Transactions in the United States and the United Kingdom can have material differences, particularly with respect to purchase price adjustment mechanics, due diligence processes, equity incentives, third-party reliance on diligence reports, sandbagging provisions, MAC closing conditions, and auction processes. This article explores these areas further, providing insights into how legal frameworks and market practices differ between the two jurisdictions.

Purchase Price Adjustment Mechanics

The purchase price adjustment mechanics in US and UK transactions are pivotal in determining the final amount the buyer pays the seller for the target business. These mechanisms are designed to ensure that the value of the target business at closing aligns with the expectations set at the time of signing the purchase agreement. While both jurisdictions aim to provide fair and accurate valuations, their methodologies and underlying principles diverge significantly.

US Approach

In the United States, purchase price adjustments are a standard component of M&A transactions. They typically focus on ensuring that the financial condition of the target business at closing matches the agreed-upon metrics. Common elements include the following:

• Net Working Capital Adjustments: The US approach customarily involves setting a target net working capital, which reflects the company’s liquidity position based on what the parties, through negotiations, jointly agree is a sufficient amount of net working capital required to run the operations of the business. The purchase price is then adjusted based on the difference between the target and the actual net working capital at closing. This ensures that the buyer does not inherit an unexpected liquidity shortfall or benefit from excess liquidity.
• Cash, Debt, Transaction Expense Adjustments: Adjustments for cash, debt, and transaction expenses are made to reflect the actual cash on hand, outstanding debt, and transaction expenses at the time of closing. This ensures that the buyer only pays for the net cash position at the time the transaction is completed, preventing either side from receiving a windfall based on fluctuations in cash reserves or debt levels.
• Closing Accounts Mechanism: In the US, closing accounts are trued-up (or finalized) post-closing to confirm the final purchase price. This process involves reviewing the financial statements as of the closing date to finalize any adjustments to net working capital, cash, debt, or transaction expenses. While this method provides accuracy, it can lead to post-closing disputes, as buyers and sellers may have differing interpretations of financial data. To minimize potential disputes, parties can agree on specific accounting principles in advance, including an example net working capital calculation with line-item details of what constitute current assets and current liabilities, including potential adjustments to those accounts, to determine net working capital as of closing.
• Dispute Resolution: Given the potential for disagreements, US agreements often include detailed dispute resolution procedures. These may involve appointment of independent accountants or arbitrators to resolve discrepancies in the closing accounts, ensuring an impartial resolution. Additionally, establishing clear communication timelines, processes, and guidelines and timelines for resolving discrepancies can further help in reducing potential conflicts.

UK Approach

In contrast, UK transactions customarily employ a “locked-box” mechanism, which offers a distinct approach to price certainty and adjustment:

• Locked-Box Mechanism: The locked-box mechanism establishes a fixed purchase price based on accounts drawn up to a pre-signing/exchange date, known as the locked-box date. The seller guarantees that no value will be extracted from the target business between this date and the closing/completion.
• Leakage Provisions: To protect the buyer, UK agreements include provisions against leakage, which is any unauthorized value extraction (generally by the equityholders) from the target business between the locked-box date and completion. Common forms of leakage include unauthorized dividends, management fees, or non-ordinary course repayment of intra-group debt, all of which can diminish the value of the target business. If leakage occurs, the seller must compensate the buyer on a dollar-for-dollar basis to account for the leakage, thereby maintaining the integrity of the locked-box price.
• Due Diligence and Assurance: The locked-box approach requires thorough pre-exchange due diligence, as the buyer must be confident in the financial state of the target business as of the locked-box date. This necessitates a high level of trust and assurance in the accuracy of the pre-completion accounts.
• Reduced Dispute Potential: By eliminating post-completion adjustments, the locked-box approach provides more certainty and reduces the scope for disputes after the transaction is completed.

The differences in purchase price adjustment mechanics between the US and UK reflect 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.

Due Diligence

Each jurisdiction employs its own approach to disclosures, which reflects difference in legal expectations and practices.

US Approach

In the US, disclosures are more specific and set out in a disclosure schedule attached to the purchase agreement:

• Specific Disclosures: These are statements in the disclosure schedule that qualify the warranties and representations directly. Each item listed in the disclosure schedule is considered disclosed to the buyer. Sellers often include extensive details in these schedules to ensure comprehensive disclosure.
• Outside Information: In general, public information that may be obtained outside of the representations and warranties and disclosure schedule (for example, UCC filings or pending litigation), or information that is included in a virtual data room but not deemed included within the disclosure schedule, is not deemed disclosed unless the corresponding information is specifically included in the disclosure schedule.

UK Approach

In the UK, warranties within purchase agreements are qualified by two types of disclosures:

• Specific Disclosures: Similar to US practice, these are disclosures detailed in a disclosure letter that accompanies the purchase agreement.
• General Disclosures: These include matters of public record, such as filings in the Land Registry or Companies House. Generally, these are inherently assumed to be known to the buyer and are therefore considered disclosed. In recent years, the practice of considering the entire contents of data rooms as disclosed against warranties has become more common. This means that any liabilities reasonably identifiable in the data room are deemed disclosed. This approach provides a comprehensive way to manage disclosures, but requires the buyer to thoroughly review, and be responsible for any potentially adverse information contained within, the data room contents.

Incentive Equity vs. Sweet Equity

US Approach: Incentive Equity (Profits Interests)

In the US, incentive equity often takes the form of profits interests, often in the context of limited liability companies and partnerships, but is distinct from equity in the new enterprise that a rolling seller receives in exchange for a portion of their equity in the target business.

• Profits Interests: These are equity interests that provide holders with a share of future profits and appreciation, without requiring an upfront capital investment, but typically subject to time-based and performance-based vesting criteria.
• Tax Efficiency: Profits interests are popular due to their favorable tax treatment, allowing management to receive capital gains treatment on eventual payouts, without requiring an upfront capital investment by the recipient.

UK Approach: Sweet Equity

Sweet equity is a common feature in UK private equity transactions, designed to incentivize management by offering them a significant upside in the company’s growth.

• Structure: Sweet equity typically involves management investing in a special class of shares that provide enhanced returns if certain performance targets are met. Commonly, sweet equity is issued via new share allotments for a nominal (par) value of the shares, through growth shares, or structured as options.
• Incentive Alignment: Sweet equity aligns management’s interests with those of the buyer by linking returns to business performance.

Third-Party Reliance on Diligence Reports

US Approach

Under US professional ethics guidelines, a US firm cannot permit a non-client to rely on a legal due diligence report that it prepares for its client, as it creates a conflict of interest. Consequently, when a US firm provides a due diligence report to a third party in connection with a transaction, it generally does so under the terms of a non-reliance letter (NRL). The NRL provides that the document was prepared for the law firm’s client, the client has shared it with the third party, but the preparing law firm assumes no attorney-client relationship and no obligation to the third party – as a result, the third party may not rely on the contents of the report.

UK Approach

The UK allows for more flexibility in third-party reliance on diligence reports, often permitting reliance letters to be issued. Reliance letters allow specific third parties, such as lenders or other third parties principally involved in a transaction, to rely on the reports (subject to negotiated terms).

Sandbagging

US Approach

In acquisition agreements in the US, it is common to encounter a “pro-sandbagging” clause. A pro-sandbagging provision allows a party to recover for breaches of representations and warranties even if the party had prior knowledge of the breach, whether before signing or between signing and closing. This clause is a frequent point of negotiation in deal-making. A common alternative is for the acquisition agreement to remain silent regarding sandbagging, which, depending on the state law governing the acquisition agreement, would not foreclose a party from recovery if the party had prior knowledge of another party’s breach.

Sellers, conversely, advocate for an “anti-sandbagging” clause to be included in an acquisition agreement, stipulating that a party cannot recover for breaches of representations and warranties if the party had prior knowledge of the breach. The rationale is that the parties should negotiate any implications of the breach that affect the value of the business prior to signing. In practice, though, anti-sandbagging provisions rarely make it into a final acquisition agreement.

UK Approach

English law tends to favor “anti-sandbagging” clauses in acquisition agreements. 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 Conditions

US Approach

US agreements almost invariably include a no “material adverse change” or “material adverse effect” (MAC) closing condition, where a buyer reserves the express right to terminate if a defined adverse event or series of events occurs between signing and closing. MAC clauses in US deals are heavily negotiated (e.g., scope, carve-outs, materiality qualifiers) and serve as a backstop against unforeseen business deterioration.

UK Approach

UK agreements typically provide more certainty of closing for sellers than US agreements by excluding any MAC-based closing condition. Once signed, the deal will complete unless an express condition (such as regulatory clearance) is unmet or a fundamental breach occurs. This “no-MAC” stance shifts the risk of intervening events onto the buyer and places a premium on thorough pre-signing diligence and robust pricing.

Auction Processes

US Approach

In the United States, auction processes typically begin with non-binding letters of intent, giving buyers the flexibility to negotiate final terms—including purchase price mechanics, indemnities, and closing conditions—during a confirmatory due diligence period that follows the LOI. Financing commitment letters need not accompany the initial bid, although buyers must secure debt or equity funding by closing, and exclusivity windows under US LOIs often extend for several weeks or months to allow ample time for detailed due diligence, negotiation of definitive documents, and satisfaction of any financing or material third-party consents.

UK Approach

By contrast, UK sell-side auctions regularly require bidders to submit fully binding offers at the final stage, with all material due diligence completed beforehand and financing commitment letters or proof of equity funding provided alongside the bid. There is no separate confirmatory diligence phase after the binding offer, and successful bidders are typically granted a very short exclusivity period—often only two to three days—to finalize transaction documentation and fulfil any remaining conditions, ensuring a swift path to exchange and completion.

Conclusion

Understanding the differences between US and UK transactions is important for legal professionals involved in cross-border deals, in particular where there are jurisdictional differences in legal frameworks and day-to-day practices. By appreciating these types of nuances, attorneys can better navigate the complexities of international transactions in counseling their clients.

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