The following article is adapted and reprinted from the M&A Tax Report, Vol. 9, No. 2, September 2000, Panel Publishers, New York, NY.


By Robert W. Wood

As a U.S.-trained lawyer doing merger and acquisition transactions for many years, and during just the last few years, as a qualified solicitor in England, work on transactions that increasingly have a U.K. buyer or seller. In that role I am struck by the fairly radical differences that U.S. practitioners face between U.S. and U.K. law, and even etiquette. I suppose United Kingdom lawyers face these legal and culture shock issues, too.

Yet generally I have found U.K. lawyers more equipped to deal with them. For years now, a significant number of U.S. law firms have had London offices, with more springing up every year. Aside from the office-opening phenomenon, U.S. lawyers have been a permanent fixture in London's global financial center for years. With the unprecedental waive of merger and acquisition activity now hitting law firms (and with accounting firms buying law firms, too!), this trend has mushroomed. Several of the largest law firms in the world are now London-based.

Generally speaking, most the true global players are instantly equipped to deal with the differences. But the rest of us need not entirely left out. There are a few points to note that may make one's role in these transactions materially easier. First a few ground rules.

I won't cover securities laws in any detail, since that is not my bailiwick. Suffice it to say that U.S. and U.K. securities laws are different, administered differently, and that in each case specialists are needed to navigate the minefield. That said, with a public company of equivalent size in the U.K. vs. one in the U.S., the U.K. approach is far more flexible, with meetings of the U.K.'s Panel on Takeovers and Mergers (more about this entity below) adopting a malleable approach that is less automatic and more yeilding, it seems to me at least, than the approach that would be taken by the SEC.

Who Wants Leverage?

One important — to many, perhaps paramount! — feature about acquisitions in any jurisdiction is financing: the simple feature of leverage. More transactions in the U.S. are likely to be highly leveraged than in the U.K. This may merely reflect the fact that the U.S. character (and U.S. business model) is more aggressive, with lenders being more aggressive, too. Although leveraged buyouts exist on both sides of the Atlantic, there are several differences worth noting.

These may (and usually do) dramatically impact the structure of the deal. First, outside buyers are far more common in the U.S. than in the U.K., with management buyouts occurring much more frequently in England. Interestingly, perhaps because of this differing buyer identity, the debt structure of deals is generally different as well. Management buyouts in the U.K. are generally funded by bank debt (or mezzanine financing) as opposed to a third party's outside debt secured by the target's assets. The latter tends to be the norm in U.S. acquisitions.

Structuring Leverage

On a fundamental level, there are several corporate law quirks in the U.K. of which tax lawyers and tax advisors should be aware. The first is Section 151 of the Companies Act 1985 (as amended). This English law generally prohibits a target company from providing financial assistance for a buyout. Mistakes are hardly small. This law's prohibition on giving financial assistance can, under some circumstances, actually result in criminal penalties.

The idea, which may seem quaint to Americans, is that the interests of the target company's creditor must be protected. Plus, other persons who are trading with the target (trade creditors and even consumers) need their share of protection as well. If the assets of the target company are offered as security to finance debts incurred by the acquirer of the target's shares, then the interests of the persons trading with the target company become subordinated. Since the share capital in an English company is a matter of public record, any persons trading with the target may rightfully assume that the shareholders are not pledging that capital to financiers of an acquisition.

How does this arguably quaint legal protection effect buyout structuring? In several ways. In the typical U.K. buyout transaction, the target and its subsidiaries provide guarantees supported by security over their assets. Surprise! On the face of it, this structure is flawed; the U.K. prohibition on financial assistance will clearly have been violated. On the other hand, there are a couple of exceptions to this prohibition that may be available.

Exception for Non-UK Companies

Maybe it seems obvious, but this prohibition on the granting of financial assistance only applies where there is an acquisition of shares in a U.K. company. If the transaction can be structured as a purchase by the buyer of assets rather than stock, the rules on financial assistance don't apply. That may seem awfully easy to avoid, and for the most part, it truly is. On the other hand, sellers in the U.K. generally want to sell stock, not assets. The concerns over liabilities that typically militate in favor of a stock deal are far more pronounced in the U.K. than in the U.S.

Payment of Dividends, Etc.

Another way around the "no financial assistance" rule simply lies in the payment of dividends. If the target company is able to pay a dividend (either to the seller in order to reduce the purchase price, or to the purchaser in order to assist with the acquisition), the financial assistance prohibition again will not be considered to be violated. This has never made perfect sense to me. The theory is apparently that the payment of a dividend is something that would be permitted by the target company if the change of ownership had not taken place.

Private Company Relaxation

Happily, the rules for private companies are far more relaxed. A private company (as well as its subsidiaries) may give financial assistance to acquire the shares of the company provided that certain requirements are met. It is perhaps an unfortunate name (given its connotation) that these conditions are often referred to with the pejorative moniker "whitewash." The conditions that need to be met in order for financial assistance to private companies to be available are hardly something that would merit that pejorative name.

In the case of private companies, financial assistance can be given if the net assets of the company are not reduced, or to the extent they are reduced, if the assistance is provided out of distributable profits. Furthermore, the directors of the company giving the financial assistance must swear out a declaration regarding the prospective solvency of the company. This latter director declaration element is interesting, and calls for some crystal ballgazing (and no little soul searching).

Another exception allowing financial assistance applies to the division of the monies. The loan facility granted to the acquirer and the target may be structured to divide funds between acquisition money and working capital money (or two different "tranches"). The two tranches may have different levels of risk and return, and even different dates of maturity. Although the rules on the provision of financial assistance apply to the monies for the acquisition, there is no restriction on the target company (or its subsidiaries) giving financial assistance or security in connection with a working capital facility.

Traditionally, such facilities or tranches have been truly separate credit facilities. Yet, it is easy to see that there is a considerable incentive to line-up the funds in ways that might later technically violate the Companies Act. The job for lawyers and lenders is therefore not an easy one.

Applicable Merger Law

It is an initial shock to most U.S. M&A lawyers that in the U.K., the legal concept of a "merger" does not exist. As a result, it is necessary to incorporate a separate acquiring company (the proverbial "Newco") to acquire either the assets or the stock of the target company. In the case of an asset purchase, Newco then becomes a holding company and any needed acquisition financing is provided to Newco. As it is not possible to merge Newco with the target, where shares have been acquired there will be a need to have the obligations of Newco to the lenders guaranteed by the target.

Typically, of course, these obligations must be backed up by security given for the target company's assets. Upstream guarantees need to be carefully drafted. In particular, the prohibition on giving financial assistance (again, emanating from the Companies Act 1985, as amended) needs to be watched closely. An asset purchase is usually structured the same way, with Newco being formed to buy the target's assets. Thus, the same issues can arise.

Management Buyouts

As noted above, management buyouts are far more common in the U.K. than in the U.S. This may be due in part to cultural differences. However, more than a few observers have suggested that U.S. fiduciary duty concepts give rise to special problems in any management-led buyout in the U.S.. After all, if the management of the company acts as the purchaser of the company, how can the company maximize shareholder value by achieving a high selling price? There is, in at least this sense, a built-in conflict of interest. The management group, assuming it is a logical and prudent buyer, would want to keep the price as low as possible.

The half-baked solution to this particular dilemma in U.S. management-led buyouts is usually a fairness opinion rendered by one or more investment bankers or valuation experts. The same kind of concept (in a much more formal way) applies in an employee stock ownership plan ("ESOP") purchase, where a detailed appraisal is specifically required by the Internal Revenue Code.

The situation in the U.K. on these points is quite different. The director of a company owes a fiduciary duty to the company, but not specifically to the shareholders of the company. Strangely, the primary focus of the U.K. director is therefore on the interests of the company and the effects a transaction may have on it. Oddly enough (or at least it seems odd to U.S. advisors), if the U.K. company is a target in an acquisition, the directors may be able to be interested in the acquiring company as a director, and as a shareholder.

U.S. concepts of the duty of loyalty and fairness, which exist under every state's corporate law, and federal securities law issues, would make such a situation improbably in the U.S. In the U.K., though, there will be no breach of fiduciary duty so long as a director is considered to have concluded that the interests of the "company" are being better served by its being acquired.

Buying Assets

Asset purchases raise many of the same fiduciary duty issues in the U.K. as they do in the U.S. The goal is to raise as much as possible on behalf of the company. Recall that in an asset transaction, a new company will have to be formed to make the purchases. If the target company forms Newco, the directors will have a duty to Newco to buy the assets on the cheap. Thus, the purchase of assets by Newco is likely to require consent of the target company's shareholders, because Newco will be considered a company with which the directors are connected (Section 320 of the U.K. Companies Act 1985).

Confidential Information

There is an entirely separate issue about confidential information and how to deal with it. Directors in the U.K. (much like those in the U.S.) owe a duty to the company to preserve information as confidential. This can stand in direct conflict with the requirement to disclose information in order to obtain financing. The buyout of a public company in the U.K. is governed by the City Code on Takeovers and Mergers. This is perhaps one of the most unique of U.K. law features.

Rather than a piece of legislation, this is a code of practice that suggests substantial latitude. One must comply not only with its rules and principles, but with the spirit of these rules and principles as well. The judging of this spirit and interpretation of these rules and principles is undertaken by the Panel on Takeovers and Mergers, a body that gives rulings on points of interpretation. Fortunately, one may consult with this body as well, lending some give and take to the entire process.

The whole idea of this system is that, when a listed company is involved in a buyout, the City Code applies, bringing with it various compliance implications. The primary goal of the City Code is to insure that shareholders receive fair and equal treatment in a takeover. An orderly framework is also provided within which takeovers are to be conducted. In what is sometimes a frustrating experience to American lawyers, the City Code consists of a series of General Principles. General Principles are followed by Rules which provide more detailed information. However, the level of specific detail is significantly less than would be the case, say, with U.S. securities laws administered by the SEC.


With the increasing prevalence of multi-country and even global mergers, corporate and tax advisors will be better prepared to render tax advice if they have some idea of the various corporate laws. Many U.S. tax advisors are acquainted with U.K. taxation (and vice versa). However, few who know the rudiments of U.S. corporate practice also understand the corporate rules that apply in the U.K. This brief summary is certainly no substitute for a more detailed analysis, but it should provide basics to make it all a little easier.

U.S./U.K. Acquisitions: Basic Differences, Vol. 9, No. 2, M&A Tax Report (September 2000), p. 4.