The UK is an open, transparent and investment-friendly jurisdiction. As such, it can be a particularly appealing location for inward investment and for buying a company from overseas. However, this does present its own complications and increases the need for proper care and protection when buying a UK company from abroad.
Once you have found an existing business to buy and reached a deal in principle, you need to carry out the relevant due diligence and agree to the specifics of the deal. Each deal is different, but here we provide an overview of how to buy a business in the UK from abroad. We focus on buying a UK limited company, although the principles can be applied to any form of business. We hope this provides a useful checklist when considering buying a UK company from abroad.
The price (or consideration) is the most critical part of any purchase, but you also need to determine the structure and conditions around the price. For example, as well as a lump sum, the consideration may be structured in some or all of the following ways:
The UK allows a wide variety of consideration structures, although caution should be exercised around clauses that could be construed as a penalty. For example a right to withhold deferred consideration as a consequence of a breach will be vulnerable to challenge (see El Makdessi v Cavendish Square Holdings BV  EWCA Civ 1539).
An earn out or similar structure can be particularly appealing for an overseas investor, as it will keep the seller and/or management involved in the business and motivated for an extended period.
Consideration should be given at an early stage as to the share structure of the company post completion. When the target company is being acquired by a passive investor (a buyer who is not going to directly run the business), then it may be beneficial to incentivise management through shares and/or share options. Any such incentivisation needs to be tax efficient for the company and the employee, which should be considered from the start. It should also not prejudice the rights of the other investors, for example by making it more difficult to sell the company in the future.
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The extent of the due diligence required depends on the nature of the business and the buyer’s existing knowledge of the target company. However, English law operates under the principle of caveat emptor (buyer beware) and, as such, any purchaser needs to make sure they know what they are buying. This is generally achieved through a process of legal and commercial due diligence and warranty/indemnity protection in the sale agreement. If the buyer is not familiar with the legal and commercial framework in the UK, then the due diligence process will need to encompass this as well.
Due diligence should be tailored to the business you are buying to be most effective, but it will normally encompass financial, commercial and legal due diligence. It is important to know what you are buying, what the value in it is and what the risks are faced by the business.
The main legal agreement will normally be the Sale and Purchase Agreement (SPA), dealing with the sale of the shares in the company. This will usually include the following types of provisions, although there can be many more:
As well as the SPA, it is common for there to be a variety of other documents depending on the terms of the deal, for example:
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It is always critical to obtain tax advice on the consequences of purchasing a UK company. The tax analysis can be complicated and it should take into account the tax status of the buyer, the seller and the company. Assuming the purchase is undertaken as a share purchase then the buyer will have to pay stamp duty on the aggregate consideration for the shares, at a rate of 0.5% (rounded up to the nearest £5).
The major tax burden will generally fall on the seller, but to the extent this can be mitigated through a tax efficient structure, the parties will often agree to share this tax saving between the buyer and the seller.
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Where the UK company is being acquired by an overseas company (or group of companies), consideration should be given to the transfer pricing implications of the new structure. If services are being provided to or from the UK company, by other members of the group, then care needs to be taken to ensure that these services are provided on an arm’s length basis. In certain circumstances it can be advisable to obtain specific advice on what constitutes an arm’s length fee, based on market practice.
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If the seller was also the manager of the business, then it is likely that they have a lot of information and contacts which would be both beneficial to the company and harmful if they took it elsewhere. It is therefore essential to make sure that you obtain the information and skills you need from the seller and protect the business from competition by the seller. However, this is one area that English law can make difficult.
It is possible to draft non-compete and non-solicit provisions in the sale agreement, but these are not the entire answer. The English courts will limit the extent of these to what is necessary to protect the business and will potentially strike out the entire clause if it goes further than this. It is also very difficult to enforce non-compete and non-solicit clauses if that proves to be necessary.
Therefore, these contractual protections need to be complimentary to the commercial and business approach to protecting the company.
After the completion of a transaction, it is imperative that the operation of the company is prioritised. The business will often have been impacted by the sale process and the buyer will be keen to improve and grow the business to achieve the desired returns.
However, it is important to bear this in mind whilst negotiating the deal, to ensure that there will be no impediments in the way of this occurring.
Elemental has an in-house team of accountants, corporate secretaries, governance professionals and lawyers who have helped a number of international clients here in the UK, whether that is setting up a UK subsidiary or buying a UK company from abroad. To discuss your individual requirements please get in touch with a member of the team.