By Greg Bonné, Jonathan Parker, Richard Butterwick, Terry Charalambous, and Catherine Campbell
As the UK Competition and Markets Authority (CMA) prepares to assume sole jurisdiction for UK competition reviews post-Brexit, M&A deal teams must evaluate the competitive consequences of deals bridging the Brexit period and update their competition strategy accordingly.
Corporates may not be able to implement the same merger control strategies as in the past.
By Jonathan Parker, Jana Dammann, Steven Croley, Calum Warren, Richard Butterwick, Terry Charalambous, and Catherine Campbell
In June 2018, the UK adopted new powers to review certain technology related deals on national security grounds, extending the scope and breadth of its control regime to those that concern computing hardware, or quantum technology for supply in the UK (see Latham Client Alert: 12 June 2018). In July, the UK government went a step further and published a White Paper on a potential new and significantly extended foreign investment notification regime, which will likely lead to wider and closer scrutiny of many transactions, including strategic M&A deals. These potential new UK rules are part of a wider global trend, with heightened scrutiny of foreign investment control increasing in a number of other jurisdictions.
The government’s White Paper proposes expanding the jurisdiction over transactions subject to potential national security review, with most areas of the economy within the proposed enlarged scope, supported by new information-gathering powers, longer review periods, and stricter penalties for non-compliance. Although the recommendations in the White Paper have not been enacted into law, changes could come into effect as early as next year, and we expect that deal teams will be assessing the implications for M&A deals in 2019 and beyond.
By Paul Davies, Richard Butterwick, Terry Charalambous, and Catherine Campbell
In recent years, China has taken significant steps in developing its environmental policy. In 2014, China’s Premier Li Keqiang declared a “war on pollution”, which began in earnest in 2017. Since then, regulators have been more proactive in enforcing environmental regulations. Factory closures have become a key part of this strategy, causing significant disruption to the global supply chain this year.
In our view, M&A dealmakers and corporates should carefully consider environmental and supply chain due diligence in China, as companies work out how to navigate the factory shutdown process. Corporates should, as part of their environmental, social, and governance (ESG) strategy, review whether their group entities and target companies are likely to be affected in the event that critical supply chains are broken. Engagement with environmental agencies in China is useful, but environmental policy and consistent regulatory enforcement are still maturing. The appropriate level of due diligence could prove to be critical to a company’s ongoing operations.
By Catherine Drinnan, Shaun Thompson, Richard Butterwick, Terry Charalambous, and Catherine Campbell
This year has seen a significant number of business failures, particularly on the high street, as businesses have struggled in the face of market fragility and Brexit uncertainty. When a UK company is underperforming, the presence of a defined benefit pension (DB) plan with a large deficit can be a significant problem. Companies with large pension deficits require contributions that affect cash flow and make exiting more difficult when the time comes to sell.
If a business slips into distressed territory, however, there are mechanisms whereby a company can divest itself of a DB scheme. As companies respond to Brexit and challenging conditions in some sectors, we believe that 2019 will see more of these types of arrangements. In our view, corporates and M&A deal teams should consider how to respond if companies are at risk. While the mechanisms can be effective in allowing a company to continue trading (in some form), corporates should note a number of important factors before deciding to attempt this.
Last year marked a continuation of strong M&A volumes, with US$3.15 trillion in global transactions according to data provider, Mergermarket. Strong activity, driven by cheap debt and a low growth environment, has continued into Q1 2018, and large deals are expected to be a fixture of the M&A landscape in the year to come. The buoyant M&A market has led to extensive reorganisation work for both sellers and buyers, particularly for mega-deals that frequently require substantial post-deal integration and non-core divestment work — a trend Latham believes will continue while M&A levels remain high. However, while well-executed reorganisations can help facilitate a smooth M&A process or integration project, they require meticulous and timely planning to ensure a successful outcome.
What constitutes a corporate reorganisation and why reorganise?
A corporate reorganisation typically involves the transfer of assets, whole businesses, or shares between entities forming part of the same corporate group, on a solvent basis. Businesses undertake corporate reorganisations for several reasons, and M&A is currently a large driver.
By Simon Baskerville and Ed Richardson
Schemes of arrangement are a well-known and familiar tool for many within M&A. They are often used to implement acquisitions of public or widely held companies or restructurings of financial indebtedness, frequently as part of an acquisition through a debt-for-equity transaction. What is less well-known is how schemes of arrangement can potentially be used to manage a target company’s liabilities beyond financial indebtedness particularly in an increasingly litigious and regulated world.
What is a scheme of arrangement?
A long-standing feature of company law, a scheme of arrangement allows a company to impose a compromise or arrangement on its shareholders and/ or creditors, provided the scheme of arrangement is sanctioned by the court and approved by shareholders and/or creditors (depending on who is affected by the scheme) accounting for 75% in value and 50% in number.
By William Lu and Jiyeon Lee-Lim
The fundamental US tax reforms brought in this year by the Tax Cuts and Jobs Act (TCJA) have changed the tax landscape for M&A more significantly than any other legislation in the modern era. Businesses and tax advisors will be considering the various opportunities created and threats posed by the TCJA for quite some time. This article looks at the tax drivers behind the current surge in US corporate M&A.
Federal corporate income tax rate reduced to 21%
From 1 January 2018, the TCJA reduces the federal corporate income tax rate from 35% to 21% (although the effective differential will often be less than 14% as a result of new deduction limitations and the addition of new taxes, as discussed below).
This tax rate reduction could increase the cash on balance sheets and overall value of US target corporations and by doing so increase their outbound M&A capabilities.
By Richard Butterwick, Jonathan Parker, Jana Dammann and Katie Campbell
Growing economic nationalism is threatening to impact M&A across Europe, as governments and regulators take an increasing interest in “foreign” acquisitions of nationally important companies. Deal teams have previously focused on established national security review regimes, including the Committee on Foreign Investment in the US (CFIUS) and the Foreign Investment Review Board in
Australia. Now legislative changes in Germany, proposed changes and heightened government interest in the UK and recent statements from the European Commission (EC) indicate a more interventionist approach to acquisitions.
Germany Increases Powers to Scrutinise and Block Sensitive Deals
Recently implemented changes to the German Foreign Trade and Payments Ordinance (FTPO) regime allow the German government to scrutinise and block direct and indirect acquisitions by non-EU bidders of German companies active in security-sensitive areas. The affected industry sectors subject to potential review are broad and include energy, water, nutrition, information technology, healthcare, financial services and insurance, transport and traffic, and software. The changes will affect German inbound deals, which we anticipate will be subject to a greater number of investigations and a stricter approach from the regulator.
By Gail Crawford, Mark Sun and Katie Campbell
Amid a growing number of high-profile corporate data breaches, cybersecurity is now a key issue for strategic acquirers. The hack of Yahoo, which came to light midway through its 2016 takeover by Verizon, resulted in a US$350 million purchase price reduction. The true extent of the hack has only recently been uncovered, demonstrating how damaging a large-scale data leak can be. With state-sponsored actors and opportunist hackers at work, and recent cyberattacks specifically aimed at obtaining inside information about transactions, a target’s cybersecurity must be front of mind. In our view, deal teams must consider how a data breach could impact a potential acquisition, before, during and after a deal.
Preparing for a Transaction — What Should M&A Deal Teams Scrutinise?
M&A deal teams must identify a target’s cyber assets and review security protocols and cyber defences, emphasising thorough technical due diligence. Diligence should include how data is stored and managed, where it is handled, and the data security measures implemented by third-party service providers. Acquirers should assess data sets including personal information, focusing on why information is being stored and whether storage is necessary and proportionate.
Acquirers should be alert to red flag issues; for example, lack of awareness about data protection and cyber issues; poor employee training on data security; failure to keep records of historic breaches; and regulatory investigations. Addressing poor practices post-close requires time and resources — buyers may prefer to factor costs into the purchase price, or require pre-closing remediation.
By Sarah Gadd and Katie Campbell
Companies operating in the “gig economy”, using a largely self-employed workforce, have enjoyed enormous growth in recent years and have made popular M&A targets. In the UK, these companies have come into conflict with long-established employment law. In our view, current laws are not fully equipped to deal with staffing models in which staff and companies alike seek more flexibility than the traditional “masterservant” employment relationship affords. For M&A deals in which business models operate on the basis that a significant proportion of the workforce is selfemployed, acquirers should consider the real nature of the working relationship to assess the risk of staff being reclassified as workers or employees. Reclassification is not only an issue in the newer gig economy sector but also in industries operating a self-employed model, particularly if small, independent businesses become part of larger corporate entities.