DealLawyers.com Blog

Multiple tax regimes and financial standards. Added regulatory hurdles. Legal differences ranging from IP to comp and benefits. Not to mention various time zones and possibly languages. Cross-border deals are not for the faint of heart. Having an understanding of transactional differences and what’s customary in other jurisdictions can help avoid headaches, misunderstandings, and ultimately mean getting to closing more quickly amidst all this complexity. To that end, this recent Sheppard Mullin blog explores material differences in legal frameworks and market practices for transactions in the US v. UK so, if you’re new to UK deals, you can better navigate transactions and work with your UK counterparts.

For example, US transactions commonly employ a purchase price adjustment to ensure the financial condition of the target matches agreed-upon metrics at closing. In the UK, you’re more likely to see a “locked-box” approach where the purchase price is fixed based on accounts drawn up to the pre-signing/exchange “locked-box” date with provisions against leakage (value extraction). The blog says this difference reflects broader cultural and legal distinctions:

The US approach emphasizes flexibility and accuracy through post-closing adjustments, allowing for dynamic financial realities at closing. However, this flexibility can lead to disputes and extended negotiations.

Conversely, the UK locked-box mechanism prioritizes certainty and simplicity, offering a fixed price that reduces the need for post-closing negotiations. This method aligns with the UK’s preference for predictability and reduced legal complexity, albeit requiring greater upfront diligence and assurance.

Another significant difference is the approach to sandbagging. US agreements may include a pro-sandbagging clause — allowing a party to recover for breaches of reps and warranties even if it had prior knowledge — or remain silent on the topic — in which case recovery may also be possible depending on the governing state law — with anti-sandbagging provisions being often sought by sellers, but less often included in the final agreement. Across the pond, English law tends to favor “anti-sandbagging” clauses.

English case law supports this position, suggesting that a buyer who knows of a breach is considered not to have relied on the warranty’s accuracy, or to have no or minimal damages, as they are assumed to have assessed the value of the shares or assets knowing the warranty was false. Anti-sandbagging clauses typically restrict the attribution of knowledge to the buyer’s core deal team, excluding knowledge held by external advisors.

MAC or MAE closing conditions allowing the buyer to terminate if a material adverse change or effect occurs, a staple in the US, are also less likely in UK agreements, so that a deal will close absent a failure to receive regulatory clearance, other express condition or a fundamental breach — also giving more deal certainty to sellers.

The blog also addresses differences in due diligence processes/disclosures, equity incentives, third-party reliance on diligence reports and auction processes. This Winston & Strawn article also discusses RWI, restrictive covenants and tax. For even more, check out our “Cross-Border” Practice Area.

– Meredith Ervine