M&A due diligence after Brexit
By
Paul Raftery and Anna Kerrane highlight some of the areas of due diligence which prudent buyers should consider in light of the UK's withdrawal from the EU
The due diligence process is crucial for buyers in deciding whether or not to proceed in an acquisition of a business and, if so, on what terms. Following the outcome of the EU referendum, due diligence into areas of the target business which may be affected by Brexit may prove even more key in the decision-making process.
M&A activity will continue before any agreement is reached on the specifics of Brexit and the UK’s ongoing status in relation the single market. During this period of uncertainty, the informed acquisitive buyer should widen the extent of its due diligence to include a number of Brexit-specific due diligence areas.
Commercial contracts
Additional consideration will need to be given to commercial agreements with parties based within the EU. Contracts should be reviewed in respect of the specified territorial scope which may be defined as limited to the EU; the governing law or forum for disputes; and payment terms (taking into account the likelihood of currency fluctuations when article 50 is triggered and/or when the UK leaves the EU).
Intellectual property
It is not yet known whether European-registered intellectual property will continue to be validly protected in the UK post Brexit. Buyers should review and assess on a case-by-case basis whether it would be prudent to obtain separate UK-specific registrations.
If the business benefits from any intellectual property licence, will the scope of the licence be restricted by Brexit – for example, is the territory linked to the EU or the European Economic Area? If so, these licences may need to be renegotiated either before or after completion.
Foreign employees
The concept of free movement of people within the EU allows employees from all over the EU to work within the UK. A standard due diligence enquiry relating to foreign workers generally asks whether the business has any employees who require work permits.
Buyers may want to extend this enquiry to include the number of employees from within the EU in order to assess the impact on the workforce should, as seems likely, free movement be curtailed.
Financial information
This is more of a financial than legal due diligence issue, but buyers should consider how strong a guide historic financial performance will be to future performance.
For businesses that are exporters, will their export competiveness caused by the depreciation of sterling offset the potential for increased compliance costs if the UK is not fully in the single market? For importers of raw materials, weaker sterling will clearly add to costs. Has the business been affected in terms of confidence and demand following the vote to leave?
Care should also be taken in relation to any target company that may have received any EU grants or investments so as to ensure that they are not at risk of clawback post Brexit.
Regulatory compliance
The realm of regulatory EU law affecting UK businesses will change following Brexit, but the extent and nature of the change is unknown. Buyers should examine existing contracts and trade arrangements of the target company to see whether they will continue to be contractually bound by the potentially more onerous EU regulatory legislation following Brexit.
Data protection
The advice of the Information Commissioner’s Office following the vote to leave is that organisations should continue to prepare for the introduction of the new EU General Data Protection Regulation. The UK is likely to want to be considered as ‘adequate’ under the GDPR post Brexit. Enquiries should made as to whether the business is processing data within the EU and, if so, what actions have been taken to ensure compliance with GDPR.We have highlighted only some of the areas which a prudent buyer may wish to consider while the UK is in a state of Brexit-limbo, which will no doubt evolve as time moves on.We are unable to predict the extent of the impact on businesses of the UK leaving the EU, but a considered due diligence process with Brexit in mind should allow buyers to identify vulnerable areas of businesses they acquire and to develop strategies accordingly.
Paul Raftery, pictured, is head of the corporate commercial department and Anna Kerrane is an associate at Weightmans