Mergers and AcquisitionsReport 2017

Featuring contributions fromA S & AssociatesABNRAlemán Cordero Galindo & LeeArthur CoxASAR-Al Ruwayeh & PartnersAtanaskovic HartnellChiomentiDaHui LawyersDemarest AdvogadosDiebold NixdorfErdem & Erdem Law OfficeFingleton Associates

Frasers Law CompanyGómez-Acebo & PomboHeuking Kühn Lüer WojtekLatham & WatkinsLee and LiMatouk BassiounyMeyerlustenberger LachenalRaposo BernardoUBSUdo Udoma & Belo-OsagieVerus

Lead contributor

M & A R E P O R T 2 017 | I F L R . C O M | 1

INTRODUCTION

Nick Cline and Robbie McLaren, corporate partners atLatham & Watkins, examine the themes that will

influence M&A deal terms in 2017

Britain’s decision to leave the European Union in June 2016,coupled with the election of Donald Trump as US President inNovember 2016, gave dealmakers plenty of pause for thought

last year – but ultimately did little to derail strategic M&A. Encouragedby the post-Brexit decline in the value of sterling and supported by thecontinuing availability of transaction financing at attractive rates, thenumber of acquisitions of UK companies by US acquirers reached thehighest level in ten years, with 262 deals valued at $48 billion closing in2016.With attractively priced credit predicted to continue to finance M&A

transactions throughout 2017 and foreign buyers continuing to regardthe UK and Europe as an attractive investment opportunity, there arestrong indications that inbound UK and European M&A activity fromthe US will continue. In light of these trends, we have outlined some ofthe key differences between the US and UK M&A market thattransatlantic deal makers are likely to encounter.

Transaction accounts: completion vs locked box

In the Latham & Watkins 2016 European Private M&A Market Study(which examined over 170 deals signed between July 2014 and June 2016)as much as 46% of European deals included a locked box mechanism.33% of deals included a completion accounts mechanism and 21% ofdeals did not provide for price adjustment. In contrast, locked boxmechanisms are significantly less common in the US, where the majorityof deals use completion accounts. Locked box mechanisms fix the dealprice at an agreed date based on a set of accounts, with the seller givingundertakings that value will not be extracted, or leak, from the target beforecompletion. In contrast, a completion accounts mechanism calculates thefinal deal price after completion, by reference to accounts relating to thetarget, drawn up to the date of completion. This allows the buyer to testand adjust its valuation by reference to the actual financials of the target.The prevalence of locked box mechanisms in Europe reflects the

historic seller friendly European M&A market. In our view, 2017 maysee a shift in the prevalence of locked box mechanisms in Europe, asprivate equity buyout firms (which traditionally favour locked boxaccounts) seeking to deploy record amounts of unspent capital, competeagainst US acquirers (which traditionally favour completion accounts)with a keen interest in Sterling transactions.

Will tax changes impact deals?

The reduction of the headline UK corporation tax rate increased theattractiveness of the UK as a holding company jurisdiction in 2016. Whilethe UK is still behind Ireland and the Netherlands in terms of overallnumber of US-listed holding companies domiciled, recent transactiontrends point to the UK being favoured. Further, the introduction ofrestrictions on interest deductibility in the UK will limit the amount of

M&A deal terms in2017: what to expect

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debt that companies can set off against tax and may impact historic dealsand new acquisitions, giving cash rich US corporate acquirers anadvantage over other purchasers who rely on debt to fund transactions.Anticipated changes to the way that US companies are taxed will surely

impact deal structures. The US House of Representatives’ proposed plansare expected to incentivise US companies to repatriate cash currently heldoverseas, which may bring an estimated $2.5 trillion in foreign profitsstored outside of the US, back to the US. The eventual impact of theprospective changes in the US is currently uncertain but may includechanges to the US tax regime on interest deductibility and the territorialtaxation (and rates of taxation) of US based multinationals’ overseasearnings. These changes may, over time, result in fewer inversion styletransactions and influence the attractiveness of the UK and otherEuropean countries as holding company jurisdictions, possibly drivingUS multinational businesses to US parented groups. Alternatively, theremay be structural advantages to holding deal leverage offshore.

Conditionality: are we there yet?

UK and US dealmakers take different approaches to deal conditions, thesatisfaction of which is required before a deal can complete. In Europeandeals, conditionality beyond regulatory and antitrust conditions isuncommon with business risk typically transferred to the buyer onsigning, as is the case, from an economic perspective, on a locked box

deal. Under US practice, deal and business risk is typically not transferreduntil completion. While completion conditions will vary, in a US leaddeal, conditions may include a requirement for the seller’s representationsand warranties to be materially accurate at completion and an absence ofany material adverse change.With increasing numbers of US acquirers in the European market,

European deal makers can expect a greater range of deal conditionsrequested than in the past. Those buyers considering how to mitigate risksof potential US tax changes should note that material adverse changeclauses are unusual in Europe and, in any event, tax change is seldomincluded as a change event, even in US deals. Deal makers should notassume that transactions can be cancelled if attractiveness is eroded bynew tax legislation. Instead, specific conditions, representations orwarranties should be sought and acquisition structures developed to allowas much flexibility as possible.Looking ahead, 2017 will clearly be another year of global political

uncertainty. Notwithstanding the political turbulence, the M&A marketremains in good shape. Last year global M&A continued through someof the biggest political shockwaves in years, and we expect it to do thesame in 2017. In a world increasingly difficult to predict, this M&A guidewill help dealmakers navigate the key risks.

INTRODUCTION

Robbie McLaren Partner, Latham & Watkins

London, UK T: 44 20 7710 1880 F: 44 20 7374 4460

E: robbie.mclaren@lw.comW: www.lw.com

About the authorRobbie McLaren is a partner in the corporate department in theLondon office of Latham & Watkins. McLaren’s practicefocuses primarily on mergers and acquisitions, private equity,venture capital, reorganisations and general corporate matters.In recent years, McLaren has represented clients who operatein a number of industries, with a particular focus on clients inthe life sciences and healthcare; TMT; and mining and metalssectors. McLaren’s recent experience includes advising:Momondo in connection with its $550 million sale to Priceline;Baxter International Inc, in connection with its $625 millionacquisition of Claris Injectables, an India-based manufacturerof sterile injectables; Sienna Biopharmaceuticals in connectionwith its acquisition of Creabilis, a privately held specialtypharmaceutical company; and Allergan on its $40.5 billion saleof its global generic pharmaceuticals business to Teva.

Nick ClinePartner, Latham & Watkins

London, UK T: 44 20 7710 1087F: 44 20 7374 4460E: nick.cline@lw.com

W: www.lw.com

About the authorNick Cline is a partner in the corporate department in theLondon office of Latham & Watkins. Cline is an M&A lawyerwith more than 17 years of experience focusing on UK andinternational cross-border mergers and acquisitions, publictakeovers, private equity transactions, carve-outs, minorityinvestments and joint-venture transactions. Cline’s recentexperience includes advising: ACCO Brands Corporation inconnection with its €297 million acquisition of Esselte Group,a leading European office products company, from privateequity firm JW Childs; Emerson in connection with itsacquisition of Permasense, a leading provider of non-intrusivecorrosion monitoring technologies; and Brundage-BoneConcrete Pumping in connection with its acquisitions ofCamfaud Concrete Pumps, Premier Concrete Pumping andSouth Coast Concrete Pumping, UK-based companiesproviding concrete pumping and material placement services.

Mergers and AcquisitionsReport 2017

Featuring contributions fromA S & AssociatesABNRAlemán Cordero Galindo & LeeArthur CoxASAR-Al Ruwayeh & PartnersAtanaskovic HartnellChiomentiDaHui LawyersDemarest AdvogadosDiebold NixdorfErdem & Erdem Law OfficeFingleton Associates

Frasers Law CompanyGómez-Acebo & PomboHeuking Kühn Lüer WojtekLatham & WatkinsLee and LiMatouk BassiounyMeyerlustenberger LachenalRaposo BernardoUBSUdo Udoma & Belo-OsagieVerus

Lead contributor

M & � R � � � R � � ��� | i f L R . C � M | 53

SECTION 1: Market overview

1.1 What have been the key trends in the M&Amarket in your jurisdiction over the past 12 monthsand what have been the most active sectors?

UK M&A in 2016 was primarily driven by inbound deals, encouragedby the post-Brexit decline in the value of sterling and supported by thecontinuing availability of transaction financing at attractive rates.Chinese acquirers remained active in 2016; there were 25 Chinese-ledUK acquisitions, valued at £6.8 billion in 2016; compared with 15valued at £1.3 billion in 2015. The number of acquisitions of UKcompanies by US acquirers was at the highest level in ten years with262 deals valued at $48 billion in 2016. In particular, US acquisitionsof UK public companies were up 50% since 2015.

UK domestic deals dropped in value after rising for a number ofyears; hitting the lowest point since 2013, principally due touncertainty over Brexit.

Technology was the most active sector for UK M&A in 2016, withdeal values rising to £29.14 billion in 2016 from $6.9 billion in 2015.This was largely due to SoftBank’s £24.3 billion acquisition of ARMHoldings, which was announced shortly after the Brexit vote andfollowing a drop in sterling. Media, financial services and energyservices were the next most active sectors by deal value.

1.2 What M&A deal flow (volume and value) hasyour market experienced and how does this compareto previous years?

UK M&A was resilient in 2016, with 1,418 deals worth £141.5 billioncompared with 1,470 deals worth £273.8 billion in 2015. Althoughdeal value and volume was lower compared to 2015, 2015 was a recordyear and M&A deal values in 2016 were at their second highest levelsince 2008.

UKNick Cline and Robbie McLaren, Latham & Watkins

www.lw.com

5 4 | i f L R . C � M | M & � R � � � R � � ���

1.3 Is your market driven by private or public M&Atransactions, or both? What are the dynamicsbetween the two?

Both public and private M&A play an important part in the UKmarket. Private M&A deals make up a far higher number of UK targetM&A deals (1,331 deals worth £65.6 billion in 2016), and values havebeen rising in previous years, although 2016 saw a drop in both valueand volume on 2015. Whilst down on 2015, public M&A in 2016was at its second highest value since 2008 with 87 deals worth £75.9billion. Part of this is accounted for by a number of large inversiondeals that announced but aborted in 2015 (for example AbbVie/Shireand Pfizer/AstraZeneca).

Given the increased buying power of US corporates as a result of thereduction in the value of sterling against the dollar, the end of 2016saw an increase in deals with US style conditionality structures, whichis expected to continue through 2017.

SECTION 2: M&A structures

2.1 Please review some recent notable M&Atransactions in your market and outline anyinteresting aspects in their structures and what theymean for the market.

The recent acquisition by Priceline of the Momondo Group shows thecontinued enthusiasm for UK and European businesses from USacquirers. This, along with other inbound acquisitions, indicates thatEuropean legal advisers will need to be well versed in both Europeanand US style deal protections and to manage their respective clients’expectations accordingly.

The merger of Technip and FMC Technologies was notable becauseit was structured under the EU cross-border regulations in acombination of mergers in France (Technip) and the US (FMC) undera new UK holding company, dual-listed on NYSE and Euronext Paris.The structure of the transaction did not offend US Treasury regulationsagainst inversion transactions.

UK

Nick ClinePartner, Latham & Watkins

London, UK �: 44 �� ���� ��8�f: 44 �� �3�4 446��: nick.cline@lw.com

W: www.lw.com

About the authorNick Cline is a partner in the corporate department in theLondon office of Latham & Watkins. Cline is an M&� lawyerwith more than �� years of experience focusing on UK andinternational cross-border mergers and acquisitions, publictakeovers, private equity transactions, carve-outs, minorityinvestments and joint-venture transactions. Cline’s recentexperience includes advising: �CC� Brands Corporation inconnection with its €�9� million acquisition of �sselte Group,a leading �uropean office products company, from privateequity firm JW Childs; �merson in connection with itsacquisition of �ermasense, a leading provider of non-intrusivecorrosion monitoring technologies; and Brundage-BoneConcrete �umping in connection with its acquisitions ofCamfaud Concrete �umps, �remier Concrete �umping andSouth Coast Concrete �umping, UK-based companiesproviding concrete pumping and material placements services.

Robbie McLaren Partner, Latham & Watkins

London, UK �: 44 �� ���� �88� f: 44 �� �3�4 446�

�: robbie.mclaren@lw.comW: www.lw.com

About the authorRobbie McLaren is a partner in the corporate department in theLondon office of Latham & Watkins. McLaren’s practicefocuses primarily on mergers and acquisitions, private equity,venture capital, reorganisations and general corporate matters.in recent years, McLaren has represented clients who operatein a number of industries, with a particular focus on clients inthe life sciences and healthcare; �M�; and mining and metalssectors. McLaren’s recent experience includes advising:Momondo in connection with its $55� million sale to �riceline;Baxter international inc, in connection with its $6�5 millionacquisition of Claris injectables, an india-based manufacturerof sterile injectables; Sienna Biopharmaceuticals in connectionwith its acquisition of Creabilis, a privately held specialtypharmaceutical company; and �llergan on its $4�.5 billion saleof its global generic pharmaceuticals business to �eva.

M & � R � � � R � � ��� | i f L R . C � M | 5 5

2.2 What have been the most significant trends orfactors impacting deal structures?

The cumulative effect of tax developments in the UK and beyond haveimpacted M&A deal structures. In particular, reduction of the headlineUK corporation tax rate has increased the attractiveness of the UK asa holding company jurisdiction. This trend is expected to continue in2017. While the UK is still behind Ireland and Netherlands in termsof overall number of US-listed holding companies domiciled, recenttransaction trends favour the UK.

Prospective changes in the US (for example, possible changes to theUS tax regime on current accumulated earnings and the taxation of USbased multinationals future overseas earnings) and Europe (forexample, the European Commission’s tax related state aidinvestigations) are also likely to influence future structure choices forglobal M&A deals by UK companies.

SECTION 3: Legislation and policy changes

3.1 Describe the key legislation and regulatory bodiesthat govern M&A activity in your jurisdiction.

The Companies Act 2006 applies to public and private companiesregistered in the UK. While the Companies Act does not govern M&Aactivity as such, its requirements dictate the way that deals by UKcompanies are effected.

The acquisition of private companies is a matter of negotiationbetween the buyer and seller and no regulated offer process is required.

In non-regulated industries (i.e. other than financial services, telecoms,media etc.), deals are not typically subject to input from regulatorybodies, save for competition matters.

Public acquisitions are governed by the City Code on Takeovers andMergers (the Takeover Code), as administered by the Panel onTakeovers and Mergers.

3.2 Have there been any recent changes to regulationsor regulators that may impact M&A transactions oractivity and what impact do you expect them to have?

The regulatory environment for UK M&A is relatively stable. WhileM&A practitioners in the UK are awaiting confirmation from thegovernment on the detail of the UK’s withdrawal from the EU, theimpact of Brexit related changes on the regulation of M&A activity isexpected to be gradual. The UK government is promoting foreigninvestment in the UK and cross-border trade as fundamental pillars ofthe UK economy post-Brexit.

3.3 Are there any rules, legislation or policyframeworks under discussion that may impact M&Ain your jurisdiction in the near future?

Changes are made to the Takeover Code periodically. Recent changeshave focused on the manner in which information and opinions arecommunicated and distributed by, or on behalf of, a bidder or targetcompany during an offer; regulating the use of social media and similar

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forms of communication by the parties to an offer; and putting furtheremphasis on the monitoring of meetings and telephone calls withshareholders, analysts and others by requiring supervision from acorporate broker or financial adviser at meetings including telephonecalls, video conferences and meetings by other electronic means. Thishas been welcomed by the market as the Takeover Panel reactingpositively to market changes.

SECTION 4: Market idiosyncrasies

4.1 Please describe any common mistakes ormisconceptions that exist about the M&A market inyour jurisdiction.

UK companies can be acquired by way of a share purchase (i.e.purchasing all the shares of the target company) or an asset purchase(i.e. purchasing all the assets of the target company) but as a matter ofUK domestic law, M&A transactions between private UK companiescannot be consummated by way of a merger by absorption. Mergersby absorption are only possible with respect to UK private companieswhere there is a combination of a UK company and a companyincorporated in an EEA (European Economic Area) state, however suchstructures are fairly unusual. The Companies Act does provide formergers for UK public companies but these provisions are generallynot used and acquisition of UK public companies by way of a schemeof arrangement is more commonly seen. This is in contrast to otherjurisdictions where mergers are frequently encountered.

Although the UK merger control regime is voluntary and there is noobligation for the notification of mergers in the UK, in reality a largenumber of transactions are notified in the interests of legal clarity andto avoid the disruption caused by interim enforcement orders requiringthe businesses to be held separate after closing or even the more remoterisk of being ordered to delay closing. Even if the transaction is notexplicitly notified to the Competition and Markets Authority (CMA),the CMA may become aware of the merger, either because of thirdparty complaints, or as a result of its own research (undertaken by itsMergers Intelligence Committee). If the deal has an EU dimension,notification must be made to the European Commission prior toimplementation of the transaction. Confidential pre-notificationcontacts can take place earlier, but formal notification typically followssigning of the transaction documents when a transaction is announced.

4.2 Are there frequently asked questions or oftenoverlooked areas from parties involved in an M&Atransaction?

See above.

4.3 What measures should be taken to best preparefor your market’s idiosyncrasies?

Early engagement with legal counsel, a detailed understanding of boththe UK and international legal markets and careful transactionplanning are essential. For example, where a deal raises UK anti-trustconcerns, parties may seek to pre-emptively engage the CMA andprovide the Mergers Intelligence Committee with information about

the deal. This can reduce the risk of the CMA calling the deal in forinvestigation.

SECTION 5(a): Public M&A

5.1 What are the key factors involved in obtainingcontrol of a public company in your jurisdiction?

A bidder may choose to stake build in order to obtain control of apublic company. If a bidder acquires shares in the three months priorto or during an offer period, any offer must not be on less favourableterms. Any dealing giving rise to speculation, rumour or an untowardmovement in the public company’s share price may mean anannouncement is required. Under the Disclosure and TransparencyGuidelines, shareholding interests must be disclosed to the publiccompany, who must then inform a regulatory information service. If abidder acquires 30% of the voting rights in a public company, amandatory cash offer for the remainder of the shares a bidder does notown is triggered.

5.2 What conditions are usually attached to a publictakeover offer?

A takeover offer will usually be subject to an extensive set of conditionsincluding: securing acceptances carrying more than 50% of the votingrights in the target, antitrust and regulatory approvals, bidder’sshareholder approvals, listing of consideration shares (where

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M & � R � � � R � � ��� | i f L R . C � M | 57

appropriate), as well as conditions dealing with the state of the target’sbusiness. A bid cannot be subject to conditions that depend on thesubjective judgement of the bidder. On occasion, a bidder willannounce a firm intention to bid on a pre-conditional basis, whereposting of the bid document is suspended pending satisfaction of statedpre-conditions, often material antitrust conditions where it isanticipated that these will involve protracted processes.

5.3 What are the current trends/market standards forbreak fees in public M&A in your jurisdiction?

In public takeover offers, break fees (where the target pays theprospective buyer) are now largely prohibited whereas reverse breakfees (where the prospective buyer pays the target) are not prohibited.

If the bidder is a UK public company and subject to the UK ListingRules and the total value of the reverse break fee(s) exceeds one percentof the market capitalisation of the bidder, the bidder’s directors willneed to treat the reverse break fee as a material transaction (whichamongst other things, requires shareholder approval). If the biddercontrols more than ten percent of the target, a reverse break fee mayalso constitute a related party transaction for the purposes of the UKListing Rules.

SECTION 5(b): Private M&A

5.4 What are the current trends with regards toconsideration mechanisms including the use oflocked box mechanisms, completion accounts, earn-outs and escrow?

According to the Latham & Watkins 2016 European Private M&AMarket Study, which examined over 170 deals signed between July2014 and June 2016, 46% of deals included a locked box mechanism.This trend is consistent with results from the previous two editions ofthe survey and reflects the continuing seller friendly nature of the M&Amarket. Thirty three percent of deals included a completion accountsmechanism and 21% of deals did not provide for price adjustment.Completion accounts are relatively common where a business is carvedout of a larger group in circumstances where it may not be possible todefine or lock the box. The number of deals which feature an earnoutremained limited at 13%. Deals which include some element ofcontingent consideration tend to be sector specific (for examplepharmaceuticals) or be in circumstances where the parties were unableto reconcile differing financial projections for the target business. Therehas been a significant increase in the use of escrows in private M&Adeals, for 2014-2016, 33% of deals included an escrow, compared with22% for the previous two years.

5.5 What conditions are usually attached to a privatetakeover offer?

The conditions to closing which are included in a purchase agreementwill vary based on the circumstances of each transaction. In UK deals,historically conditionality beyond regulatory and anti-trust clearancesis uncommon but the increase of US acquirers in the UK market couldchange this landscape somewhat.

According to the Latham & Watkins 2016 European Private M&AMarket Study, only 15% of deals included a material adverse changeclause (material adverse changes clauses refer to events which have anegative impact on the market generally or, more specifically, on thetarget company’s business). The use of breach of covenant/warrantyconditions and financing conditions also remains very limited, with13% of deals including a breach of warranty condition and just twopercent of deals including financing conditions.

The UK approach contrasts with experience in the US, whereconditions typically include a requirement for the seller’srepresentations and warranties to be materially accurate at closing,absence of material breaches of the seller’s covenants, absence ofmaterial adverse change and completion of a marketing period toobtain financing and regulatory and anti-trust clearances. Thedifference between UK and US practice results from the differentapproach taken to deals, under UK practice deal certainty is paramountand business risk is usually transferred to the buyer on signing.

5.6 Is it common practice to provide for a foreigngoverning law and/or jurisdiction in private M&Ashare purchase agreements?

Purchase agreements relating to UK companies and assets are typicallygoverned by English law and subject to the jurisdiction of the Englishcourts. For global transactions, depending on the location of the partiesand their advisers, purchase agreements are frequently governed byEnglish law but may alternatively be subject to the laws and courts ofanother jurisdiction, such as New York. English law is widely perceivedas stable, impartial and commercial, with a developed litigationinfrastructure. Accordingly, English law is commonly seen as thegoverning law and jurisdiction for non-UK based companies and assets,particularly in Eastern Europe, the Middle East and parts of Asia.

5.7 How common is warranty and indemnityinsurance on private M&A transactions?

According to the Latham & Watkins 2016 European Private M&AMarket Study, 13% of UK transactions employed warranty andindemnity insurance, a 60% increase since Latham’s 2015 survey. Asexpected, warranty and indemnity insurance is most prevalent in salesby private equity sellers, with 22% of UK deals taking up a policy.

SECTION 6: Outlook 2017

6.1 What are your predictions for the next 12 monthsin the M&A market and how do you expect legalpractice to respond?

2016 was a strong year for UK M&A, despite the political climate inthe UK, Europe and the US and various macroeconomic factors.Investors and advisors remain hopeful that UK investment activity willremain robust in 2017. Please refer to our article at page 1 for furtheranalysis of the factors we predict will drive deal terms in 2017.

UK