M&A and Private Equity

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More US buyers — and more buyer-friendly deal terms — are entering the seller-friendly UK market, although the picture is increasingly nuanced.

By Joshua M. Dubofsky, Sam Newhouse, Jennifer N. Cadet, and Catherine Campbell

Whilst global M&A deal volumes have dipped at the start of Q1 2023, UK-bound M&A activity is expected to be one of the year’s highlights as overseas buyers seek out attractively priced British public and private targets. Within this activity, the deal term preferences of US buyers are likely to impact private UK M&A. A detailed understanding of both UK and US expectations is therefore essential for transatlantic dealmakers.

US private M&A deal terms — particularly related to deal certainty and post-closing recourse — have historically been viewed as more buyer-friendly than those in the more seller-friendly UK market. However, the picture is increasingly nuanced, and deal teams navigating ongoing economic uncertainty and financial market dislocation are being called upon to find new solutions to deal valuation, certainty, and recourse concerns.

Warranty and indemnity insurance may remain a staple of European private equity, but are buyers changing course?

By Neil Campbell, Tom D. Evans, Sebastian Pauls, Maximilian Platzer, David J. Walker, Edward Coates, and Catherine Campbell

Warranty and indemnity (W&I) insurance has become an important component of European PE transactions in recent years. However, changing market dynamics and challenging macro conditions (which have cooled deal flow) mean that PE buyers are now more critically evaluating the merits of W&I insurance. The Eighth edition of the Latham & Watkins Private Equity Market Study indicates that the overall uptake of W&I insurance is beginning to plateau, having increased significantly between 2016 and 2019. From a high of 35%, overall usage of W&I insurance in European deals has dropped in the past two consecutive years.

As W&I insurance has matured and PE buyers have become more experienced consumers of the insurance (and of low or nominal liability caps for warranties), the emerging picture is one of a product with a nuanced value. Increasingly, deal-specific characteristics, structures, and issues are playing a role in the demand for and success of W&I insurance, including appetite for stapled policies.

PE acquirers should view unions as stakeholders and factor possible or actual engagement obligations with them into the deal process.

By Kendall Burnett, Tom D. Evans, David J. Walker, Paul Lawrence, and Catherine Campbell

Widespread economic pressure — including pay, inflation, and the ongoing cost of living crisis — has increased union visibility. As the number of workers interested in union membership grows and the frequency of strikes surges in the UK and elsewhere, PE deals teams should remain mindful of the presence and role of unions in M&A.

PE firms face growing regulatory and litigation risks from greenwashing claims as they navigate a fragmented anti-greenwashing landscape.

By Tom D. Evans, Nell Perks, Anne Mainwaring, David J. Walker, and Catherine Campbell

Amid concerns of exaggerated or misleading sustainability claims, the UK Financial Conduct Authority’s (FCA) recent proposal for new labelling and disclosure rules to combat greenwashing (see text box) should put PE firms on alert for a growing range of greenwashing risks. The FCA proposals are just the latest in a wave of new rules and requirements being enacted and contemplated as regulators across jurisdictions look more carefully at green claims and seek to hold regulated firms (including PE sponsors) to account for exaggerated credentials and misstated investment policies.

Similarly, investor and other stakeholder claims over greenwashing are on the rise as firms and portfolio companies come under greater scrutiny and are required to publish ESG disclosures in market-facing and other public information. These claims can be brought under different and overlapping laws, including statute, securities regulations, and “soft law” provisions, making a consistent and proactive risk management approach essential.  

Bond issuers may wish to pursue an unmodified reverse Dutch auction for debt repurchases, an effective but underutilised transaction template that is gaining popularity.

By Francesco Lione, Tom D. Evans, David J. Walker, and Catherine Campbell

During the second half of 2022, amid ongoing market dislocation and as debt trading prices shrunk, paring back financial obligations by repurchasing debt at a discount became an increasingly attractive option for PE-owned businesses. Beyond the more commonly encountered issues that companies must navigate when embarking on debt repurchases (see Navigating Debt Repurchases in Europe: What You Need to Know), borrowers have taken a fresh look at liability management templates. Dealmakers have deployed unmodified reverse Dutch auctions with increasing frequency — a development that we see continuing to gain traction as long as the current economic slowdown and tight financing conditions persist.

European corporate venture capital teams should reflect on their rights in light of falling valuations, revised exit expectations, and other challenges.

By Richard Butterwick, Beatrice Lo, Shing Yuin Lo, Mike Turner, Jon Fox, and Catherine Campbell

This year has been challenging for venture capital (VC). Valuations of VC-backed companies listed on the public markets dropped by 74.2% in the first half of 2022, and evidence indicates private valuations are also declining. While the downturn underlines growing challenges for early and late-stage emerging companies, it also presents risks and opportunities for large corporates, who have significantly increased their presence in VC deals in recent years — with participation growing by 462.5% in the decade to 2021. In Q4 2021, corporate VC participated in 2,858 deals with an aggregate value of US$98.7 billion, a record high.

Given the significant increase in the number of corporates participating in the VC and growth equity space, many corporate VC teams will be dealing with a downturn for the first time. In our view, corporate VC teams should proactively seek to understand any downside protections they benefit from in order to position themselves to manage risk and maximise prospective opportunities.

Navigating evolving digital economy regulation requires a sophisticated and proactive approach from dealmakers.

By Tom D. Evans, Deborah Kirk, David J. Walker, Alice Drayton, Catherine Campbell, and Amy Smyth

Amid the ongoing global proliferation of regulation governing the digital economy, EU and UK legislators are taking significant strides toward creating a fairer and safer digital trading environment for consumer and business users. Much of this incoming regulation is applicable to a wide range of actors, impacting the tech sector and beyond, with a particular focus on large platform providers. From the giant-tech focused EU Digital Markets Act to the far-reaching UK Online Safety Bill, the European regulatory landscape is maturing, and regulatory expectations on businesses operating in the digital space are increasing. As a result, sponsors and portfolio companies should begin their assessments of the legal, regulatory, and commercial implications of this changing landscape.

A new regulation to control foreign subsidies could entail more complex, costly, and time-consuming deal clearances.

By Carles Esteva Mosso, Tom D. Evans, Elisabetta Righini, David J. Walker, Gillian Bourke, Natália Solárová, Werner Berg, France-Helene Boret, and Catherine Campbell

European M&A is set to become more complex after the entry into force of the Foreign Subsidies Regulation (FSR), a new regime introduced to control foreign subsidies that distort the EU internal market. This unprecedented new regulatory layer will apply in addition to existing merger control and foreign direct investment scrutiny, and comes at a time of heightened regulatory focus on deals across multiple jurisdictions.

A new regulation to control foreign subsidies could result in more complex, costly, and time-consuming M&A clearance processes.

By Richard Butterwick, Carles Esteva Mosso, Beatrice Lo, Elisabetta Righini, Gillian Bourke, Natália Solárová, Werner Berg, France-Helene Boret, and Catherine Campbell

European M&A is set to become more complex after the European Parliament and European Council agreed the Foreign Subsidies Regulation (FSR), a new regime introduced to control foreign subsidies that distort the EU internal market. This new regulatory layer will apply in addition to existing merger control and foreign direct investment scrutiny of M&A, and comes at a time of heightened regulatory intervention in deals across multiple jurisdictions.