenants as long as three years could be considered enforceable, if justifiable and proportionate in the context.
On share deals the seller will usually indemnify the buyer against any tax liabilities of the target company predating the buyer's ownership. In the UK this can either be dealt with in a separate tax deed, or it is built in to the SPA as a stand-alone tax covenant in a schedule. In Ireland, although the latter option could be adopted, normally a separate tax deed is the preferred option. This should not prove a contentious issue on a transaction.
Warranty and indemnity (W&I) insurance coverage for warranty and indemnity claims under an SPA is increasingly popular in the UK, particularly on the buyer side. The UK W&I market is sophisticated, diverse in terms of the types of policy on offer, relatively expedient and comparatively inexpensive, due to there being a competitive market. In Ireland, W&I policies are less common on domestic transactions when compared to the UK, as the market is smaller and costs can be prohibitive. However, the Irish W&I market is maturing and W&I policies are becoming more attractive.
One issue that can become contentious on an Irish transaction is whether a seller is required to warrant the accuracy of the contents of a data room of documents disclosed to the buyer in relation to the target company. In the UK such a warranty will typically be included in a buyer's first draft SPA but then negotiated out by the seller without much protest from the buyer, albeit it every case will turn on its own facts.
In Ireland, however, some lawyers in Dublin would argue that such a warranty is standard and would push hard for its inclusion in an SPA. A seller should be very cautious about agreeing such a warranty, particularly where there is a large volume of data produced by a third party. There are often difficult negotiations over this point in an Irish transaction.
In the UK an SPA will include a 'full title guarantee' from the seller to the buyer in relation to the shares being sold. This term implies certain matters, such as that the seller has the right to dispose of the shares and that the shares are free from charges and encumbrances. The term 'full title guarantee' is not a recognised legal term in Ireland, and standard title and capacity warranties provide the necessary comfort, which are also included in a UK SPA.
A UK SPA normally includes a clause stating that no rights to enforce any term of the contract can be invoked by anyone other than the parties to the SPA. This derives from a statute which permits third parties to enforce rights if the contract so states. In Ireland, there is no equivalent statutory concept therefore there is not strictly any need for a third party rights clause.
Dorian Rees is a corporate law expert at Pinsent Masons, the law firm behind Out-Law.com