Tech M&A: Mind the Gap - Bridging UK and US market practice in M&A

Introduction

The first half of 2025 has seen a continued flow of in-bound private M&A activity from US companies and investors acquiring or investing in UK technology companies. This has been driven by several factors including: 

• well-financed US technology companies with a strong cash position (e.g. UK start-ups raised £16.2bn in 2024, compared to £65bn for US start-ups);

• a valuation discount for UK tech companies versus US equivalents (e.g. EBITDA multiples), although recent data suggests the valuation gap is narrowing as Magnificent 7 performance and US growth estimates are revised downwards, while EU growth prospects improve

• the relatively strong US dollar, however the current macro environment means this may also be narrowing;

• the deep pool of technology talent, particularly reinforced by the research ecosystems of the main university hubs (e.g. London, Oxford, Cambridge); and

• the attractiveness of the UK as a foothold for European investment, due to the shared language, similar business culture, and business-friendly environment.

The full impact of newly imposed tariffs by the current US administration and the newly agreed US-UK trade deal remains to be seen, however our own data suggests this trans-Atlantic trend continues to hold steady.

A well-advised US investor or UK target can ensure a smooth process and avoid unnecessary tensions between the parties by making sure it has anticipated areas where market practice differs in the UK and US. Generally speaking, the US market is more "buyer-friendly" than the UK market and  positions should be anticipated and clarified early in the process to avoid mis-matched expectations and, ideally, reflected in any term sheet or LOI before moving to long-form documents. 

In the US, the relevant contract for a share sale is the merger agreement, business combination agreement or stock purchase agreement. Because of the prevalence of US transactions structured as triangular mergers, these agreements are typically between the buyer (through a newly established merger subsidiary) and the target company. On the other hand, in the UK the relevant contract is the share purchase agreement (referred to as the "SPA"). This is an agreement entered into between the buyer and the target's selling shareholders. In both the US and the UK, the relevant contract for an asset deal will an asset purchase agreement (referred to as "APA") typically entered into between the buyer and the company.

A UK seller will expect that the buyer is "on risk" from signing and so there should be fewer conditions, typically limited to regulatory/antitrust conditions. A US investor will expect to have broader termination ('walk-away') rights and protections as the buyer. Set out below are some of the common conditions that come up for discussion:

Purchase price mechanisms

We tend to see "locked box" purchase price mechanisms in the UK, whereas in the US we tend to see the use of "closing accounts". The distinction between the approaches is that a closing accounts process ensures that the purchase price reflects the actual profitability of the target to the day of closing whereas under the locked box approach the purchase price reflects an estimate of that profitability with the buyer taking the risk of an over-estimate and the seller of an under-estimate, as further detailed below:

• Closing accounts: the purchase price reflects the actual debt, cash and working capital position of the target as at (and therefore its profits to) closing.  As these cannot be known with certainty on the day of closing they are estimated for the purpose of the provisional purchase price.  After closing, this provisional price is adjusted by reference to specially drawn-up closing accounts. This approach provides both parties with certainty that the price paid reflects the pre-closing profits accurately but it can lead to drawn-out post-closing discussions to settle the final figures and, in the absence of escrow arrangements, involves both parties taking the covenant risk on the payment of any adjusting amounts.

• Locked box: the purchase price is initially agreed on the basis of an historic balance sheet (such as the one last audited) and estimates of the target's profitability since then and up to closing.  Any disclosed value extracted from the target in that period (e.g. by way of dividend) will then be deducted from that initially agreed price to arrive at the price actually payable. To protect against any undisclosed value extraction ("leakage") during that period the seller will agree to recompense an amount of the purchase price equal to any such leakage. 

Risk allocation: Warranties and indemnities. 

In both the UK and the US, warranties and indemnities are used to allocate risk from the buyer to the seller and are therefore usually the subject of extensive negotiations.¹

A warranty is a contractual promise typically given by a seller (as warrantor) to the buyer² that a certain matter is accurate (e.g. the target company has the required licenses to operate). If the warranty is untrue, the warrantor is in breach of contract and liable for damages. Damages will be determined by a court to reflect the reduced financial value of the asset or shares due to the breach of warranty.  Warranties will be "qualified" to the extent of facts disclosed by the seller against the warranties. Warranties are used (i) to give the buyer a contractual damages claim against the seller where inaccurate information was provided, (ii) to provoke disclosure by the seller of all relevant information prior to signing so that informed decisions can be made by the buyer and (iii) in the US (and occasionally in the UK), as the basis for a 'bring-down' condition that can allow a seller to walk away from a signed deal if there are material breaches of warranty between signing and closing (see 'Deal certainty: MACs and other conditions' above). 

In the context of M&A the phrase "indemnification" and "indemnity" is used differently by US and UK lawyers.  

A US agreement may include, subject to negotiations, a general post-closing indemnity clause under which a breaching party "indemnifies" the other party in respect of any breach of the representations, warranties and/or covenants by the breaching party.  This general indemnity does not alter how the damages for that breach are calculated but does ensure for instance that the innocent party will be able to claim its litigation costs of pursuing the claim.  As a result, when a US M&A lawyer refers to the indemnification provisions of an SPA they may often be referring to the warranty protections. Where known issues are disclosed against the warranties, the general indemnity will not apply. Similar to the UK position (see below), specific indemnities may still be used to mitigate against specific known risks identified through due diligence.

Under UK law these types of general indemnity for breach are neither common nor necessary; they add nothing to the protection already afforded by the contract. In relation to costs, in UK litigation a successful claimant will normally be awarded costs from the losing party. From time to time, a confused party may argue that an indemnity claim is a superior remedy to a warranty claim because it is a "debt claim" and not subject to the same limitations as a "damages claim" (e.g. causation and mitigation of loss).  But English courts have rejected this approach as "the tail wagging the dog".³  A party cannot simply categorise a clause as an indemnity and then rely on this label to jump to conclusions as to the legal consequences of the clause. Instead, each indemnity needs to be construed in accordance with its terms, which is why the drafting needs to be approached with care. 

When a UK M&A lawyer refers to indemnities they are referring to a provision of the contract (sometimes referred to as 'specific indemnities') designed to recompense the seller should a particular matter that at the time of signing has been identified as possible but uncertain (as to occurrence and/or amount) come to pass.  

For example, the target might be subject to unresolved litigation.  The parties could agree an adjustment to the price to reflect the risk but whether that is the "right" adjustment will only be known later.  To avoid either side obtaining a wind-fall an indemnity provides that once the outcome of the litigation is known the price will effectively be retrospectively adjusted downwards by the seller paying to the buyer an amount equal to the actual impact of the litigation on the target.   Payments made under such an indemnity are made pursuant to the terms of the contract; unlike a warranty claim, there is no breach of contract by the seller.  Accordingly, concepts relevant to contractual breach, such as causation, remoteness and mitigation, do not automatically apply.  The necessary link between the matter in question and the obligation to pay, and any obligation of the seller to procure that that target minimises the impact of the matter in question, must be set out in the clause. 

On the other hand, if an indemnity is drafted to recompense the seller for loss due to a  warranty being inaccurate, then the loss covered will be the amount recoverable as a claim for breach of warranty. The addition of an indemnity would not change the damages, which would be assessed in the normal way for breach of contract.

Warranty Coverage and the Impact of Insurance⁴

There may also be fewer differences than expected in UK and US practice with respect to the coverage of warranties. Until recently, UK market practice has been to draft warranties with narrower coverage than typically seen in the US market. For example, US warranties may be drafted on a more generic basis for each relevant category (e.g. disputes, employees, real estate), with "sweeper" warranties, such as no undisclosed liabilities, also being used. Arguably, this gap has narrowed due to the entrenchment of warranty and indemnity insurance as a feature of UK M&A. For a fee, the insurance will pay out what would have been recoverable from the seller had the seller's liability not been capped under the SPA (up to a separate limit set out in the insurance policy). Frequently the seller's cap under the SPA is a low or nominal (£1) amount. Naturally, a seller with such limited liability will be less concerned about reducing the scope of warranties and is likely to concede to the buyer much broader coverage.

Insurance has influenced other deal terms, such as purchase price retention arrangements. It has typically been less frequent in the UK than in the US for a seller to accept escrows or holdbacks as security for payment of warranty/indemnity claims and any post-closing price adjustments. In insured transactions, a large portion of this risk is mitigated and so it is even less likely for these mechanisms to feature.