We have published our new M&A report, which we have titled “M&A in 2021 – Resilient, agile and coming off mute”, here.
In it we look at the prospects for M&A in 2021 – whilst the significant regional and global questions from last year may not have gone away, there are reasons for optimism. Issues we discuss in the report include:
- the lessons learnt from the impact of the pandemic that we are building into deal process and documentation, in particular around termination rights, for whatever black swan event next comes along;
- the continued rise of FDI regimes and their deployment by governments in the pandemic;
- the significance of shifts taking place in ESG, and the energy transition agenda in particular as a driver of M&A;
- the rebound in activity in the public markets as bidders seek to take advantage of lower valuations; and
- the distressed deals that we might expect to see in 2021, when governmental support necessarily runs out and the true impact is felt in the most damaged sectors.
Colleagues from our offices around the world also share their views and experiences of M&A in 2020, and their outlook for 2021.
The UK ceased to be a Member State of the European Union on 31 January 2020. A transition period then applied until 31 December 2020. During the transition period, EU law continued to apply in and to the UK, and the UK continued to trade as part of the Single Market.
The Brexit transition period ended on 31 December 2020, with the EU and UK having agreed to the terms of their future relationship through a Trade and Cooperation Agreement – you can read more about the implications of the agreement here.
Retained EU law
As of 1 January 2021, EU law no longer applies in the UK. By virtue of the European Union (Withdrawal) Act 2018, directly applicable EU law in force in the UK at the end of the transition period is retained as part of the UK statute book. Retained EU law has broadly the same status as any other UK enactment and is subject to the same rules/processes for amendment as any other UK primary or secondary legislation (or if made under devolved powers, the rules of the relevant legislature in Scotland, Wales or Northern Ireland).
EU Exit statutory instruments
The Government has made secondary legislation dealing with a range of corporate law matters to ensure that both Retained EU law and existing UK law and regulation (for example that referenced EU concepts or bodies) could operate effectively once the transition period ended. These regulations include:
- Company law – the Companies, Limited Liability Partnerships and Partnerships (Amendment etc.) (EU Exit) Regulations 2019 make a range of miscellaneous amendments in relation to EEA companies with a UK establishment or branch, and revoke the Companies (Cross-Border Mergers) Regulations 2007;
- Accounts – the Accounts and Reports (Amendment) (EU Exit) Regulations 2019 amend the Companies Act provisions on the preparation and filling of accounts, to remove the preferred treatment for EEA companies and limit the scope of certain exemptions to UK companies with UK parents;
- Market abuse and inside information – the Market Abuse (Amendment) (EU Exit) Regulations 2019 address deficiencies in the market abuse regime arising from Brexit. The regulations amended Retained EU Law relating to market abuse, including UK MAR, to ensure that the relevant legislation continues to operate effectively.
- Listing regime – the Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019 underpin the changes to the Listing, Prospectus Regulation, Disclosure Guidance and Transparency Rules necessary for Brexit.
- Prospectus regime – the Prospectus (Amendment etc.) (EU Exit) Regulations 2019 ensure the UK has a coherent and functioning prospectus regime, including transferring the UK prospectus supervisory functions from ESMA to the FCA.
- Contract – the Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc.) (EU Exit) Regulations 2019 ensure that EU rules that determine the law applicable to contractual and non-contractual obligations continue to operate effectively in domestic law after Brexit by incorporating the substantive rules in Rome I and Rome II into UK domestic law.
- Enforcement of judgments – the Civil Jurisdiction and Judgments (Hague Convention on Choice of Court Agreements 2005) (EU Exit) Regulations 2018 implement the UK’s international treaty obligations as an independent contracting party to the Hague Convention on Choice of Court Agreements 2005, ensuring that the Convention can work effectively between the UK and all the existing contracting parties to the Convention, and allowing the UK to operate the Convention with any future contracting parties.
- Competition – the Competition and Markets Authority was granted the power under the Competition (Amendment etc.) (EU Exit) Regulations 2019 to review mergers that affect the UK market (even where the transaction is also being reviewed by the European Commission), where the UK jurisdictional thresholds are met. There are transitional provisions for proceedings and investigations that were already under way at the end of the transitional period.
The FCA has made a number of changes to its Handbook that apply with effect from the end of the Brexit transition period, including changes to the Listing, Prospectus Regulation, Disclosure Guidance and Transparency Rules.
The impact of the rule changes for UK incorporated companies which have securities admitted only to a UK regulated market will be minimal. Issuers which have shares admitted to a regulated market in the UK and in an EEA state will have to adjust their systems and controls and, for example, make additional notifications to regulators for certain matters, including in relation to PDMR transactions.
The Takeover Panel has similarly made a number of changes to the Takeover Code that were required as a result of Brexit. The changes will not have a significant impact on transactions.
On 11 November 2020 the UK Government introduced the National Security and Investment Bill (NSI Bill) to Parliament, setting out significant legislative reforms which will overhaul the review of transactions and investments on national security grounds in the UK, against a backdrop of tightening of foreign direct investment (FDI) regimes globally. Continue reading
The government has introduced a new National Security and Investment Bill to Parliament, which will overhaul the regime for reviewing transactions on national security grounds in the UK.
The new regime will be “pro-active” immediately: whilst it will not be possible to notify deals for clearance under the new regime prior to formal commencement of the final Act, once the Act comes into force the government will have powers to call in any deal that falls within the scope of the new regime which is completed any time from 11 November 2020 onwards.
The government first made clear its intention to introduce a new review framework in its July 2018 White Paper, but the Bill deviates from the White Paper framework in a number of important ways, with potentially significant implications for investors.
Key features of the Bill include:
- Transactions in scope – The proposed regime would apply to investors from any country, and there will be no minimum target turnover or market share thresholds. The key question is simply whether there is an acquisition of “material influence” in a company, assets or intellectual property which potentially gives rise to national security concerns (subject to certain exceptions for transactions involving an increase in an existing shareholding).
- Intervention on grounds of national security – The focus of the Bill is on intervention on grounds of “national security” (rather than a broader “national interest” test which had reportedly been under consideration). National security is a concept which is increasingly broadly defined and clearly goes well beyond simply defence-related interests. However, the government has stated that it will not extend to allowing intervention for “broader economic reasons”.
- Mandatory notification in some sectors – In a significant departure from the voluntary notification regime proposed in the White Paper, the Bill requires mandatory notification (to a new dedicated government unit via a digital portal) for at least some transactions in 17 specified sectors: civil nuclear; communications; data infrastructure; defence; energy; transport; artificial intelligence; autonomous robotics; computing hardware; cryptographic authentication; advanced materials; quantum technologies; engineering biology; critical suppliers to Government; critical suppliers to the emergency services; military or dual-use technologies; and satellite and space technologies. Transactions covered by the mandatory notification requirement which proceed without obtaining clearance will be void.
- Power to call in transactions in other sectors – In other sectors, notification will be voluntary. However, the Bill includes a retrospective “call-in” power allowing for post-completion review of any non-notified transaction. In practice, this may lead to a significant number of “failsafe” notifications being made.
For further information, see the e-bulletin prepared by our competition, regulation and trade team. We will be publishing a more detailed briefing on the bill in due course.
We have published out latest M&A update briefing in which we look at the latest developments and trends, including:
- current M&A activity levels;
- what has changed on M&A transactions because of the Covid-19 pandemic;
- what we are seeing on public M&A transactions;
- some of the particular features of a distressed M&A transaction; and
- the potential impact of foreign direct investment controls and merger control on transactions.
The briefing is available here.
We also discussed these themes in our recent webinar, which you can access here. An audio recording of the webinar (and the other webinars in our Catalyst series) is available here.
The thresholds at which the merger control regime is triggered in the UK has been lowered for three further sectors. This follows changes made in June this year in relation to businesses involved in the response to a pandemic (see our corporate update 2020/13) and changes in June 2018 for businesses involved in military, or military and civilian, use items; quantum technology; or computing hardware (see our corporate update 2018/10).
Under the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2020 and the Enterprise Act 2002 (Share of Supply) (Amendment) Order 2020, lower thresholds apply to businesses involved in:
- artificial intelligence;
- advanced materials; and
- cryptographic authentication.
The UK merger control regime under the Enterprise Act 2002 now applies to transactions involving businesses in these sectors where:
- the target’s UK turnover exceeds £1 million (as compared with £70 million in most other sectors); or
- where a merger involves an enterprise which has a 25% or more share of supply of the relevant goods/services in the UK (as well as where the merger leads to an increase in the share of supply to, or above, the 25% threshold).
The amended thresholds in these sectors apply if the change of control takes place after 21 July 2020. Guidance on the changes to the turnover and share of supply tests for mergers from the Department for Business, Energy and Industrial Strategy has been updated to reflect these Orders.
Further guidance for companies has been published in light of the Covid-19 pandemic.
- Shareholder meetings – Relaxations to the company meeting requirements contained in the Companies Act 2006 (as well as the meeting requirements for certain other entities) came into force on 26 June 2020. Under the relaxations, which were made by the Corporate Insolvency and Governance Act 2020, shareholder meetings can take place by electronic or any other means, notwithstanding the provisions contained in the Companies Act 2006 and the company’s articles of association. The participants need not be in the same place and shareholders do not have a right to attend in person. The relaxations apply to company meetings held between 26 March and 30 September 2020. ICSA: The Chartered Governance Institute and the City of London Law Society have published guidance on holding meetings under the Act. The guidance is available to members on The Chartered Governance Institute’s website.
- Temporary extension to filing deadlines – The Companies etc. (Filing Requirements) (Temporary Modifications) Regulations 2020, which were made under the Corporate Insolvency and Governance Act 2020, temporarily extend various filing deadlines under the Companies Act 2006 and other legislation for companies and other entities, including:
- Accounts: extended by three months, to 12 months for a private company and nine months for a public company. The extension, which is automatic, applies to the original filing deadline. It will not be added to any filing extension already granted by Companies House;
- Confirmation statement: extended from 14 days to 42 days;
- Events-driven filings (such as changes in details of directors): extended from 14 days to 42 days; and
- Charges: extended from 21 days to 31 days.
The longer filing periods apply to filing deadlines that fall between 27 June 2020 and 5 April 2021 (inclusive). Companies House Guidance notes that the revised filing dates can be checked via the Companies House Service.
- Extension of Companies House upload service – Companies House has extended its temporary upload service (see our corporate update 2020/13) to enable companies to file articles of association and related forms and resolutions online, rather than in paper format. The list of documents and forms which can now be uploaded using this service is available here.
Insolvency regime and directors’ duties
As well as relaxing the requirements for company meetings and allowing extensions to the filing deadlines for certain documents, as discussed above, the Corporate Insolvency and Governance Act 2020 has also made changes to the insolvency regime in the UK. The changes include:
- Suspension of wrongful trading – When determining what contribution, if any, a director should make to a company’s assets following a finding of wrongful trading, the court must assume that a director is not responsible for any worsening of a company’s financial position between 1 March 2020 and 30 September 2020.
- Ipso facto (termination) clauses – Contractual clauses permitting a supplier of most goods or services to terminate supply as a result of the customer’s entry into an insolvency procedure will cease to have effect.
- Winding up petitions – Winding up petitions cannot be presented if based on statutory demands dated 1 March 2020 to 30 September 2020. Creditors will also be prevented from winding up a company unless the creditor has reasonable grounds to believe that Covid-19 has not had a financial effect on the company.
- New company moratorium – A new moratorium is available for companies, which will give a company up to 40 business days of protection from creditors, without court or creditor approval. The moratorium prevents legal processes against the company, including commencing insolvency proceedings and crystallising a floating charge.
- Restructuring plan – This new form of restructuring, similar to a scheme of arrangement, allows the court to impose a compromise on a company’s creditors and shareholders, including a cross-class cram-down.
We have previously published briefings on the impact for supply chains, landlords, banks and pension scheme trustees.
Other relevant materials
- ESG – Corporate purpose and environmental, social and governance (ESG) issues dominated headlines in the months leading up to the Covid-19 outbreak. The intense public scrutiny of corporate conduct, governance and investment behaviours during the pandemic has served to accelerate the conversation around ESG issues. To help make sense of this new paradigm, we have published a guide in which we set out some of the ways in which Covid-19 is impacting the key ESG considerations confronting businesses, asset managers, asset owners and lenders.
- Investment and acquisition opportunities – We expect the crisis to operate as a catalyst for change. As we transition to a new normal, there will be opportunities for those with access to capital and a desire to invest or participate in industry consolidation. In our latest guide we look at possible options and issues for those looking to invest.
- Land Registry and electronic signatures – The Land Registry has issued draft practice guidance setting out the basis on which it will accept electronic signatures. The consultation closes on 18 July 2020 and the final practice note will be issued in the “next few weeks”.
- Service of proceedings – The High Court has set aside default judgment obtained against a defendant Council where the claim form and particulars were posted to its offices shortly after the start of the Covid-19 lockdown. For further information, see our Litigation Notes blog post.
For further Covid-19 related publications, see our COVID-19 Hub.
The UK government has announced two amendments to the UK merger control regime, which will enhance its powers to scrutinise certain foreign direct investment (FDI) into the UK, against the backdrop of the Covid-19 pandemic and wider national security concerns.
These amendments come ahead of the National Security and Investment Bill, which is expected to be brought before Parliament in the coming weeks to create a new distinct FDI regime in the UK.
Under the changes:
- Businesses involved in the response to a pandemic – The grounds on which the government can intervene in a transaction on public interest grounds under the Enterprise Act 2002 have been expanded to include “to combat and mitigate the effects of a public health emergency”. This change was introduced by The Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order which took effect on 23 June 2020. The reforms cover not only companies directly involved in the response to a pandemic (e.g. pharmaceutical or medical equipment suppliers), but also companies which mitigate its effects (examples given include internet service providers and food supply companies); and
- Artificial intelligence, cryptographic authentication technology and advanced materials – The jurisdictional thresholds for transactions in these sectors will be lowered so that the government will be able to intervene in more transactions. These changes will be implemented by way of two statutory instruments: the Enterprise Act 2002 (Share of Supply Test) (Amendment) Order and the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2020, which is yet to be published. The orders will come into force once they have been debated.
Our competition, regulation and trade team has published a more detailed ebulletin on the changes which is available here.
Given the current restrictions on interaction which have been imposed by the UK Government and with a large number of people working from home, it is not always possible to adopt the usual methods for signing and completing deals. We have summarised some practical points to ensure compliance with the necessary legal formalities whilst these measures remain in place.
Briefing available here.
Gavin Davies has published a video for Practical Law in which he outlines how the COVID-19 pandemic is affecting new M&A activity in the UK and Europe, including its impact on levels of M&A activity, the practical challenges of conducting M&A while the pandemic continues, how deal processes are adapting, and the response of (and impact on) other market participants such as banks, insurers and regulators.
The video covers:
- anticipated impact of COVID-19 on new deals;
- practical difficulties in progressing deals;
- impact on M&A deal processes and structures;
- availability of debt finance and W&I insurance; and
- impact on merger control and FDI restrictions.
Click here to access the video on Practical Law’s website (free-to-view for the next 7 days and then available to Practical Law subscribers).